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4 commonly misunderstood tax deductions for the self-employed

On Behalf of | Oct 22, 2020 | Uncategorized |

There’s nothing like being your own boss. However, the downside of only having to answer to yourself is that you are responsible for your own payroll taxes.

To help lighten your tax burden, the IRS allows for several tax deductions. It’s important that you understand how these deductions work, both for your benefit and to avoid getting in trouble with the IRS. The following are four of the more commonly misunderstood tax deductions available to the self-employed.

1. Start-up costs

Business formation is not a cheap undertaking. However, our country values entrepreneurship and innovation. To help encourage people to partake in the American dream, the IRS allows business owners to deduct some of their start-up costs. You should be aware of the limits of what you’re allowed to deduct. If you exceed these limits, you could very well find yourself facing an audit.

2. Depreciation of work-related equipment

When you account for your work-related equipment depreciation, you can help spread out your deductions over several years. Bear in mind if you decide to sell or lease your business equipment, the IRS could hit you with a tax bill for depreciation recapture. This might not be a huge concern if you’re selling a gently-used whiteboard. However, expensive equipment could lead to a tax bill in the tens of thousands of dollars. It’s important to consider the potential impact of depreciation recapture if you choose to take this form of deduction.

3. Deductions for business-related vehicles

If you use a vehicle in the course of your business, you may take certain deductions. However, if you do so, there are strict limits on how you may use this vehicle in the course of your personal life.

4. Phone bills and utilities

You may deduct a portion of your phone bill if you use the phone as part of your business. The same goes for your utility bills. However, you may only deduct the amount that is actually used as part of your business operations.

Other rules and exemptions apply to all of the above deductions. A skilled tax law professional can help ensure you are receiving the full benefit of your tax deductions while ensuring your accounting is in line with the rules enforced by the IRS.