Top 15 tax deductions and benefits for the self-employed

As a self-employed business owner, you have probably pondered about ways to reduce your self-employment taxes. Most freelancers struggle with their taxes because every industry and career involves a different set of deductions.

Unfortunately, the IRS doesn’t exactly provide a list of small-business tax deductions for every profession. However, it provides self-employed individuals with the ability to seek deductions on anything which is considered “ordinary and necessary” to run your business.

In other words, if you require certain items or services to maintain your business, you can write off those expenses on your tax return. If you struggle to keep a track of all your expenses, you can make use of tax engines like FlyFin, which is powered by AI and can automate all your expenses into deductions that may apply to you on the basis of your profession. There’s also an expert team of CPAs who can guide you through certain expenses that are specific to the type of business you run.

The following article features some of the most common tax deductions:

Home Office Deduction

If you are self-employed and use your home for business purposes, you can claim a deduction for the home office on your income tax return.

Who qualifies for home-office deduction?
You can claim the deduction as a homeowner or even as a renter, and you can use the deduction for any type of home where you reside: a single-family home, an apartment, a studio, or a houseboat. However, you can’t use it for temporary lodging.

As mentioned above, to be eligible for the home office deduction, you must meet one of the following requirements:

• Exclusive and regular use: You must regularly use part of your home exclusively for conducting business. For example, if you use a spare room to run your business, you can take a home office deduction for that extra room.
• Principal place of business: You must prove that you use your home as your principal place of business. If you conduct business at an outside location apart from your home and use your home regularly, you may qualify for a home office deduction.

What can you deduct?
The home office deduction offers you a tax write-off for items such as mortgage interest, rent, utilities, real estate taxes, maintenance, repairs, and other related expenses.

How to claim the home office deduction?
There are generally two major options available for taking the deduction:

• Standard method
• Simplified method

The simplified method is generally favored since it is less time-consuming. However, due to the $5 per square foot limitations set within the simplified option the maximum you’ll be able to deduct from 300 square feet is $1,500.

If you wish to claim the largest home office deduction you’re entitled to, you’ll have to calculate the deduction using both the standard and simplified methods. If you choose the former method, calculate the deduction using IRS form 8829, Expenses for Business Use of Your Home.

To know more about the home office deduction, click here.

Education Expenses

According to the IRS, for your education expenses to be considered as a write-off towards your taxable income, it must help to “maintain or improve your job skills”.

What are the requirements?
To ensure that your education can be considered a write-off, one of the following conditions must be met:

• The education must help in maintaining or improving skills for your business
• Education must be required by law to maintain status/certification
• The course or the program you undertook, must relate to your current business

What sort of education expenses are deductible?
As per the IRS, you can deduct the costs of “qualifying work-related education”, including expenses such as tuition, books, supplies, lab fees, transportation to and from classes, and other related expenses.

What sort of expenses cannot be deducted?
There are certain expenses that you can’t deduct such as:

• Traveling to gain experience to improve your skill or education. For example, a Japanese teacher who takes a trip to Japan to improve her knowledge of the Japanese language can’t deduct her travel expenses.
• Vacation expense or annual leave you took to attend classes

Many deductible job-related academic expenses might be eligible for other education credits or deductions such as:

• An education credit
• Employee-business expense deduction

Car or Mileage Deduction

If you travel for business, you may deduct the miles you drove from one place to another. To benefit from this particular tax deduction, you need to track your mileage. Any sort of distance that you cover with the use of your vehicle for your business, can be considered as a part of business mileage deduction.

You can also claim a percentage of all your car-related expenses. Here, the only complication is based on what the IRS calls “commuting.”

What sort of car-related expenses can be written off?
If you own a car, then you can write off your car payments. This includes gas, insurance, maintenance, oil change, and other car-related expenses.

What’s the mileage deduction?
Mileage deductions were introduced as an alternative to car tax write-offs. Self-employed Americans can deduct 57.5 cents per mile.

Car expenses or mileage deduction, which is better?
Both deductions will help you reduce your taxable income, however, the mileage deduction requires you to maintain a mileage log. Car expenses are comprised of multiple deductions, which may be more beneficial. Mileage deduction will be preferable if you drive a lot.

Below are some reasons why you might want to select the mileage deduction:

• You drive a lot for work
• Your car is old, but gas efficient
• You drive an electric vehicle

Business Travel

Whether it's for a flight across the country or a quick overnight trip, travel expenses can be considered a deduction.

What can you deduct?
Flights, hotels, taxis, and food are deductible business expenses as long as they're for actual, legitimate business purposes. Generally, all travel-related expenses while on a business trip are tax-deductible, including:

• All transportation
• Lodging
• Meals
• Wi-Fi
• Shipping
• Dry cleaning

What sort of expenses cannot be deducted?
The following expenses cannot be deducted:

• Costs associated with bringing a child or spouse
• Use of paid amenities

How to claim travel expenses when filing your taxes?
As a self-employed individual, you can claim all your income tax deductions on Schedule C. This is part of Form 1040 that is completed every year for self-employed individuals.

Business Meals

Until 2020, you could deduct up to 50% of the cost of a business meal. However, as of 2021, you can now deduct 100% of business meal costs.

What counts as a business meal?
The IRS describes a business meal as the following: food and beverages provided to a current or potential business customer, client, consultant, or similar business contact.

What sort of expenses cannot be deducted?
The following shall not be considered as deductible:

• Snacks consumed while working
• Groceries
• Sololunch

What kinds of records do you need?
You don’t have to hoard all the meal receipts, instead, you can provide bank and credit card statements as proof of purchase.

Start-up expenses

Start-up expenses (capital expenses) are not deductible unless the business owner elects to deduct the expenses. According to the IRS, you can deduct up to $5,000 in business startup costs and $5,000 in organizational costs.

How does it work?
As mentioned above, the IRS allows you to deduct up to $5,000 in business startup costs and $5,000 in organizational costs. The $5,000 deduction is reduced by your total start-up or organizational costs exceeding $50,000.

What can you deduct?
Startup costs generally include the costs to get your business up and running before it opens, such as advertising, salaries, and wages for employees in training, travel to obtain suppliers or customers, or consulting fees.

How to claim business startup deductions?
If you wish to claim your business start-up, it needs to be reported on your business tax form. That would be Schedule C for a sole proprietor, K-1 for a partnership or S corporation, or Form 1120 of a corporate tax return.

Advertising Expenses

Freelancers may deduct all ordinary and necessary business expenses, which also include advertising expenses.

What can you deduct?
Advertising as a business expense includes:

• Advertising in various media- newspapers, TV, internet, cable, and magazines
• Marketing activities
• Promotional and public relations expenses
• Online activities
• Producing advertising materials
• Costs of advertising events

What sort of expenses cannot be deducted?
You may not deduct primarily personal costs, even if they have some promotion value.

You can't deduct the cost of advertising in any publication or website used by or for political affiliation.

Phone and internet costs

Cell phone and internet costs are necessary to run any business,, and if you happen to use both regularly for conducting your business then you may get a deduction.

What can you deduct?
You can deduct your entire bill if you have a separate business cell phone or internet connection. If you don't have a dedicated line, you can deduct the percentage used for business.

How to deduct internet expenses?
If you have a website or use the internet to do business, some or all of your internet costs may be deductible.

Can you deduct the cost of a personal phone?
You cannot deduct the cost of your regular phone unless the calls or services are directly related to your business. You can deduct the full expense of having a second, business-only line in your home.

If you also use your cell phone for personal use, you can only deduct the direct business expenses and the percentage of time the phone is used for business reasons.

Memberships and subscriptions

If you are a member of a professional association, a networking organization, or subscribe to business/trade journals specifically to help you in your business, you can deduct these costs.

What can you deduct?
Subscriptions to magazines, newspapers, journals, newsletters, and similar publications can also be a deductible expense.

What can you not deduct?
There are several expenses that you can no longer deduct including subscriptions related to:

• Investments
• Unreimbursed employee expenses
• Job searching

How to deduct subscriptions on tax returns?
You can deduct your business expenses on Form 1040 Schedule C under “other expenses”. Schedule C will help you figure out your net profit so you can add it as income on your form 1040.

Utilities

Utilities generally include expenses such as electricity, gas, water, waste disposal, heating, and sewage. However, you are only allowed to write off a percentage of your utilities based on what is used in your business.

However, if you pay for a utility or a service that does not aid your business, you won’t be able to deduct that portion of your expense.

Is it part of a home-office deduction?
If you happen to have a designated office area within the premises of your home, you may include utilities as part of your home office expenses.

Is it valid for rental properties?
If you rent an office space for your business start-up you can deduct the cost of the utilities. Apart from these ten deductions, you can also deduct the following expenses:

1. Office supplies
2. Insurance premiums
3. Rent
4. Repairs and maintenance
5. Credit card and loan interest

Office supplies

Any equipment needed to perform your job is usually counted as a deductible expense. You can deduct the cost of materials and supplies consumed and used during the tax year.

Insurance premiums

According to the IRS, you may apply for tax deduction over the amount you paid for medical and dental insurance and qualified long-term care insurance for yourself, your spouse, and your dependents on Form 1040.

For self-employed individuals, the health insurance plan must be claimed under your business or in the name of the individual. The tax deduction is restricted to your net profit on Schedule C. If all or part of the health insurance amount is not applicable under this particular section, the balance may be deducted from Schedule A under medical expenses subject to the (as of 2020) 10% percent minimum of AGI.

If in case you received a tax credit for the amount you paid for health insurance, you need to subtract the credit from the amount you paid for health insurance. This amount is what will be allowed for your health insurance deduction. Qualified long-term care insurance premiums may be included in this health insurance tax deduction up to the following amounts for 2020:

Rent

You can deduct rent as an expense only if the property is meant to conduct your trade or business. If you receive equity in or title to the property, the rent will not be deductible.

Repairs and maintenance

This involves the cost incurred to ensure that an asset continues to operate. Self-employed workers can deduct expenses for repairs and maintenance of their property and equipment, however, the average homeowner can't generally claim a tax deduction for these expenses. The rule for business owners and landlords is that you can generally deduct amounts paid for repairs and maintenance as long as the expenses don't need to be capitalized.

Credit card and loan interest

If you take a business loan, you can write off your interest payments as a business expense. The IRS generally demands certain conditions to qualify your business loan:

• You must be legally liable for the loan
• You and the lender must unanimously agree that you intend to pay off the debt
• And you and the lender have a true debtor-creditor, or lender-borrower, relationship

The interest you pay on a credit card is considered as a personal expense, however, it’s a different story if a business is involved. To convert your credit card interest into a deductible, your credit card debt must be related to your trade or business activity.

Bottom line

We know, it’s not easy to handle taxes, and mulling over a spreadsheet is a task, here, FlyFin can ease up your burden. FlyFin is the tax engine that is powered by artificial intelligence and can help you to deduct items properly. This will help maximize your deductions and minimize your audit risk.