Like being your own Boss? There are a lot of positives, and one is that you have a lot more options regarding tax deductions. The good news is, when you are self-employed, there are many strategies you can take advantage of, which create big opportunities for tax savings. The bad news is that you have to be much more diligent in tracking your income and expenses. To be sure you make the most of your options, here is a list of tax tips from our TFG accounting professionals and CPAs to help you make the most of self-employment.
Vehicles:
Self-employed people like real estate professionals who are using a car a minimum of 50% for business can claim the Section 179 deduction in the year they purchased the car, as well as potential bonus depreciation. Otherwise there are two methods for figuring deductible car expenses. One is to deduct a certain amount based on mileage traveled for business. For 2024, the IRS set the distance-based deduction at 67 cents per mile. The second the IRS allows is to use maintenance and other expenses as deductions. This would require you to track essentially all of the costs for your car, like gas, insurance, maintenance, any repairs and so on. If a taxpayer uses the car for both business and personal purposes, then the expenses must be split accordingly. The deduction is then based on the portion of mileage used for business.
Equipment Depreciation:
A great opportunity presents itself when someone’s buying a cell phone or computer. If those are under $2,500, you can expense it all in year one when those costs were incurred. Maybe you were not aware that you can deduct the full price of any piece of equipment that depreciates and costs $2,500 or less at purchase in the year it was bought rather than having it allocated over many.
Self-employment Tax Deduction:
Since the self-employed pay almost double the Social Security and Medicare taxes that employees do, they receive a 50% deduction on them. The IRS realizes you are paying both the employee and the employer portion.
Health Insurance:
Health and dental insurance, as well as long-term care premiums reduce taxable income for the self-employed. You’re actually able to take a tax deduction against those costs for you and your family.
Simplified Home-Office Deduction:
If you use part of your home exclusively and regularly for business, you can choose a simplified method to deduct expenses rather than the regular method for calculating this deduction. The home office deduction is available for homeowners and renters, and applies to all types of homes. The “simplified” method comes from multiplying the size of the home office by $5 up to 300 square feet — meaning the maximum deduction would add up to $1,500. The regular method is extremely complex.
Retirement Plans:
Self-employed individuals can take their pick among a Simplified Employee Pension Individual Retirement Account (SEP-IRA), an individual 401(k), a profit-sharing Keogh plan, a Savings Incentive Match Plan for Employees Individual Retirement Accounts (SIMPLE IRA) or a defined-benefit pension. You fund a retirement plan to avoid taxes in the current year, as well as to save for retirement. There are many options, and it comes down to which plan suits your company the best. For example, individual 401(k) has big tax benefits for contractors and solo practitioners, you get to contribute as both the employer, and the employee. Talk to your TFG CPA, or your TFG Financial Advisor.
Secure 2.0 Small Business Tax Credits:
Thanks to the Secure 2.0 Act, the owners of businesses with 50 or fewer employees may qualify for the maximum tax credit of up to $1,000 per employee based on their matching retirement-plan contributions.
Qualified Business Income:
If you are a services based business (with certain exceptions), you may be eligible for substantial savings due to the 20% deduction for qualified business income. The deduction is available regardless of whether taxpayers itemize deductions on Schedule A or take the standard deduction. Many owners of sole proprietorships, partnerships, S corporations and some trusts and estates may be eligible for a qualified business income (QBI) deduction – also called the Section 199A deduction. Eligible taxpayers can claim the deduction for tax years beginning after December 31, 2017, and ending on or before December 31, 2025. Section 199A allows entities with pass-through business income to deduct up to 20% of their QBI in calculating their income tax liability, subject to certain limitations. The deduction is claimed against a taxpayer’s adjusted gross income. QBI is a pass-through business owner’s net amount from the items of income, loss, gain, and deduction from every qualified business he or she owns; it does not include wages, capital gains, dividends, and interest and annuity income unrelated to a trade or business. The maximum Section 199A deduction cannot exceed 20% of a pass-through business owner’s taxable income, less capital gains and dividends. The maximum deduction is subject to two limits: (1) a “specified service trade or business” (SSTB) limit and (2) a wage and capital asset (WCA) limit. An SSTB is a personal service business such as accounting, law, and medicine. Whether the limits apply depends on a taxpayer’s taxable income (without the deduction) and filing status. No limit applies if a taxpayer’s taxable income is less than $364,200 for joint filers and $182,100 for single filers. The limits phase in for incomes between $364,200 and $464,200 for joint filers, and between $182,100 and $232,100 for single filer. Thresholds may change for 2024.Under the SSTB limit, an SSTB owner with taxable income above the upper income threshold may claim no deduction for the SSTB’s QBI. Under the WCA limit, a non-SSTB owner with income above the threshold may claim a deduction, but it cannot exceed the greater of 50% of the owner’s share of the business’s W-2 wages or 25% of those wages plus 2.5% of the owner’s share of the business’s tangible capital assets placed in service in the past 10 years. Do not attempt to figure this out on your own without advice from your TFG CPA.
Reach out to us: When you are self-employed, it is likely your taxes will become a bit more complicated. Make sure you pick the best fit as a business entity for tax purposes among a sole proprietorship, a single-member limited liability company, a partnership, or an S-corporation. Our TFG Accounting and Tax professionals can help you choose, and also make sure you are taking advantage of all available deductions, even the Section 199A deduction. Don’t try to navigate all of these complexities on your own. Contact us at CPA@fuoco.com or 855-542-7537.
