What are some commonly overlooked self-employment deductions?
Cell phones and internet deductions
Cell phones are now a given in everyday business. Same for internet service – how could you do business without it? The thing is, you probably also use both of these expenses for personal use, so how are they deductible?
The answer is, you have to prorate the expense and only deduct the business use portion. So if 30% of your calls are personal, for example, you can only deduct 70% of the phone’s expense. The deduction can also apply to software you buy for your phone, provided you use the software in your business.
Careful: For the self-employed especially, many tax experts caution against claiming 100% business use of a cell phone or internet service. That tends to be a red flag with the IRS. Think about it: if you only have one cell phone, who would really use that 100% for business? On the other hand, if you have an office that’s totally separate from your home, complete with totally separate internet service, you could conceivably claim 100% business use.
Just be ready to back it up with documentation. For cell phones, no matter what your usage percentage is, the recommendation is to keep logs showing your usage of any tech gear that gets both personal and business usage. Some tax experts suggest going back over your monthly call logs for cell phones to see what your professional and personal usages were.
Travel and meals deductions
Sometimes, in the course of business, you have to travel to other locations. If you meet the IRS conditions, your ordinary and necessary expenses for the trip are deductible.
First, your duties must require you to be away from the general area of your tax home substantially longer than an ordinary day’s work, and you need to get sleep or rest to meet the demands of your work while away from home. So in a nutshell, your business travel has to be longer than a day trip and you need to sleep over once you get there.
Your tax home is your regular place of business, regardless of where your family home is. Your tax home includes the entire city or metro area where your business is located.
- Transportation – You can deduct the cost of travel by plane, bus, train or car between your home and your business destination.
- Taxi, commuter bus and limousine – You can deduct fares for these – and other types of transportation – between the airport or train station and your hotel, or between the hotel and your work location away from home.
- Car or truck expenses – The costs of operating and maintaining your own vehicle when traveling on business are also deductible. As is the case with day-to-day auto expenses, you can choose to use the standard mileage rate or actual expenses. You can also deduct business-related tolls and parking. If you rent a car while on your business trip, you can deduct only the portion of the expense directly related to business use.
- Meals and lodging – These expenses are deductible if your business trip is overnight, or long enough that you need to stop for sleep or rest to properly perform your duties. In most cases, though, you can deduct only 50% of your meal expenses.
- Laundry expenses – You can deduct dry cleaning and laundry while on your business trip.
- Communications – You can deduct the cost of business calls while on your business trip, including business communication by fax or other devices. Data charges from your remote location may also qualify.
Deductions for education expenses
Self-employed taxpayers must report qualifying work-related education costs on the same forms they use to report other expenses – Schedule C for business income, or Schedule F for farm income. If your education expenses include expenses for a car or truck, travel or meals, report those expenses the same way you report other business expenses for those items.
If you’re an employer, you can deduct the amount you spend for educational expense for your employees if the education is to maintain or improve skills in their current jobs. As a business owner, you can write off your own educational expenses unless you’re training for a new line of work.
Refer to IRS Publication 970 – Tax Benefits for Education for more information.
Deductions for pension plans
As a business owner, you have some options when setting up a retirement plan for you and your employees. SEP (Simplified Employee Pension), SIMPLE (Savings Incentive Match Plan for Employees) and qualified plans (including Keogh or H.R. 10 plans) all offer you and your employees a tax-favored way to save for retirement.
You can also deduct trustees’ fees if contributions to the plan don’t cover them. Earnings from the plan contributions are generally tax-free until distributions are received.
Startup costs for retirement plans
As a business owner, you may also be able to claim a tax credit amounting to 50% of the first $1,000 of qualified startup costs if you set up a qualified defined benefit or defined contribution plan (this includes a 401(k) plan, a SIMPLE plan or a SEP plan).
For more information on small business retirement plans, see IRS Publication 560 – Retirement Plans for Small Business.