Tax time is especially stressful when you’re self-employed. Even if you’re a tax veteran, you may have questions like, “Do LLCs get a 1099?” or “What can I write off as a business owner?”
The best way to prepare yourself for tax season is by taking small steps throughout the year. You’ll be more organized with all your expenses to write off to maximize your deductions and reduce your liability.
This article contains information specifically for an LLC or a sole proprietorship in California, but you may find deductions that apply to other businesses. Always consult with a tax professional if you’re not sure.
What Can Businesses Write Off?
Here are some write-offs that are common for most self-employed individuals:
Self-Employment Tax Deductions
The self-employment tax includes your Medicare and Social Security taxes, which, as a self-employed individual, you are responsible for yourself. You can deduct half of this tax from your net income as a business expense.
Home Office Deductions
Home office deductions include the workspace you use for your business. Keep in mind that you may need to defend this deduction to the IRS.
Business Insurance
Any insurance premiums that you pay for your business, such as general liability insurance, auto insurance for your business vehicle, or fire insurance.
Vehicle Use Deduction
Business vehicles may be tax deductible, but it’s important to keep detailed records of your business use with mileage, purpose, and dates. You can calculate this deduction using standard mileage determined by the IRS.
Depreciation
Some business items depreciate with regular use and qualify for a deduction, such as equipment, machinery, and vehicles.
Business-Related Meals
Business-related meals, such as meals with clients or business associates, may be deductible at 50% of the meal.
Office and Supply Expenses
Office supplies are deductible if you use them throughout the tax year, such as copy paper, pens, and pencils.
Business Travel
Business travel is deductible under specific circumstances. Your travel must be longer than the workday, located outside your tax home, requiring sleep or rest. The IRS looks closely at business travel deductions, so you must have good records.
Professional Fees and Dues
Professional fees related to your business, such as professional development costs or legal fees, are deductible.
Education Costs
Education costs are deductible if that education is directly related to your business or occupation.
Taxes and Licensing
Business taxes and licensing fees are deductible, including federal, state, local, and foreign taxes.
Commissions
Commissions paid to agents or third-party vendors to conduct business are deductible, but only if they’re directly related to your business.
Qualified Business income
The qualified business income deduction (QBI) is a tax deduction for businesses and self-employed individuals, allowing a deduction of up to 20% of business income.
Phone and Internet Bills
Phone and internet bills are deductible if they’re directly related to your business, such as a second, dedicated phone line.
Bad Debt
Bad debt from unpaid invoices or bills may be deductible as a short-term capital loss.
Charitable Contributions
Charitable contributions are tax deductible if they’re validated by the charity and you have records.
What You Can’t Write Off
Though you have a lot of expenses you can write off, you can’t deduct every single expense that you have for your business. Here are some expenses that are usually not considered deductible:
Food
Food is considered a personal expense unless it’s a business-related meal.
Clothing
Clothing is typically not deductible unless it’s specifically required for your work.
Federal Income Taxes
Some taxes are deductible, but federal income taxes are not.
Monetary Value of Volunteer Work
You may deduct the expenses related to volunteer work, but not the time for the work itself.
Pet Expenses
Pet expenses, such as food or vet bills, are not considered a business expense unless that pet provides a specific service.
How to Track Expenses
Maximizing your deductions requires strict planning throughout the year. Here are some tips to prepare:
- Track your receipts or invoices as records of payments for expenses
- Retain your bank statements to track your spending and earning
- Keep copies of canceled checks and credit card statements as proof of payment
- Retain mortgage and loan documents for any properties you use for your business
- Keep copies of interest statements for interest-bearing accounts like savings accounts or certificates of deposit (CDs)
The better your records are, the more prepared you’ll be at tax time to maximize your deductions without errors or overpaying.
Prepare for Taxes All Year Long with This Cheat Sheet
Small business owners and self-employed individuals face complicated taxes, especially when deductions are involved. If you learn the rules for deductions and stay organized, you can maximize your deductions to get all your available deductions and save on your taxes.
Author Bio: Shahar Plinner
Shahar is a tax and accounting expert with over 20 years of experience in the field. He is an entrepreneur and known as The Tax Guru on the west coast. Shahar moved to Seattle from Israel and founded, scaled, and sold a leading tax and accounting firm in the Seattle Metro area. Over the years, he served thousands of business owners and perfected the playbook for self-employed tax strategy. That’s why he founded Formations, to make sure the self-employed never overpay on taxes again.