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22-Aug-2020 By - Anna Eydlish

What can I deduct if I am self-employed?

With self-employment comes freedom, responsibility, and a lot of expense. While most self-employed people celebrate the first two, they cringe at the latter, especially at tax time. They might not be aware of some of the tax write-offs to which they are entitled.

When it comes time to file your returns, don’t hesitate to claim the benefits you get for being the boss. As a self-employed success story, you’ve earned them.

Many times an overlooked deduction is educational expenses. If one is taking courses or buying research material to be more effective in their work, this can be deductible.

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If you’re a self-employed or entrepreneur, you should always search for ways to minimize cost and increase profit. What if you could save hundreds or even thousands of dollars a year just by doing some paperwork?

Deductions are a great way to reduce your taxes (and your costs), but they can be difficult to understand for the average person. Here’s what you need to know to take advantage of self-employment reductions.

Common deductions for the self-employed

This list is relevant for many self-employed professionals, including rideshare drivers, such as Uber, who claim large mileage deductions, or writers who might take the home office deduction.

These business deductions can also apply to designers, housekeepers, photographers, construction workers, consultants or any other professionals who work for themselves. Here are some of the most common deductions:

Travel and hotel

If you travel to visit clients or attend trade shows, you may be able to deduct the cost of travel. Business travel expenses include transportation and accommodation costs. The ATO allows a 50% deduction for business meal expenses, but a recent tax law change makes the deduction more difficult to calculate. Have a CPA review your business meal expenses.

You shouldn’t attempt to deduct any expenses associated with sightseeing and leisure travel, which can trigger an audit.

Many self-employed people work out of their homes.

Part of your house

If you work from your home or use part of it in your business, a few self-employment tax deductions could get you a break on the cost of keeping the lights on.

What you can deduct: A portion of your mortgage or rent; property taxes; the cost of utilities, repairs and maintenance; and similar expenses. Generally, this deduction is only available to the self-employed; employees typically cannot take the home office deduction.

Home office

Many self-employed work out of their homes and the ATO allows self-employed persons to deduct the portion of their mortgage (including property taxes) or their rent that goes toward a home office.

To qualify for this deduction, you must have a specific area in your home designated for working, and you must refrain from using it for other purposes. When claiming this deduction, you can calculate the deduction’s value, using either the regular or simplified home office deduction option.

The home office deduction may also include a portion of your home utility costs.

Utilities

self-employed who work at home can deduct a portion of utility costs as a home office expense. The percentage of your tax-deductible utility costs is proportional to the percentage of your home occupied by your office.

Along with gas and electricity, self-employed can deduct the costs of heating, air conditioning and phone service. Be aware, however, that you cannot deduct the actual cost of utilities if you claim the simplified home office deduction.

Your professional development costs may also be tax-deductible.

Professional development

As a self-employed, you must find ways to stand out from your competitors. To keep ahead of the pack, many self-employed attend classes and educational seminars.

The cost of these expenses can add up, so the ATO allows self-employed to deduct expenses related to professional development on their tax returns. Additionally, self-employed persons can deduct their dues for professional organizations and membership fees.

Every business needs to get attention and generate interest.

Advertising and marketing

In our increasingly connected society, self-employed people have to engage in marketing and advertising if they hope to stay competitive. The ATO permits self-employed to deduct the cost of flyers, web advertisements, business cards and print ads, along with other marketing expenses.

Your website may be your primary tool for marketing your business.

Website

With a majority of consumers using the internet to research purchases, creating a mobile-friendly, responsive website is crucial for a self-employed’s success.

Self-employed persons can deduct costs related to their business websites, including domain fees, web design, web building and maintenance.

Software

These days, most self-employed spend their days staring at computer screens. From sophisticated video editing programs to more basic options like Microsoft Office and Adobe Acrobat, the software can be expensive. Software costs are a common tax deduction for small business owners and self-employed.

Kilometers Travelled and Petrol

Do you regularly drive to meet clients or suppliers? If so, you should take advantage of the tax deductions available for vehicle mileage or normal vehicle wear and tear.

You can choose between two types of vehicle-related deductions: the standard mileage option or the actual expense option.

The standard mileage option allows you to make a deduction based on how many miles you use for business purposes. The actual expense option requires that you figure out how much it costs you to maintain and operate your car expressly for business use.

Whether you’re looking for Business Accounting Services, or need a start-up business accountant to set up your books, we are here you can rely on.

Incorporation

If your freelance business is successful, you may consider incorporating in the future. The ATO permits new businesses to deduct expenditures associated with incorporation, including state registration fees and legal costs.

One of your biggest costs may be for health insurance coverage.

Self-employment health insurance deduction

Most full-time employees receive their health insurance through their employer. However, many self-employed professionals must pay for their own healthcare out of pocket, and those monthly premiums can add up to a hefty chunk of change every month.

Self-employed individuals who meet certain criteria may be entitled to a special tax deduction that allows them to deduct the cost of health insurance premiums. The deduction includes coverage for dental expenses, vision, long-term care and short-term care. You can deduct the cost of coverage for yourself, your spouse and any dependent family members.

Keep the paperwork in perspective

Filing taxes as a self-employed can be stressful, and the self-employed tax forms may be confusing. However, by taking advantage of all possible deductions and understanding what’s expected of you, you can minimize your tax burden and grow your business.

Preparing your taxes can also be time-consuming. However, if you invest the time to claim all of your deductions, you’ll pay less in taxes.

Use financial software—like QuickBooks, MYOB or Xero —to track expenses throughout the year and automatically post the expenses as deductions.

For more tax-time tips, check out our guide to taxes for the self-employed. To find expenses that may qualify for a personal deduction. 

We love learning about how we can help simplify your accounts through our small business Bookkeeping Services.

Long-term tax-saving strategies

Don’t just look at last-minute write-offs when considering self-employment tax deductions. Think about laying down some long-term strategies for money savings from year to year—particularly if you are a high earner.

Accountants typically tell you what you have to pay. They don’t always tell you strategies to reduce your payments.

To reduce your gross taxable income, consider setting up a defined-benefit pension plan. This plan is based on your age and income: The older you are and the higher your earnings, the more you are allowed to contribute. 

Another strategy for high-earning business owners who own their own building through a limited liability company or similar business structure is to pay themselves rent. This rent is used to pay down the mortgage, but it is also considered a business expense for tax purposes.

Self-employed professionals required to have liability insurance should consider setting up their own insurance company. A captive insurance company is one that ensures the risks of the business—or businesses, in the case of a cooperative. Its premiums can be tax-deductible.

If money accumulates and claims are minimal, the money taken out is taxable under capital gains. But that it can save you money by allowing you to “pay yourself” instead of an insurance company and still deduct the premiums.

With any of these more complicated, long-term strategies, consult with a business attorney or financial planner to ensure you have the best plan possible for your business.

The good news is that you don’t have to have to conquer this tax beast on your own. A tax specialist can help you to deduct items properly. Using a specialist will also minimize your audit risk, ensure you adhere to the tax laws, and maximize the deductions for which you are eligible.

Check out our range of Business Planning Services to work towards your business’ success.

Guest post by : Anna Eydlish Form -

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