The law affects small businesses in many ways, particularly via a qualified business income QBI deduction for pass-through businesses—those that pay taxes as individual taxpayer s rather than through a corporation. For owners of sole proprietorships , partnerships , S corporations , and certain trusts , estates , and limited liability companies LLCs , this deduction provides a great benefit.
Some deductions that have been eliminated or changed post-TCJA include:. Key provisions that are set to expire in include:. It is important to note that tax laws are constantly changing, and these provisions may be modified or extended at any point prior to A review of the most common self-employed taxes and deductions is necessary to keep you up to date on any necessary changes to your quarterly estimated tax payments.
The self-employment tax refers to the Medicare and Social Security taxes that self-employed people must pay. This includes freelancers, independent contractors, and small-business owners. The self-employment tax rate is Employers and employees share the self-employment tax. Each pays 7. People who are fully self-employed pay both parts themselves. An additional 0. The threshold figures are:. The income thresholds for additional Medicare tax apply not only to self-employment income but also to your combined wages, compensation, and self-employment income.
Paying extra taxes to be your own boss is no fun. The good news is that the self-employment tax will cost you less than you might think because you get to deduct half of your self-employment tax from your net income when calculating your income tax. The Internal Revenue Service IRS treats the employer portion of the self-employment tax as a business expense and allows you to deduct it accordingly. It does not reduce the net earnings from self-employment or reduce the self-employment tax itself.
Self-employed individuals determine their net income from self-employment and deductions based on their method of accounting. Most self-employed individuals use the cash method of accounting and will therefore include all income actually or constructively received during the period and all deductions actually paid during the period when determining their net income from self-employment.
The home office deduction is one of the more complex deductions. In short, the cost of any workspace that you use regularly and exclusively for your business, whether you rent or own it, can be deducted as a home office expense. You are basically on the honor system, but you should be prepared to defend your deduction in the event of an IRS audit.
One way to do this is to prepare a diagram of your workspace, with accurate measurements, in case you are required to submit this information to substantiate your deduction, which uses the square footage of your workspace in its calculation.
In addition to the office space itself, the expenses that you can deduct for your home office include the business percentage of deductible mortgage interest , home depreciation , utilities, homeowners insurance , and repairs that you pay during the year. Some of these deductions, such as mortgage interest and home depreciation, apply only to those who own rather than rent their home office space. The standard method requires you to calculate your actual home office expenses and keep detailed records in the event of an audit.
The simplified option lets you multiply an IRS-determined rate by your home office square footage. To use the simplified option, your home office must not be larger than square feet, and you cannot deduct depreciation or home-related itemized deductions.
Regardless of whether you claim the home office deduction, you can deduct the business portion of your phone, fax, and Internet expenses. The key is to deduct only the expenses directly related to your business.
For example, you could deduct the Internet-related costs of running a website for your business. A meal is a tax-deductible business expense when you are traveling for business, at a business conference, or entertaining a client. Unfortunately, this means that the desk lunch is not tax deductible. This provision is effective for expenses incurred after Dec.
The lunch that you eat alone at your desk is not tax deductible. Additionally, before the TCJA, meals and entertainment expenses were considered together. To qualify as a tax deduction, business travel must last longer than an ordinary workday, require you to get sleep or rest, and take place away from the general area of your tax home usually, outside the city where your business is located. Further, to be considered a business trip, you should have a specific business purpose planned before you leave home and you must actually engage in business activity—such as finding new customers, meeting with clients, or learning new skills directly related to your business—while you are on the road.
Keep complete and accurate records and receipts for your business travel expenses and activities, as this deduction often draws scrutiny from the IRS. Deductible travel expenses include the cost of transportation to and from your destination such as plane fare , the cost of transportation at your destination such as car rental, Uber fare, or subway tickets , lodging, and meals.
If your trip combines business with pleasure, then things get a lot more complicated; in a nutshell, you can only deduct the expenses related to the business portion of your trip. For example, if your spouse who does not work for you as an employee joins you on a business trip, then you can only deduct the portion of lodging and transportation costs that would have been incurred if you had traveled alone.
When you use your car for business, your expenses for those drives are tax deductible. You can calculate your deduction using either the standard mileage rate determined annually by the IRS or your actual expenses. The standard mileage rates are Using the standard mileage rate is easiest because it requires minimal record keeping and calculation. Just write down the business miles that you drive and the dates when you drive them.
Then, multiply your total annual business miles by the standard mileage rate. This amount is your deductible expense. To use the actual expense method, you must calculate the percentage of driving that you did for business all year as well as the total cost of operating your car, including depreciation, gas, oil changes, registration fees, repairs, and car insurance.
If you want to use the standard mileage rate on a car that you own, then you need to use that method in the first year when the car is available for use in your business. In later years, you can choose to use either the standard mileage rate or switch to actual expenses.
If you are leasing a vehicle and wish to use the standard mileage rate, you must use the standard mileage rate in each year of the lease period. As with the home office deduction, it may be worth calculating your deduction both ways so that you can claim whichever is the larger amount. Interest on a business loan from a bank is a tax-deductible business expense. You will need to track the disbursement of funds for various uses if the entire loan is not used for business-related activities.
First up: If you have a full-time job, but occasionally use your personal auto for professional duties, you're probably qualified for write-offs.
Mileage is the biggest deduction, Schrage noted, adding, "Although it may not seem like much, it adds up.
If you drive from your usual work site to another job-related destination—a sales meeting, to get office supplies, or to the airport—those miles may be deducted. If your employer reimburses you for mileage, however, you cannot deduct these expenses on your taxes.
The per-mile rate for is 56 cents for business miles driven. For a list of current-year and prior-year mileage rates see "Standard Mileage Rates. If you are self-employed, you may either deduct your exact expenses or use the optional standard mileage rate to calculate deductions.
Illinois CPA Neil Johnson recommends you keep meticulous records throughout the year to ensure you are prepared when tax time arrives. The more information the better, says Johnson, who has adopted the nickname given him by one of his clients and is now known as "the Tax Dude. However, the distance driven between each client can be written off.
Also worth noting: you may deduct miles driven to odd jobs such as babysitting, pet care or lawn work. TurboTax Self-Employed uncovers industry-specific deductions. Some you may not even be aware of. Find more tax deductions so you can keep more of the money you earn with TurboTax Self-Employed.
Business Use of Vehicles. Taking Business Tax Deductions. Neither does having your company logo on the side of the car. Parking fees are deductible when you're driving to a meeting, not when you park at your place of work. If you opt for the mileage write-off, just track the number of miles you drive for business and the reason for the trips. If your schedule is a regular one - same route every week or month - you only have to record enough mileage to establish a pattern.
For actual expenses, you have to keep records of your automotive expenses as well as mileage. You'll also need both your work mileage and your non-work mileage. For instance, if you drive the car 60 percent for work, you can claim 60 percent of your expenses as a deduction. That's not as hard as it sounds. Record the odometer reading at the start and end of the year, then divide the total miles you drove into your work mileage.
So if you put 50, miles on the car and 20, miles were for work, you can write off 40 percent of your automotive expenses.
A lot of the actual expenses you can deduct, such as property taxes and insurance, are the same no matter how much you drive. If you don't use your car much, taking actual expenses will probably give you a higher per-mile write-off than the standard deduction. The only way to be sure, though, is to crunch the numbers.
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