Business Use Of A Vehicle
There’s a tax deduction waiting if you drive your own car for businessand it isn’t just for Uber or Lyft drivers. Any self-employed person who makes deliveries, drives to a client’s location or otherwise uses a personal vehicle for work-related purposes can claim this deduction.
There are two ways to calculate the deduction you can use the standard mileage rate or your actual car expenses. If you use the standard mileage rate, you can deduct 58.5¢ for every mile driven for business during the first six months of 2022 and 62.5¢ per mile for the second half of the year . Make sure you keep good records of the dates and miles you drive for workand don’t include driving for any personal trips or errands.
With the actual expense method, you add up all your car-related expenses for the year gas, oil, tires, repairs, parking, tolls, insurance, registration, lease payments, depreciation, etc. and multiply the total by the percentage of total miles driven that year for business reasons. For example, if your total annual car costs are $5,000 and 20% of your miles were for business, then your deduction is $1,000 .
Eliminated Or Changed Deductions
Some deductions that have been eliminated or changed post-TCJA include:
- Entertainment and fringe benefit deduction
- Employees parking, mass transit, or commuting expenses deduction
- Domestic production activities deduction
- Local lobbying expenses deduction
- State and local tax deduction is now limited to $10,000
- Deduction of settlement or legal fees in a sexual harassment case when the settlement is subject to a nondisclosure
Key provisions that are set to expire in 2025 include:
- Standard deduction will return to pre-TCJA levels
- Income tax rates will return to pre-TCJA levels
It is important to note that tax laws are constantly changing, and these provisions may be modified or extended at any point before 2025. Therefore, reviewing the most common self-employed taxes and deductions is necessary to keep you updated on any changes required to your quarterly estimated tax payments.
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Simplified Employee Pension Ira
Deducting contributions is one of the most convenient ways for self-employed people to reduce their taxable income. Self-employed people can contribute up to $61,000 for 2022, and that contribution is fully tax-deductible. Self-employment tax is calculated before SEP contributions. Thus, these contributions do not affect self-employment tax.
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How To Claim Small
You can claim most small-business deductions on Schedule C and Schedule E forms . You can use these forms to add up all your deductions and figure out your taxable income.
Remember, the more deductions you claim, the lower your taxable income. And the lower your taxable income, the less youll owe Uncle Sam. Got it? Great!
But look, this stuff gets trickyespecially if youre a small business with employees. The last thing you want to do is miss out on deductions that could save you hundreds or thousands of dollars on your taxesor worse, make some mistakes that leave you in hot water with the IRS. Youll want to talk with a tax pro to make sure you have everything sorted out.
Vehicle Or Mileage Expenses
Some self-employed people do not need a car. For instance, a marketing freelancer would only need a computer and a desk in their home to do their job. However, other people’s freelancing work might take them to different areas, meeting clients or picking up necessary items.
You may deduct a little over $1 for every two business miles that you drive with your car. This can be done as long as you can prove it was not a personal expense and that you conducted those miles for business purposes.
Try our free template to track miles for taxes to help you with this.
You need to keep a receipt of your actual car expenses as well. This includes things such as gas, licenses, depreciation, tolls, oil, garage rent parking fees, lease payment, insurance, registration fees, tires, and repairs.
The actual expense method needs to be used anyway, especially if you are using more than five cars for business purposes. You may also collect deductions for a leased car, but you’ll have to consult with your tax bill. The IRS Publication 463 can give you information on the rules for lease payments.
Read more about the mileage versus actual deduction method.
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Retirement Tax Shelters And Credits
Once you start working for yourself, the door opens wide to tax-sheltered retirement plans. Unlike employees, whose options are pretty much limited to whatever their employer offers and an IRA, self-employed people can contribute pretax money to a simplified employee pension or a solo 401, both of which have higher annual limits than regular individual retirement accounts.
You may also get a tax credit for contributions to your retirement plan if your income isn’t too high. It’s called the Saver’s Credit, and it can trim up to $1,000 off your tax bill . The credit is worth 50%, 20% or 10% of your contributions depending on your adjusted gross income. However, for the 2022 tax year, it’s completely phased out for single filers with an AGI over $34,000 .
Consultancy & Professional Fees
If your business has incurred professional fees over the course of the year, weve got food news for you. All consultancy and professional fees that were fundamental to the operation of your business are allowable expenses. Some examples of qualifying professionals would be accountants and solicitors.
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Business Use Of Home Office Expenses
There are two major criteria to fulfill to be able to claim deductions for your home office expenses. Your home office is to be either your principal place of business or used exclusively for purpose of earning business income. You can deduct eligible expenses only for proportionate areas of business use. For example, you use 25% space of your home for business purposes, you can claim up to 25% of eligible expenses for business purposes.
You may have one more business and you operate one business from home and the other one from a different place. You can claim home office expenses against that particular business income which you operate from home office. Such expenses cannot be claimed to create a business loss. If you are unable to claim any portion of home office expenses on your income tax return in the current year you can carry forward to future years to get deductions subject to fulfillment of business use criteria.
If you are a GST/HST registrant you would qualify for input tax credit on eligible business use of home office expenses on which you paid GST/HST. You can claim this while filing your GST/HST Return to CRA. You may wish to consult with any Tax Professional who usually provides GST/HST Service and file GST/HST Return for Small Business.
For more details, you may review CRA Form T2125 and Guide T4002 . You may also want to discuss Business Tax Return or Self-Employed Tax Return with any Tax Preparer or Tax Return Preparation service providers.
Tax Deductions For Volunteers
If youre the type of person who likes to donate your free time to volunteering, and you dip into your own wallet to travel to your favorite charity, you can add those expenses to your charitable deductions . The primary purpose of the trip must be for charity, with no substantial element of a vacation. According to the IRS, to qualify, you must be “on duty in a genuine and substantial sense throughout the trip.”
Whether you ride the bus or drive your own car, you’ll need good records of your charitable activities: Keep receipts for public transportation or mileage logs for your car , as well as receipts for parking and tolls.
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Startup And Organizational Expenses
Before your business even opens its doors, youre already spending money. Between market research and registering your business, youre likely racking up thousands of dollars in expenses. You can deduct some of these costs in the first year of operations.
The IRS calculates startup and organizational costs separately. Looking for office space or conducting market research count as startup costs. Organizational costs include business registration and legal fees.
You can deduct up to $5,000 for startup costs and another $5,000 for organizational costs. The deductible amount goes down when the categorys total expenses exceed $50,000. The remainder of your startup and organizational costs are expensed over the first 15 years of your businesss operations in a process called amortization.
Although Im telling you about these deductions, you might be better off skipping them. The startup and organizational cost deductions dont make sense for businesses that dont plan to be profitable in their first year. To maximize your tax savings, you should elect to amortize all of your startup and organizational expenses over 15 years.
Like education expenses, sole proprietors deduct startup and organizational expenses in the other expenses section of Form 1040 Schedule C.
Books Courses And Coaching
Growing and sustaining a business means that youre continually learning on the topics relevant to your industry, like new audio editing programs or paying coaches to help you with new business strategies. All of these expenses can be tax deductible.
When it comes to books, make sure that theyre relevant to your business. Lets say youre a freelance writer and want to learn about how to write whitepapers for a software company. Purchasing a book to teach you how to write them is an acceptable business expense, whereas a book about inspirational writing quotes probably isnt.
If you like attending seminars or conferences , these count as businesses as well.
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The Home Office Deduction
If you work from your home or use part of it in your business, then self-employment tax deductions like this one could get you a break on the cost of keeping the lights on.
What you can deduct: A portion of your mortgage or rent property taxes the cost of utilities, repairs and maintenance and similar expenses. Generally, this deduction is only available to the self-employed employees typically cannot take the home office deduction.
How it works: Calculate the percentage of your home’s square footage that you use, in the IRS words, exclusively and regularly for business-related activities. That percentage of your mortgage or rent, for example, becomes deductible. So if your home office takes up 10% of your house’s square footage, 10% of those housing expenses for the year may be deductible. IRS Publication 587 outlines a lot of scenarios, but note that only expenses directly related to the part of your home you use for business say, fixing a busted window in your home office are usually fully deductible.
What else you can do: Choose the simplified option, which lets you deduct $5 per square foot of home used for business, up to 300 square feet thats about a 17-by-17-foot space. You wont have to keep as many records, but you might end up with a lower deduction, so consider calculating it both ways before filing.
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How Much Do You Get Back From Tax Write
How much you get back from tax write-offs depends on how much you spent and your tax rate. One thing to note is that you usually dont get the full amount of the write-off back.
For example, say you have a $1,000 deduction and a 30% tax rate. The deduction reduces your income by $1,000. Thats $1,000 youre not paying 30% on. So you get back $300.
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No Matter How You File Block Has Your Back
Use Of Personal Vehicle
You can deduct the business use of your personal car in one of two ways. The most straightforward is applying the IRS mileage rate — $0.575 in 2020 — to every mile driven for business purposes.
Say you own a construction business, and you use your personal car to visit clients homes. When you make a 14-mile round trip to a clients home, you can deduct $8.05 on your taxes .
Either set up a spreadsheet or use software to track your business mileage. It might benefit you to take pictures of your cars odometer before and after each business trip.
Your second option is deducting a portion of the total amount you spent operating your car during the year. To deduct actual costs, you need to determine what percentage of miles driven were for business and multiply it by the total cost of insurance, registration, gas, oil, and the like.
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Standard Deduction Vs Itemizing Expenses
When it comes to the standard deduction, you’ve got a choice. You can either take the $12,000 and change, no questions asked, or you can itemize your personal deductions on your tax return.
It’s important to note that these personal itemized deductions have nothing to do with your deductible business expenses, which you can claim on top of the standard deduction. More on that later!
Itemized deductions that you can replace with the standard deduction include the following:
- ð· Health insurance premiums
- ð Disaster losses from a federally declared disaster
Tax filers who choose to itemize will indicate the personal deductions they’re taking on Schedule A of their tax return.
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Child And Dependent Care Expenses
If you pay someone to care for a child or another dependent while you work, you may be able to claim the Child and Dependent Care Credit. To qualify, the person receiving the card must be a child or a spouse or other dependent who is physically or mentally incapable of self-care.
The credit is worth between 20% and 35% of your allowable expenses, depending on your income. Allowable expenses are limited to $4,000 for the care of one dependent and $8,000 if you paid for the care of two or more dependents. IRS Publication 503 provides more information on the Child and Dependent Care Credit. Youâll need to attach Form 2441 to your Form 1040 to claim the credit.
Meals Self Employment Tax Write Offs
Meals when youre traveling or entertaining clients are tax-deductible. In addition, you can only deduct 50% of the total meal expenses from your self-employed taxable income. This is a self-employment tax deduction to track. It is often challenging to diligently track tax-deductible meal expenses for the self-employed. Therefore, we recommend using a convenient expense tracking app such as Falcon Expenses.Falcon Expenses automates the process of keeping track of expenses. For example, integrate your debit and credit card charges into Falcon Expenses. Then quickly categorize self-employed tax write-offs such as meal expenses with a few taps of your finger.
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Is Rental Income Subject To Self
Rental income can be subject to self-employment tax depending on how much work you do.
If you actively manage your properties and provide services to your tenants, your rental income may be business income subject to self-employment tax. If you sit back and let a property manager do all the work, your rental income may be passive income thats not subject to self-employment taxes.
How To Claim Business Expense Tax Deductions On Your Taxes
You will file Schedule C to report your profit to the IRS. On this form, you record all your income and tax deductions. You pay taxes on your net income, which is your total income minus any business tax deductions.
Youll find your income information on the Uber or Lyft driver dashboard. You may also receive two tax forms, Form 1099-K and Form 1099-NEC. The dashboard and forms will record your income and some of the tax deductions you qualify for.
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