Having to get your taxes done as the owner of a small business or entrepreneur can be extremely frightening. The thought of how much self-employment taxes that you'll have to pay can be enough to keep you up at night. Just know that there are many deductible expenses that you can take in order to lower the amount of self-employment taxes that you'll have to pay to the IRS.
Disclaimer: I am a certified tax preparer and am giving you advice from the best of my 10 years of tax knowledge. If you are unsure if an expense is deductible please consult with your tax preparer or accountant.
You are able to deduct the cost of operating your vehicle for business purposes only. However, you should have documents to prove the business use of your vehicle just in case of contact from the IRS. When you use your vehicle for business purposes you should keep records of any cost of gas or any other automobile costs that you paid during that tax year. If you decide to take the standard mileage deduction (53 cents per mile for 2017) you won't be able to deduct the actual costs that you spent on gas, oil changes, etc... for your vehicle but you must know how many miles you drove for business that year. Your accountant or tax preparer can help you to decide which deduction will benefit you the most.
You are able to deduct any office supplies that you purchased for your business during that tax year. These would be tangible items such as paper clips, ink cartridges, staples/stapler, pens, pencils, etc... Any furniture items such as a bookcase, filing cabinet, small desk, etc... can also be deducted under office supplies if the cost of the item is under $2,500. Keep all of your business receipts in that shoe box just in case you need them for the IRS.
Office expenses are usually confused with office supplies when filing taxes. These are two completely different sets of deductions with their own rules. Office expenses would include the costs of running your office such as website hosting, domain names, monthly costs for any business programs you use, accounting software, fees for processing credit cards, software and hardware.
Utilities / Home Office Deduction
You are able to deduct costs for your utilities such as electricity, cell phone charges, landline charges, rent/mortgage etc... However, when you are deducting utilities such as electricity for your home office you will need to calculate the deduction based on the size of your home office in relation to your house. You can calculate this with the formula below:
For example, my home office is 144 sq. feet and my house is 2,876 sq. feet so my home office would be 5% of my house. This percentage will vary with the size of the room and size of your house.
So to calculate how much of your utilities you can deduct you will take how much you pay monthly for electricity and calculate that for the entire year. (i.e. $150 per month x 12 months of the year = $1,800) Since my home office is 5% of my house I would take $1,800 and deduct 5% of that. (1,800 x 0.05 = $90) So, in that case, I would be able to deduct $90 of my electric bill on my taxes.
The IRS states that, in order to take a home office deduction, you MUST solely use your home office space for business and nothing else. There is a small exception - If your home office is part of your bedroom or living room you CAN consider that your home office but again, you must solely use that part of your room (home office space) for business. If your home office is a part of another room you're going to have to do some math to figure out the percentage...ready?
You would calculate that by measuring the square footage of your home office "space" inside of the room and divide that by the square footage of your home. Let's say your home office is a part of your bedroom and your bedroom and your home office square footage is 24. (You just have a small desk and filing cabinet.) 24 sq ft. / 2,876 sq ft. (size of home) = 0.8% of your home is your home office.
If you're self-employed and you pay for your own insurance premiums, your health insurance costs are 100% deductible. Keep in mind that your deduction can't be more than the net profit that your business brings in. Are your children also on your health insurance policy? Your dependents' premiums will also be 100% deductible!
If you travel for business some of your costs may be deductible. Deductible expenses would be considered hotels that you stay at and costs of transportation (plane, train, taxi/uber etc...) -- These expenses are 100% deductible.
Unreimbursed costs of your meals, when traveling for business, are only 50% deductible. You would pay half and you'd be reimbursed for half. (So don't go overboard on luxury business meals when you travel! However, I would stay at the best hotels and fly first class if I traveled for business! *wink*) Make sure that you keep all of your receipts for business travel related expenses just in case you need them for tax purposes.
Legal & Accounting Fees
You are able to deduct any fees that you pay to lawyers, accountants, consultants or any other business professionals but these have to be related to your business. (Accountant fees include costs to prepare your taxes from an accountant or tax preparer.)
If you're just starting your business and have any legal fees (such as incorporation) you are able to deduct them as business start-up expenses. (The first year you're in business)
Things can get complicated when you own a small business and have to get your tax return done but an accountant or tax preparer can definitely help you to find out what you can and can't deduct. I highly suggest that you take any deduction that you possibly can because this will help you a great deal when it comes to paying self-employment taxes!