If you're a freelancer, sole proprietor, or small business owner, you're already doing multiple jobs to keep your business afloat. Being your own accountant and tax preparer just adds to the workload. However, if you know the tax rules — even the odd ones — and use them to your advantage throughout the year, it can lead to significant savings come tax-filing season. Here are just 40 tax moves that can ease the burden on established and burgeoning entrepreneurs.
GETTING THE BOOKS IN ORDER
ORGANIZING THE SMALL THINGS
CAPITAL VS. BUSINESS EXPENSES
Under Section 179 of the Internal Revenue Code, business owners can write off the full amount of qualifying purchases, such as vehicles and computer software, in one year instead of depreciating them over several years. The annual value of this special deduction has varied, but it is $1 million for 2018.
Did you buy new office furniture, computer servers, cranes, end loaders, cattle, trucks, or taxis for a business last year? Did you build oil derricks, warehouses, office space or, utility plants? Well, if you did so after Sept. 26, 2017, the bonus depreciation you could claim on the first year of owning those assets increased from 50 percent just a day before to 100 percent of "expensing" from Sept. 27 onward. Recent tax reform also extended bonus depreciation from items bought or built new to both new and used assets. That "expensing" also applies to productions (qualified film, television, and or staged performances) and certain fruit or nuts planted or grafted after Sept. 27.
ELECTRIC VEHICLE AND PLUG-IN HYBRID TAX CREDIT
Want to get even more credit to go along with that depreciation? Make your business's car or fleet electric or plug-in hybrids. Despite fears that it would be eliminated, this provision still offers consumers and businesses that buy an electric or plug-in hybrid vehicle a tax credit up to $7,500. While this credit isn't going to be around forever, it's still a formidable tool for boosting sales of these fuel-efficient vehicles in spite of low gas prices and the market's hunger for less-efficient SUVs.
While charitable donations tend to work out better for individuals, who can deduct donations up to 50 percent of their adjusted gross income, businesses can get in on them, too. If you find yourself with surplus inventory, your business can donate it and deduct it. You have to maintain records of cash donations, but noncash donations of more than $500 and less than $5,000 requires itemization.
HEALTH INSURANCE PREMIUMS
Yep, sole proprietors, self-employed workers, and freelancers can deduct the cost of health insurance premiums for themselves and their families. However, there are a couple of caveats: The deducted amount cannot exceed the total earnings of the business, and anyone with access to an employer-subsidized health plan, even through a spouse, cannot take this deduction.
HEALTH SAVINGS ACCOUNTS
Business owners and contractors with a high deductible health plan (HDHP) can put money into a health savings account. That money is tax-deferred, and the taxpayer will get a deduction for the amount contributed. If that money is used to pay for medical expenses, it's tax-free. In 2018, the maximum annual contribution limit is $3,450 for individuals and $6,900 for families (those 55 or older can contribute an additional $1,000 each year).
The tax code allows business owners to set up a medical reimbursement plan, health reimbursement arrangement, or other plan to ease the business's tax burden. If you or a family member is compensated as an employee of the business and submits medical expense receipts to the business, the business can reimburse you and turn non-deductible expenses into a legitimate business expense. It's tricky and often requires a professional to set it up, but it can save a business as much as $5,000 a year.
HEALTHCARE FOR EMPLOYEES
Small businesses with fewer than 25 full-time employees and average annual wages below $53,000 per employee can deduct up to half the premiums paid for employee healthcare. The business also must pay at least half of employee health insurance premiums and purchase health insurance through the small business health options program, aka the SHOP marketplace, to be eligible.
BANKED HEALTH CREDIT
Businesses that employ fewer than 10 full-time-equivalent employees with average wages under $25,000 per person get the most benefit from the healthcare credit. If your business owes no taxes for 2018, you may be able to carry the credit forward to another year when you owe more. If you have some of that credit left over, you can claim business expenses against it.
Self-employed business owners can reduce their income for the year by contributing to SEP-IRA, SIMPLE IRA, or solo 401(k) retirement accounts. For 2018, the maximum contribution allowed is $12,500 for an IRA (plus an additional $3,000 for those 50 or older), $18,500 for a 401(k) ($24,000 for those 50 and over) and $55,000 for a SEP-IRA.
TAX-FREE RETIREMENT MONEY
LIFE INSURANCE PLANS
PAYING FICA TAXES
LOOPHOLE: AVOIDING FICA TAXES
LOOPHOLE: CHILD LABOR
If you're a sole proprietor, you can hire your kids as help. If that child is younger than 18, you do not have to pay FICA. If they're under 21, you don't have to pay federal unemployment taxes. The upside for kids is that they get a job and spending money that isn't an allowance. The downside is that they may need to file a tax return if their earned income is more than the standard deduction, which is $12,000 for 2018 income.
LOOPHOLE: FAMILY INCOME SPLITTING
It's another benefit of child labor, but one worth noting. If a business owner makes $60,000 in income a year, that will be taxed in the 22 percent bracket. However, if that same business owner hires a son or daughter and pays them $30,000 of that income, that $60,000 will be taxed at 12 percent in a lower bracket. Instead of paying for an allowance, tuition, or utilities, that child can pay for all of that themselves, learn some financial lessons, and save the entire family a huge tax hit.
LOOPHOLE: HIRING GRANDKIDS
The cost of magazines on work-related topics are a potential business expense. If the business has a reception area, the cost of reading material for waiting customers may be deductible.
If your business is an S corporation, partnership, LLC, or sole proprietorship, you can deduct losses immediately on your personal income tax return, offsetting other sources of income. With a C corporation, however, losses may have to carry over to the first year you have a profit. Just don't rack up too many losses: If your business looks more like a hobby, you can't use your losses to offset other gains.
BOOKS AND CLASSES
Whether you need continuing education or want to network, professional organization fees are legitimate business expenses. Organizations could include a chamber of commerce, real estate board, and trade or professional association.
BUSINESS GIFT DEDUCTION
Business owners who like to reward promising employees and thank local customers can show their appreciation with gift. Up to $25 per person per year is deductible.
HOME OFFICE DEDUCTION
ACTUAL EXPENSES VS. MILEAGE
Business owners can deduct the cost of using their vehicle for business reasons in two ways. They can deduct the actual costs, including depreciation (there are calculators for this), of using the vehicle for business. Or, they can claim a standard mileage rate – 54.5 cents per business mile in 2018. However, they must keep a detailed log when claiming the mileage tax deduction. Parking and registration fees, tolls, and taxes may also be deductible.
Nope, you can't deduct your commute. However, if you're going from your first job to a second job, that might be deductible at the standard business mile rate. In addition, driving for business-related medical reasons, moving, or to donate items or volunteer are deductible driving expenses. The standard mileage rates vary: 18 cents a mile for medical and moving and 14 cents a mile for charitable causes for 2018.
Business owners can deduct the cost of meals for business-related meetings, within reason, but usually only half. Office snacks, birthday cakes, and other items considered fringe benefits for employees are exempt.
MEALS ON THE ROAD
Even when traveling for work, business owners can deduct only half the cost of meals. However, they can opt to deduct half the government's per diem rate for meals and incidentals instead of the actual amount. This means a deduction as high as $51 a day, even when spending less than that. In either case, hang onto receipts.
KEEPING VALUABLES IN THE OFFICE
Have a valuable painting that needs to be insured? Hang it in the office — the cost of insurance might be a write-off.