BOSTON (CBS) - There are many tax deductions for the self-employed and to learn more get yourself a good CPA for your team of advisors.
Let's start with your car. You can either deduct the actual expenses of driving your car or you can use a mileage allowance set by the IRS. This year it's 53.5 cents a mile for business travel.
If you choose the actual expenses, you would deduct gas, oil changes, new tires, insurance, excise tax, etc. With the mileage allowance, you only need to keep track of the miles you travel for business. You get to deduct tolls and parking fees no matter which method you choose.
If your business owns the car you are allowed to depreciate it each year as well.
Health Insurance Premiums: You can deduct 100% of the cost of your premiums. This is a nice perk!
Social Security: As a self-employed individual you will be responsible for paying both the employee's and the employer's share of Social Security and Medicare taxes on your earnings. However, you will get a deduction for the employer share's you pay and taxes are due with your tax return.
Home Office Deduction: You may be eligible if you use the office exclusively in your business. There is now a simple method to figure your deduction based on the square footage of your office. You can deduct $5 a square foot with a maximum of 300 square feet. For more information, see IRS Publication 587, Business Use of Your Home.
Travel: You can deduct your legitimate travel expenses. If you are on vacation and make a sales call you cannot write off the whole trip. A part of the trip, yes. If you add a weekend away to your business trip you should deduct only the business portion of the trip.
Entertainment: There are limits as to what you can deduct under meals and entertainment. This is an area that the IRS feels is abused by small businesses so keep good records and always be able to justify an expense. Who you took out to dinner and why you took them out to dinner.
One more thing:
IRS: Home Office Deduction Often Overlooked by Small Business Owners
WASHINGTON — The Internal Revenue Service today reminded small business owners who work from a home office that there are two options for claiming the Home Office Deduction. The Home Office Deduction is often overlooked by small business owners.
As part of National Small Business Week (April 30-May 6), the IRS is highlighting a series of tips and resources available for small business owners.
The first option for calculating the Home Office Deduction is the Regular Method. This method requires computing the business use of the home by dividing the expenses of operating the home between personal and business use. Direct business expenses are fully deductible and the percentage of the home floor space used for business is assignable to indirect total expenses. Self-employed taxpayers file Form 1040, Schedule C , Profit or Loss From Business (Sole Proprietorship), and compute this deduction on Form 8829, Expenses for Business Use of Your Home.
The second option, the Simplified Method, reduces the paperwork and recordkeeping burden for small businesses. The simplified method has a prescribed rate of $5 a square foot for business use of the home. There is a maximum allowable deduction available based on up to 300 square feet. Choosing this option requires taxpayers to complete a short worksheet in the tax instructions and entering the result on the tax return. There is a special calculation for daycare providers. Self-employed individuals claim the home office deduction on Form 1040, Schedule C , Line 30; farmers claim it on Schedule F, Line 32 and eligible employees claim it on Schedule A, Line 21.
Regardless of the method used to compute the deduction, business expenses in excess of the gross income limitation are not deductible. Deductible expenses for business use of a home include the business portion of real estate taxes, mortgage interest, rent, casualty losses, utilities, insurance, depreciation, maintenance and repairs. In general, expenses for the parts of the home not used for business are not deductible.
Deductions for business storage are deductible when the dwelling unit is the sole fixed location of the business or for regular use of a residence for the provision of daycare services; exclusive use isn't required in these cases.
Further details on the home office deduction and the simplified method can be found in Publication 587 on IRS.gov.
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