If you are a sole proprietor or receive a 1099 for contract work then you will want to consider tax deductions attributable to the income earned in the profit motivated activity.
To be deductible the business expense must be reasonable and ordinary. Expenses that are common to the industry and appropriate for the activity.
Common business expenses include:
· Tools and supplies used to carry out the activity
· Certifications, licenses and continuing education
· Liability insurance
· Wages and contract labor
· Accounting and other professional fees
· Advertising
· Auto expense
Home office Deduction:
This deserves its own category. Home office deduction has the option of the simplified method. This method is simply to deploy and does not require depreciation recapture when you sell your home in the future. It is simply $5 a square foot up to 300 square feet ($1,500).
Business wanting to maximize the home office deduction will want to consider the home office allocation. This method usually provides a larger home office expense. The home expenses are allocated based on the percentage of the home office square feet of the total square feet of the home in which it is located. The value of the home used is also assigned to this percentage and taken as a depreciation deduction. Other expenses included in the calculation are:
· Mortgage interest and real estate tax
· Utilities
· Internet and phone
· Homeowners Insurance
· Repairs and Maintenance including lawn care
Other considerations to reduce your taxable income:
· Capturing Education Expenses
· Setting up a retirement plan
· Purchasing an office condo or building
Do not forget the estimated tax payments:
The IRS requires taxpayers to pay tax on earned income evenly throughout the year. For the self-employed, quarterly estimated tax payments satisfies this requirement. If you do not pay estimated payments when required, you may incur interest and penalties on the underpayment.
Contact us to discuss your tax and accounting needs for your small business or self-employed activity.