Taxes can get complicated for freelancers, sole proprietors, and small business owners, but becoming familiar with the many loopholes and obscure rules can help lower your tax burden. With help from some professionals -- Lisa Greene-Lewis, a certified public accountant at TurboTax; Lee Phillips, an attorney who writes about taxes and asset protection; and Gary Marriage Jr., founder and CEO of Nature Coast Financial Advisors -- Cheapism.com came up with 30 tips for small businesses and independent professionals looking to maximize their tax savings.
Getting the Books in Order.
When dealing with taxes, the first step is to get the books in order. Online services such as Upwork connect businesses and independent contractors with bookkeepers who know specific industries and different accounting software. Help is available on a project or ongoing basis, and the expense may be tax-deductible.
The Small Things.
For small businesses, the small things can add up. Be sure to have a system in place to collect and organize receipts, no matter the size. Business owners may be surprised how small expenses add up to big tax savings.
Capital vs. Business Expenses.
Expenditures that directly help a business make money during the year count as business expenses and can be deducted that year. By contrast, capital expenditures, which typically benefit a business for several years, depreciate over time. For example, a new vehicle is typically a capital expenditure, while the gasoline for the vehicle is a business expense.
'The SUV Tax Loophole.'
Under section 179 of the Internal Revenue Code, sometimes referred to as the SUV tax loophole, business owners can write off the full amount of qualifying purchases, such as vehicles and computer software, in one year instead of depreciating them over several years. The annual value of this special deduction has varied; the limit sits at $25,000 for 2015, but it was retroactively raised in December last year. Keep an eye on the news and plan for last-minute business purchases.
Health Insurance Premiums.
Sole proprietors and self-employed workers can deduct the cost of health insurance premiums for themselves and their families. The deducted amount cannot exceed the total earnings of the business. Note that anyone with access to an employer-subsidized health plan, even through a spouse, cannot take this deduction.
Health Savings Accounts.
Depending on the health insurance plan, a business owner or business may be able to put money into a health savings account. The money in the HSA is tax-deferred, and if used to pay for medical expenses, it's tax-free.
Healthcare for Employees.
Small businesses with fewer than 25 full-time employees and average annual wages below $50,000 per employee can deduct up to half the premiums paid for employee healthcare. The business also must pay at least half of employee health insurance premiums and purchase health insurance through the small business health options program, aka the SHOP marketplace, to be eligible.
Self-employed business owners can reduce their income for the year by contributing to SEP-IRA, SIMPLE IRA, or solo 401(k) retirement accounts.
Life Insurance Plans.
Like contributions to retirement accounts, contributions to life insurance policies may be tax deductible. Businesses can also set up 412(e)(3) defined benefit pension plans that invest money in fixed annuity and life insurance products.
Paying FICA Taxes.
As every business owner and freelancer likely knows, they have to pay both the employer and employee portions of their Federal Insurance Contributions Act taxes for Social Security. The upside is that half the amount is deductible.
Avoiding FICA Taxes.
Depending on how their businesses are structured, owners may be able to avoid paying FICA taxes on some of their income. If the business is an S corporation, the owner must take a competitive market-rate salary, but profits beyond that may be exempt from FICA taxes.
The cost of magazines on work-related topics are a potential business expense. If the business has a reception area, the cost of reading material for waiting customers may be deductible.
Sole proprietors and people in partnerships can hire their children. Everyone wins: The child gets a job and the parent does not have to pay FICA or federal unemployment taxes as long as the child is younger than 18.
Business owners can also hire grandchildren and keep money in the family while lowering their tax bill. As long as the children earn less than the personal exemption ($4,000 in 2015 and $4,050 in 2016), they do not need to file taxes. Not sure what your grandkids can do? One idea is to have them take photos for ads and social media profiles.
Starting a business can be expensive. During the first year there are expenses for basic supplies, equipment, meetings with potential investors, incorporation, advertising, utilities, and more. New business owners can deduct up to $5,000 for business costs and $5,000 for organizational costs. If costs exceed profits the first year, the remaining portion can carry over to the following years. However, these write-offs are only allowed if total start-up costs are less than $50,000.
Fees paid to tax professionals, lawyers, and other consultants hired on a one-off or ongoing basis can be written off. Sole proprietors can write off only the costs that exceed 2 percent of their adjusted gross income.
Books and Classes.
Business owners studying a subject relevant to their business can write off the cost of books, classes, and professional publications. The subject does not need to be related directly to the services the business provides. For example, classes on tax preparation or management techniques make the grade.
Whether you need continuing education or want to network, professional organization fees are legitimate business expenses.
From Foosball to Fritos.
Transportation, food, a ping-pong table -- if it's a workplace improvement or the business owner is paying part of employees' expenses, that's a business expense.
Home Office Deduction.
The small business owner's favorite deduction can set off red flags with the tax man. Read the rules
and consider checking with a professional before writing off a home office. IRS agents have been known to make house calls to see if office space is being used for other purposes.
If you take the home office deduction, a portion of the utility bill, including Internet access, is deductible. Utilities at conventional offices are also deductible as business expenses.
A small business can buy a vehicle and write off the cost. However, keep in mind that commercial vehicle insurance is typically more expensive than insurance on a personal vehicle.
Actual Expenses vs. Mileage.
Business owners can deduct the cost of using their vehicle for business reasons in two ways. They can deduct the actual costs, including depreciation (there are calculators for this), of using the vehicle for business. Or, they can claim a standard mileage rate -- 57.5 cents a mile in 2015. However, they must keep a detailed log when claiming the mileage tax deduction
. Parking and registration fees, tolls, and taxes are also deductible.
Unfortunately, driving back and forth to work as part of a normal commute is not deductible. What does qualify: driving for business-related medical reasons, moving, or to donate items or volunteer. The standard mileage rates vary: 23 cents a mile for medical and moving and 14 cents a mile for charitable causes.
Business owners can deduct the (reasonable) cost of meals for business-related meetings, but usually only half. There are exceptions, including promotional meals for the public and office snacks.
Business expenses related to travel can be deducted. Keep receipts for everything: hotels, cabs, etc. Be careful combining a business trip with a vacation, since that's a potential red flag to the IRS.
Meals on the Road.
Even when traveling for work, business owners can deduct only half the cost of meals. However, they can opt to deduct half the government's per diem rate
for meals and incidentals instead of the actual amount. This means a deduction as high as $37 a day, even when spending less than that. In either case, hang onto receipts.
For TV personalities, bodybuilders, and other professionals whose appearance is directly related to their livelihood, grooming essentials such as body oil and makeup may be tax-deductible business expenses.
Keeping Valuables in the Office.
Have a valuable painting that needs to be insured? Hang it in the office -- the cost of insurance might be a write-off.
A Final Note.
Many tax rules depend on how a business is structured and how its contracts are written. Speak with a tax professional and/or an attorney before implementing any complex tax sheltering strategies.