Entrepreneurs and the self-employed who want to maximize their income tax deductions would do well to remember the acronym HELP when filing taxes. It stands for Home Office + Equipment + Logbook + Postage, four of the best ways for independent contractors to reduce their taxable income.
Home office deductions
If you don’t maintain a storefront or office space for your business, you may be entitled to deduct a portion of your house or apartment rent, plus heat, electricity, and other household expenses at the time of tax return. To qualify, you must move from the dining room table to a vacant room designated for business use only. No folding sofa is allowed for house guests, out-of-season storage of Christmas decorations or other non-commercial use is allowed in a tax deductible home office.
Inventory storage space also qualifies for the home office deduction, so if you use a room in your house for inventory only, you could also get a tax deduction. Household services would not be part of the deduction if this storage unit is not within your living space.
To take the home office deduction, you will need to know the square footage of your home, as well as your office or storage room. The part of your home that the office occupies becomes the percentage of expenses that you will be able to deduct at the time of the tax return. For example, if your room is 10 ‘x 20’ (200 square feet) and your house has a total of 2,000 square feet, your office would occupy 10% of the total space. That would make 10% of your shared household expenses a business deduction.
In the event of a tax audit, it is helpful to have a photograph of your office or storage space in use, as well as copies of all utility bills and receipts for expenses you deducted. Homeowners can deduct household expenses without depreciating their home.
Every piece of equipment needed to run your business is deductible, along with all the supplies you need to operate that equipment. Equipment purchases would include the tablet you buy to keep up with business when you’re out of the office, the camera or cell phone you put on your credit card and use to take product photos, and furniture for your office in home. Even equipment converted from personal use to exclusive business use is deductible at current value.
Any commercial equipment you purchase that has a life expectancy of two or more years and costs more than $ 75 will need to be listed individually at the time of tax return. No need to itemize equipment supplies and small equipment purchases; these can be grouped. Keep receipts for purchasing equipment and supplies with the rest of your income tax receipts; If you wish to keep the original receipt with your warranty documents, a copy will suffice.
Entrepreneurs and small business owners often overlook the importance of recording company mileage and automobile expenses. This log book serves two purposes. It will give you higher tax deductions and earn IRS audits. If you don’t write down every mile driven for your small business, as well as your actual car expenses, you could end up paying hundreds of dollars in income taxes that you don’t owe. This includes all the mileage for business errands performed on the family car.
During the first year a vehicle is used for business, you can choose whether to deduct mileage or out-of-pocket expenses, as long as you use that car or truck at 50% or more for business. Once you elect to deduct mileage, you cannot proceed to deduct actual expenses. That’s why it’s important to add your car payment, gas, oil, repairs, insurance, licenses, and other vehicle expenses together that first year, before selecting mileage as your deduction. Which one is better will depend on how many miles you drive vs. your actual expenses.
It is surprising how many small business owners use stamps purchased with personal funds to send their business invoices. It may sound easier when you tell the grocery store clerk to add that stamp book to the total, but it’s a tax-deductible expense you’re letting through your fingers. Take the receipt and stamps, circle the amount paid, and post them in your office. You’ll get the savings when you file your taxes.
There you have it, real tax HELP for entrepreneurs. But don’t stop there, because almost everything you do on behalf of the business is tax deductible when you understand what the IRS allows. Whether you hire an accountant to do your tax return or prepare it yourself, all independent contractors should take the time to learn the basics of small businesses from the IRS. It will keep more money in your pocket and at the same time provide you with a proof of audit.