Tax Deductions For The Self-Employed Part 2
Welcome back as we continue our series on tax deductions that the self-employed can not afford to miss.
Home Office Expenses
Using part of your home for business allows you to deduct expenses for the business use of your home. This can be applied to all types of homes including business owners who rent.
If you use your home exclusively and regularly for conducting business you can deduct the following:
- Mortgage Interest
In order to qualify for the home office deduction, you must show that your home is used regularly and exclusively for conducting business and is the principal place of business.
There are two methods for calculating the house office deduction. In the standard method, you use Form 8829 to itemize the various expenses involved in using and maintaining your home office. This includes rent or mortgage interest payments, utilities, homeowners insurance premiums, and property taxes. In the simplified method, you determine the square footage of your home office (up to 300 square feet) and multiply by five dollars.
The simplified method is more straightforward but you should see which one gives you a larger deduction amount.
We should point out that office expenses are not the same as home office expenses. Office expenses should include things such as maintenance, cleaning, and repair. This is mostly if you use a dedicated office for your business and not a home office.
We have already mentioned being able to deduct mortgage payment interest. If you’ve got a mortgage on a property that’s primarily used for your business (that is, not your primary home), you’ll write off the interest thereon mortgage. You’ll need to get a Form 1098 from the lender to report the interest paid therein year.
The second category includes all other sorts of interest. Examples are business credit cards, lines of credit, or interest on equipment loans.
A self-employed person can deduct fees paid to licensed professionals like attorneys and accountants, as long as some of the services are done in furtherance of your business. Just make sure you separate the business and personal fees.
Licenses And Certifications
You can deduct any expenses associated with business licenses, certifications, and regulatory fees related directly to your business. This can include incorporation fees and small business licenses for your state.
Rent Or Leasing Payments
If you rent office space, cars, or any physical equipment for your business, all those expenses are deductible.
If you leased your car for a term of 30 days or more, though, you’ll need to reduce the deduction by an “inclusion amount.” For more information, refer to the “Leasing a Car” section in chapter 4 of Pub. 463.
Repairs and maintenance
This category includes incidental repairs and maintenance made to machines and other property. For example, you can deduct costs for painting your office or fixing your broken computer.
Any expenses that are work-related education expenses can be deducted.
To be deductible, your expenses must be for education that:
(1) Maintains or improves your job skills or
(2) The law requires you to keep your status or occupation.
However, albeit the education meets either of those tests, the education cannot be a part of a program that will qualify you for a replacement trade or business or that you got to meet the minimal educational requirements of your trade or business.
Expenses that you can deduct include:
- Tuition, books, supplies, lab fees, and similar items
- Certain transportation and travel costs, and
- Other educational expenses, like the value of research and typing
Incidental office supplies such as paper, pens, and clips can be deducted from your taxes. However, if the supplies are consumable, such as plastic needed to produce a product, you are limited to only deducting the amount that you use for the tax year, not the total amount that you purchased.
Employee Retention Tax Credit
This credit was designed to help companies retain employees while facing pandemic hardships. Businesses will be eligible for this credit if operations were fully or partially suspended due to the coronavirus shutdown. You can also be eligible if gross receipts for your company went down more than 50 percent compared to the same time period in the previous year.
Businesses that are eligible can get a refundable 50% tax credit on wages with a maximum of $10,000 per employee. The credit can be obtained on wages paid or incurred from March 13, 2020, through December 31, 2020.
Employers will need to report total qualified wages and related health insurance expenses on their quarterly tax returns on Form 941. This needs to be done in the second quarter of 2020. The Employee Retentions tax credit can be taken against the employer’s share of Social Security taxes.
Family And Sick Leave
Employers will be 100 percent reimbursed for providing sick and paid family leave to employees for reasons related to the Coronavirus, by a tax credit. This will be paid every quarter. Employers will also be able to hold on to their portion of payroll taxes to be deposited and use this money to pay for the sick and family leave. There will be no penalty for businesses that do not deposit payroll taxes because they were anticipating a tax credit.
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