You already know how challenging it may be to keep track of all the financial facets of your business since you are self-employed. You have to deal with a lot of issues on a monthly basis, from budgeting to filing taxes. Trying to optimize your tax savings, especially with the many deductions that are available, is a significant challenge you can run against. You might be able to claim certain deductions, such as the one for moving costs, particularly if your business has recently moved.
Let’s examine the moving expense deduction in more detail, including what it is, how it operates, and how self-employed people can benefit from it.
The Moving Expense Deduction: What Is It?
People who moved due to a new job or self-employment are eligible for a specific deduction called the relocation expenditure deduction. This deduction was established to assist in defraying some of the moving-related expenses, including those for storage, travel, and transportation. Typically, two conditions must be met in order to qualify for this deduction:
Distance test: Your new place of employment or self-employment must be at least fifty miles away from your former place of employment or self-employment.
Time requirement: During the first year after the move, you must work full-time for at least 39 weeks. If you work for yourself, you must put in at least 78 weeks of full-time employment in the first two years after the transfer.
The Internal Revenue Service (IRS) has, however, offered some aid to those who have relocated as a result of the COVID-19 outbreak. For instance, even if the pandemic prevents you from passing the time test, you can still be qualified for the moving expense deduction.
Self-Employment: What Is It?
It is crucial to comprehend what self-employment entails before delving into the relocation expense deduction for those who are self-employed. Working for yourself instead of an employer is possible through self-employment. When you work for yourself, you are in charge of managing your company’s day-to-day operations, expenses, and taxes. Self-employed people include independent contractors, consultants, freelancers, and business owners.
Getting the Most Out of the Moving Expense Deduction
The cost of moving your firm can be high if you are self-employed. It’s not just about moving your items and equipment; you might also have to pay for things like recruiting new staff, moving your office, or opening a new storefront. You might be able to reduce your tax liability significantly by claiming the relocation expense deduction. The following advice will help you save as much money as possible:
- Maintain Accurate Records: The IRS may ask you for proof of your deduction for moving expenses. As a result, make sure to keep thorough documents of all your moving costs, including receipts, bills, contracts, and invoices. If you drive when moving, you should also keep a mileage journal.
- Understand What You Can Deduct: Most moving-related costs, including travel, packing, storage, and shipping of household items, as well as lodging while traveling to your new home, can be written off. The IRS has regulations on what you can and cannot deduct, though. For instance, payments associated with selling your previous house, such as closing costs or real estate commissions, are not deductible.
- Be aware of the Limitations: The amount you can deduct for relocation expenses is limited. The most you may write off in 2021 is $18,000. But bear in mind that your deduction cannot be greater than the total income you receive from your new job or place of self-employment.
- Time Your Relocation: The amount of money you can save on taxes depends greatly on when you relocate. Try to relocate your company at the start or close of the tax year, if at all possible. Moving in December will offer you more time to meet the time test requirement and claim the moving expense deduction on the tax return for the following year, for instance, if your tax year is the calendar year.
Filing Taxes as a Self-Employed Person
As a self-employed person, filing taxes can be difficult. This is due to the fact that you must calculate and pay both a self-employment tax and a personal income tax because you are responsible for both employee and employer tax duties. Additionally, you might need to negotiate the tax code’s intricacies to determine which deductions and credits you qualify for.
The following advice will assist you in filing your taxes as a self-employed person:
Maintain Accurate Records: As we just discussed, it’s essential to maintain thorough records while submitting your taxes as a self-employed person. This comprises financial statements, invoices, receipts, and other records that attest to your earnings and outgoings.
Keep Business and Personal Expenses Separate: If you work for yourself, it might be simple to mix up your personal and business finances. However, it’s essential to keep them separate when it comes to submitting your taxes. You ought to open a distinct business bank account and utilize it only for commercial dealings.
Understand Your Deductions: As a self-employed person, you have access to a variety of deductions that can help you pay less in taxes. You might be able to write off costs for your home office, automobiles, travel, and meals, for instance. Understanding which deductions are permitted and which ones are not, nevertheless, is crucial.
Ask for Help If You Need It: If you have never filed taxes before, filing taxes as a self-employed person might be stressful. Consult with a tax expert with experience in self-employment taxes if you have any questions or encounter any issues.
Conclusion
When you transfer your business, the moving expense deduction is a priceless tax break that can help you save a sizable sum of money. You have several challenges as a self-employed person when it comes to filing your taxes and making the most of your savings. However, you may use the moving expense deduction and many other tax benefits to lower your tax obligations and keep more money in your wallet by using good planning, record-keeping, and tax code understanding.