Top 5 Tax Breaks Self-Employed Taxpayers Should Know About
When you’re self-employed, you’re the boss. But because you're the boss, that also means you’re the one stuck with the big tax bill. When tax season rolls around, make sure to double-check all the tax deductions and tax benefits that will help lower your tax bill. Here are 5 tax deductions self-employed individuals should take advantage of.
#1: Home Office Deduction
You can write off the cost of any workspace you use frequently and solely for your business whether you rent or own the workspace. It's common to misunderstand the home office deduction. An office must be a space that is utilized frequently and only for professional business activities. That means a kitchen counter or desk in a family room would be ruled out. You can either deduct $5 for every square foot of your home office -- up to 300 square feet -- the actual costs of your home office.
In cases where a tax audit does appear because there was inaccurate information on your tax return, you should be prepared to defend your deduction. If you are needed to give information and proof to verify your home office deduction, which employs the square footage of your workspace, a good way to go about this is to draw a diagram of your workspace with precise measurements.
#2: Travel Expenses
Work-related travel expenses are tax-deductible. Transit costs to and from your business destination like aircraft fares, transportation costs while you're there such as car rentals, Uber/Lyft fares, metro/train/subway tickets, accommodation costs, and food costs are all deductible travel expenses.
The business travel, however, must last longer than a typical workday and require an overnight stay at the very least. Keep all your complete and accurate records and documentation of all your business travel expenses and activities because the IRS frequently examines travel expenses a little more sensibly.
#3: Meal Deductions
If certain conditions are met, up to 50% of the costs of business lunches (including food and beverages) may be tax-deductible. A pandemic-related exclusion raises the deduction for meals at restaurants in 2021 and 2022 to 100%.
The lunch must be connected to business, the owner of the company (or an employee) must be present, and the expense cannot be exorbitant or ostentatious in order to be deducted. In addition, the cost of the meal must be shown separately from any entertainment expenses, which are typically not deductible, on the bill or receipt.
#4: Vehicle Use Deductions
Either your actual expenses or the IRS-established standard mileage rate might be used to assess your deduction. In 2021. the usual mileage rates are 56 cents and in 2022, the usual mileage rates are 58.5 cents, respectively.
Because it takes the least amount of calculating and record-keeping, using the standard mileage rate is the simplest option. Simply record your business mileage and the dates on which you traveled whether on paper or digitally in excel. Then, multiply the usual mileage rate by the number of business miles you log annually. This sum is deducted from your income.
Your expenses for any drives you make while operating a vehicle for business purposes are tax-deductible. Don't try to pass off personal automobile trips as business ones, and make sure you keep thorough records of the time, distance, and destination of each trip.
#5: Deducting Education Classes
Any education-related costs you wish to write off must be connected to preserving or enhancing your abilities for your current business. It is not tax-deductible to pay for classes to learn a new profession.
Any education expenses you want to deduct must be related to maintaining or improving your skills for your existing business. For instance, a florist might write off the expense of a seminar on flower arranging but not the cost of a knitting class.
Attending a course on real estate investment analysis to brush up on your knowledge would be tax-deductible if you were a real estate consultant but attending a yoga course would not be plausible for deductions.
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