We would all love to be our own boss, right? While it may sound great, keep in mind that doing so can introduce a lot of complexity to your tax situation.
We hear questions from clients on this all the time, such as: What can I deduct? What is deductible for meals and travel? Do I need to track my mileage? Can I deduct my home office expenses?
Deductions can reduce the income that is subject to income tax and self-employment tax. Below are common expenses incurred by self-employed individuals:
Let’s review a few of the most popular items:
You can generally figure the amount of your deductible car expense by using one of two methods: the standard mileage rate method or the actual expense method.
Other car expenses for parking fees and tolls attributable to business use are separately deductible, whether you use the standard mileage rate or actual expenses.
Depreciation allows you to deduct a percentage of the cost of an asset during each year of what the IRS considers its useful life. Most IT assets, like computers and computer-related peripheral equipment, are classified as five-year property. Office furnishings are considered seven-year property. However, if you have a capitalization policy in place, you can deduct the cost of any asset under a certain amount stated in the policy (usually up to $2,500).
You can still generally deduct 50% of the cost of business-related meals. You can deduct 100% of the cost of business meals provided by restaurants in 2021-2022.
Self-employed individuals can deduct their health insurance premiums “above the line.” This means that the deduction is not limited to 7.5% of your adjusted gross income as an itemized deduction. The health insurance deduction includes the self-employed individual as well as their spouse and any dependents that are on the policy. This also includes dental insurance.
If you conduct your self-employment work from home, you are able to deduct costs related to your home office. To qualify for the home office deduction, you must have a specific area in your home designated for working, and you must refrain from using it for non-business purposes. Two options are available for claiming this deduction: