Are you self-employed and wondering how to maximize your tax deductions for tax year 2023? Here’s a look at 15 of the best tax write-offs you don’t want to miss:
1. Qualified business income.
2. Mileage or vehicle expenses.
3. Retirement savings.
4. Insurance premiums.
5. Office supplies.
6. Home office expenses.
7. Credit card and loan interest.
8. Phone and internet costs.
9. Business meals.
10. Business travel.
11. Startup costs.
12. Continuing education.
13. Subscriptions and memberships.
14. Advertising.
15. Self-employment taxes.
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1. Qualified Business Income
If you’re an eligible business owner, the qualified business income deduction allows you to deduct:
— Up to 20% of your qualified business income, or the net amount of taxable income you earn from a qualified trade or business.
— Up to 20% of qualified publicly traded partnership income and real estate investment trust dividends.
You may qualify if you operate as a sole proprietor or through a partnership, S Corp, trust or estate. Employees and C Corp owners aren’t eligible.
2. Mileage and Vehicle Expenses
If you use one or more vehicles for business purposes, you may be able to deduct the costs using the standard mileage rate or actual cost method.
If you qualify for the standard mileage rate, multiply the number of miles you drove for business by the applicable rate. The 2023 standard mileage rate is 65.5 cents per mile for self-employed individuals and businesses.
If you use the actual cost method, add up your eligible car expenses and deduct the total amount. Eligible expenses include licenses, depreciation, gas, lease payments, oil, tolls, parking and registration fees, insurance, tires, garage rent and repairs.
When you qualify for both methods, the IRS recommends calculating your deduction both ways to see which is larger.
3. Retirement Savings
Saving for your future can also be tax deductible.
“Self-employed folks have several options for tucking money away in a tax-advantaged retirement account, including SEP IRAs, traditional IRAs, SIMPLE IRAs and solo 401(k)s,” certified public accountant and certified financial planner, Taylor Jessee, said an email.
“The solo 401(k) is especially appealing because it acts very similar to a traditional 401(k) plan offered by most companies,” Jessee said. In 2023, a self-employed person could contribute up to $66,000, plus an additional catch-up contribution if they’re 50 or older.
Whether you can deduct your contributions, however, will depend on factors including the retirement plan type you choose, your tax filing status and income level. For example, Roth IRA contributions are not tax deductible. And although traditional IRA contributions can be deductible, income limits apply if you or your spouse are covered by an employer’s retirement plan.
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4. Insurance Premiums
You can often deduct insurance premiums for various policy types, including but not limited to:
— Business liability insurance.
— Malpractice insurance.
— Business credit insurance.
— Business insurance against damage from fire, accidents, storms, theft, etc.
— Auto insurance for business vehicles.
— Business interruption insurance.
— Personal medical insurance.
— Personal dental insurance.
“Health insurance costs are an above-the-line deduction that affects every calculation below AGI. It’s like a supercharger for your Schedule A deductions,” said Zachary B. Westwood, a CPA at Westwood Public Accounting, in an email.
“Also, be aware if you are on Medicare and are self-employed, you can deduct it as self-employed health insurance. Many tax preparers miss this deduction,” he said.
5. Office Supplies
Don’t forget about all the materials and office supplies you bought for your business throughout the year like paper, pens, printer ink and packaging supplies.
If you used them during the tax year, you can generally deduct them. If the usefulness of an item extends long after the year ends, however, you can use the depreciation method.
6. Home Office Expenses
If you have a dedicated workspace in your home, you may be able to deduct home office expenses such as utilities, repairs, maintenance, rent and mortgage interest.
The IRS offers two calculation methods for the home office deduction:
— Simplified method: $5 per square foot, up to 300 square feet.
— Regular method: An amount based on your expenses and the percentage of your home that you dedicate to business use.
Again, calculate the deduction using both methods to find out which yields greater tax savings.
[READ: Can You Take the Home Office Deduction?]
7. Credit Card and Loan Interest
If you use a credit card or take out a loan for business purposes, you can often deduct the interest charges.
The deduction you take, however, can’t exceed your taxable income, 30% of your adjusted taxable income or what’s known as your floor plan financing interest expenses (interest charges that accrue when you purchase motor vehicles to sell or lease using a loan secured by the acquired inventory) for the year.
8. Phone and Internet Costs
You can deduct phone and internet expenses but only the percentage of them that you use for business. Additionally, basic local telephone service for the first phone line in your home is not deductible, even if it’s in your office.
9. Business Meals
For business meals to be tax deductible, the business owner or an employee must have been present for the meal, it must have been purchased from a restaurant and it cannot have been “lavish or extravagant.” If you have a meal that qualifies from 2023, you can generally deduct 50% of the cost, including tax and tip.
10. Business Travel
When traveling to another city is ordinary and necessary for your business, you may be able to deduct expenses like plane tickets, meals and lodging, as long as they aren’t outrageous.
Keep in mind, however, that your work assignment must be temporary — it can’t require you to be away from your primary residence for more than a year.
11. Startup Costs
Did you start a new business this year and incur costs before starting operations? You can typically deduct up to $10,000 in business startup costs and up to $5,000 in organizational costs. However, your allowable deductions will be reduced if your total startup costs exceed $60,000 or your total organizational costs exceed $50,000.
You can amortize any remaining nondeductible startup costs ratably over a 180-month period (once your business becomes active).
12. Continuing Education
If you’ve invested in maintaining or improving the skills you need to run your business, you may be able to deduct those education expenses. Tuition, books, supplies, transportation and more may all be deductible if you’re self-employed.
The IRS provides a work-related education tool to help you figure out if your expenses qualify.
13. Subscriptions and Memberships
“If you incur expenses for subscriptions that are related to your business, such as industry magazines or online research tools, you may be able to claim a deduction for these costs,” Andrew Lokenauth, a tax preparer and the author of the Fluent in Finance Newsletter, said in an email.
Membership and subscription dues for any club organized for business, recreation, pleasure or other social purposes, however, are generally not deductible.
14. Advertising
Have you spent money advertising or marketing your business this year? These costs can include activities like running ads, building a website, hiring a social media manager and taking brand photos.
As long as the costs are common and necessary in your industry, you can likely deduct them.
15. Self-Employment Tax
One downside to being your own boss is the self-employment tax. It’s currently 15.3%, which breaks down to 12.4% for Social Security and 2.9% for Medicare.
The good news? You can generally deduct half of it when you calculate your adjusted gross income. While this won’t impact your net self-employment earnings or tax liability, it will reduce your income tax.
The Bottom Line on Self-Employment Deductions
What should you keep in mind as you file taxes this year?
“The general rule is that any paid expense that is ordinary and reasonable during the course of conducting a business activity is deductible in the year that it was paid (unless it applies to a future period),” Andrew Griffith, a CPA in New York City, said in an email.
“In order for a tax deduction to survive an audit by the IRS or some other income tax authority, good record-keeping and internal control practices must be maintained on an ongoing basis,” he said.
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A Guide to Tax Deductions for the Self-Employed originally appeared on usnews.com
Update 02/26/24: This story was published at an earlier date and has been updated with new information.
