As a business owner, you’re entitled to various deductions that are generally not available to employees. This includes things like the amount you spend on supplies, office rent, books, magazines, and other research needed for your business, the cost of business travel, the amount you pay for business-related meals and entertainment, and the cost of attending business-related seminars, conferences, and classes. You also can often write off bigger things, such as contributions to retirement plans, business use of your home and certain automobile expenses.
Whether you’re a freelancer, independent contractor, small business owner, or have multiple sources of income, we’ll help you uncover industry-specific deductions you qualify for to get you every dollar you deserve. It’s free to start, and enjoy $20 off TurboTax Self-Employed when you file.
1. Funding your retirement
Often, the single biggest deduction you can have is funding your retirement. There are a variety of plans available to businesses and the self-employed. If you’re self-employed with no employees, you can likely set up an individual 401 (k) plan. Under this arrangement, you can generally contribute up to $19,000 in tax year 2019 (up to $25,000 if you are age 50 or older) as a 401(k) deferral and up to another 25% of your net income, lowering your taxable income by thousands of dollars.
If your business has employees, you can set up a Savings Incentive Match Plan for Employees (SIMPLE) IRA. This plan provides an easy way to contribute to your retirement and that of your employees, while lowering your taxable income. An employee can contribute up to $13,000 if they’re under 50, and up to $16,000 if they’re age 50 and older (tax year 2019).
Another business-only retirement plan is the Simplified Employee Pension IRA, or SEP IRA. Under this plan you can contribute up to either 25 percent of your income or $56,000, whichever is less (tax year 2019). If you have eligible employees, they must also contribute at certain levels or you will be restricted on what you can contribute for yourself.
2. Using your home for business
Many self-employed taxpayers start their businesses in their home, and many remain home-based. Self-employed software developers, website designers, artists, writers, architects, accountants, and many others work out of offices or studios located in their homes. If you use part of your house or dwelling exclusively for business purposes, you can likely take a deduction for business use of your home.
There are two ways to calculate the deduction for a home office. The easiest is to multiply the square footage of your in-home business space (up to a maximum of 300 square feet) by $5 (tax year 2019). For example, if you have an office that is 200 square feet and meet all of the requirements, you get a deduction of $1,000.
- 200 square feet x $5 = $1,000 home office deduction
If you use the simplified square footage method, you cannot take additional deductions for direct expenses, taxes, rent, or home depreciation.
The second way of calculating the deduction is the percentage of your home method. Using this method, you claim a percentage of your qualifying home expenses based on the percentage of your home that you use for the business. For example, if you have a 2,000-square-foot home and your office is 200 square feet, you can claim 10% of your qualifying home expenses as business deduction.
- 200 business square feet ÷ 2,000 home square feet = 10% of home used for business
Deductible household expenses often include:
- mortgage interest
- property taxes
- homeowner insurance
If you use this method, it is important to keep close track of your housing expenses.
As long as your gross business income exceeds your total business expenses, you are allowed to deduct all of the expenses related to the business use of your home. However, if your gross business income is less than your total business expenses, you can only deduct the difference between your gross income and the sum of all the business expenses you’d pay if your business was not located in your home.
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3. Business use of your car
If you use your car or truck for business, you usually can deduct the cost of your vehicle. There are two ways to calculate the business use of your car. The simplest is to multiply the number of business miles you drove by the standard mileage rate of 58 cents per mile (tax year 2019). The second method is the actual expense method. In this case, you carefully track all of your vehicle expenses and multiply them by the percentage of the vehicle’s business use. Actual expenses can include:
- fuel costs
- car payments
- vehicle registration
- garage rent
- parking and toll fees
Using the actual expense method requires excellent recordkeeping of all expenses. Using the standard mileage rate requires equally careful recordkeeping for all miles driven for business purposes as well as the total number of miles for the year. For more tax write-offs for the self-employed, visit TurboTax.com.