10 Things Self-Employed Taxpayers Can Write Off for Savings
Tax time is here, and if you work for yourself, you can lower your tax bill by writing off a bunch of business-related expenses. When it comes to saving money and staying in the good graces of the Internal Revenue Service, the name of the game is meticulous documentation, receipts, logs, and records. A word to the wise: Be honest about what you actually use for business purposes and speak with an accountant just to be sure.
The IRS allows self-employed taxpayers to write off a home office and has introduced a new, simpler means of calculating the deduction: Multiply the square footage of the room by $5. (The more complex method involves determining the portion of home expenses, taxes, insurance, and depreciation that can be attributed to the home office.) There are two catches, however: The home must be your principal place of business and you must use the space you're writing off exclusively for work.
Most self-employed taxpayers can write off not just their own health insurance premiums when they file their taxes but also those of their spouse and dependents, as well -- whether they itemize deductions or not. The only requirement is that they cannot be eligible for coverage under a spouse's employer's plan. The deducted amount cannot exceed the total earnings of the business.
The IRS allows write-offs for tablets, computers, phone and internet service, and even TV -- as long as they are a "usual, necessary, customary and reasonable expense for your type of work," according to TurboTax. An advertising agent may be able to write off cable TV; a construction manager, probably not. Also, claiming 100 percent business use for any of these items is likely to raise some eyebrows.
Dues for professional societies and organizations, as well as subscriptions to trade journals and industry publications, can be tax deductible. They must, however, be a legitimate part of the taxpayer's quest to keep up with trends and information in the industry. A hot tub dealer's subscription to SpaRetailer magazine likely would be acceptable. A subscription to Maxim or Sports Illustrated probably would not. Organizations could include a chamber of commerce, real estate board, and trade or professional association.
Self-employed taxpayers can deduct entertainment expenses, but like their brethren filing corporate expense reports, they must confine their claims to legitimate business expenses. This might include entertaining clients or engaging in any activity that takes place in an obvious business setting, such as a convention. Even if there's a legitimate business purpose, however, most entertainment expenses are subject to the "50 percent rule," which mandates that taxpayers can write off only up to half the expense.
The IRS allows self-employed taxpayers to deduct some meals, provided they are consumed while traveling for business or meeting with clients, customers, or other business stakeholders (or immediately before or after). Meeting a client for coffee? Save the receipt and write it off. Just grabbing lunch during the workday? Sorry, that doesn't count. The meals can't be more luxurious than the circumstances require, and the taxpayer cannot deduct a meal as both entertainment and travel. The 50 percent rule usually applies.
Self-employed taxpayers can write off business-related car travel expenses, even for short distances close to home. The standard mileage rate is 53.5 cents a mile for 2017 and will increase to 54.5 cents for 2018. If you don't use the standard mileage rate, you may be able to deduct actual expenses including registration, payments, depreciation, repairs, tolls, and parking -- with proper documentation, of course.
Self-employed taxpayers can currently write off the cost of most learning materials intended to make them more effective at their work. This might include webinars, classes, workshops, and seminars, as well as books, ebooks, and other reference materials. The key, as with most business write-offs, is to keep receipts or other proof of purchase. Educational expenses that meet the minimum requirements of a trade or business -- or related to entering a new line of work -- do not qualify. But don’t count on using these current write-offs next year, thanks to the recent tax reform law. Self-employed taxpayers who are used to taking such deductions may need the help of a tax professional in 2019.
If you own property used to generate income, you can write off its depreciating value, provided you own it for more than one year. This could be a computer for a writer or a gas-powered generator for a contractor. The IRS requires an estimate of the property's useful life span and the amount of time you will be able to use it to generate income.
The granddaddy of all write-offs: retirement account contributions. Self-employed taxpayers can lower their current tax bill by contributing to a Simplified Employee Pension Individual Retirement Arrangement, which has higher contribution limits than a traditional IRA. SEP-IRA contributions made before the tax-filing deadline can be applied to the previous year. Another option is a solo 401(k) retirement account. Taxpayers may need to apply for a federal Employer Identification Number -- a quick, online process -- to open an account. The paperwork can be a bit complicated, but like a SEP-IRA, a solo 401(k) lets individuals defer more money than a traditional IRA. The taxpayer must set up an account and elect to make a contribution by Dec. 31, but funds needn't be deposited until the tax-filing date (April 17, or even later with an extension).
Raechel Conover contributed to this story.