Posted by National Association of Tax Professionals

Self-Employed Consultants and Small Business Owners – A tax guide to deducting certain expenses for the self-employed individual

Self-Employed Consultants and Small Business Owners – A tax guide to deducting certain expenses for the self-employed individual

Picking up a second job to supplement household income in a tough economy is becoming more common. Many Americans are choosing to become consultants who visit homes to sell make-up, jewelry, candles, kitchen utensils and food products. Some may not realize the tax implications of becoming a sole proprietor and what they need to do to file taxes.

Your first step when starting a business is to open a separate business checking account. It will be easier to track your deductible expenses if they are not commingled with your personal expenses. If you incurred expenses prior to opening your business, keep them separate from your other expenses. Special tax treatment applies to start-up expenses.

It’s also important to keep track of your mileage, because you might be able to deduct it on your tax return. If you are self-employed and maintain an eligible office in your home, you can deduct the mileage to and from your client’s or customer’s place of business, as well as between jobs. There are two ways to calculate your auto deductions: the standard mileage rate or actual expenses. 

The standard mileage rate is the easier method to use because you simply take your total business mileage and multiply it by the current rate ($.56 for 2014). The actual expense method requires you to record the actual expenses, such as the cost of gas, oil, insurance, repairs, maintenance, tires, washing, licenses and depreciation. If you use your car for personal and business purposes, you’ll have to divide the expenses between the personal and business portion, so keeping detailed records is a must. The business miles for the year divided by the total miles for the year determine the business percentage of your actual expenses.

If you use an automobile for business, you may be able to receive a tax deduction to lower your income tax. Unless your car is used 100 percent for business, some of your expenses aren’t deductible. The IRS is quick to question a vehicle used 100 percent for business. Do you, for example, keep the car at the company headquarters over night?

Deducting auto expenses requires diligent record-keeping. There are two ways to calculate your auto deductions - the standard mileage rate or actual expenses. These methods are available whether you own or lease your vehicle.

Taxpayers who wish to use the standard mileage rate in lieu of actual expenses for computing deductible vehicle expenses must elect to do so in the first year. Switching to the standard mileage rate in a later year is not an option. 

The actual expense method is as exactly as it sounds. Actual expenses, such as the cost of gas, oil, insurance, repairs, maintenance, tires, washing, licenses and depreciation or lease payments, are eligible. 

For the standard mileage rate method, instead of tracking the above expenses, you track the business mileage you accrue and use a standard rate. The standard rate is 56 cents per mile. 

You’ll need to keep accurate records of the miles incurred for business purposes, dates of business use, destinations and the business purpose. Also, you’ll need to note the odometer readings at the beginning and end of the year to determine the total miles for the year for all uses. The important aspect is to make sure you maintain accurate records. The IRS may disallow a deduction for mileage if you are unable to substantiate your deduction.

It’s important to note that you cannot deduct commuting mileage (mileage from your home to your regular job). It is necessary to determine your tax home. If you are self-employed and maintain an eligible office in your home, you can deduct the mileage to and from your client’s or customer’s place of business, as well as between jobs. As an employee, you can deduct mileage between jobs or to a temporary assignment. If you do not have a regular place of business, you can only deduct your transportation expenses to a temporary location outside your general area of employment.

Generally, in order to claim a business deduction for your home, you must use part of your home exclusively and regularly as your principal place of business, as a place you meet your clients, or in connection with your business, where the business portion of your home is a separate structure not attached to your home.

For the most part, the amount you can deduct depends on the percentage of your home used for business. Your deduction for certain expenses will be limited if your gross income from your business is less than your total business expenses. 

It’s important to note that there are special rules for qualified daycare providers and for persons storing business inventory or product samples in their home.

There are benefits to hiring your children to work for you. If your children are under the age of 18, you are not required to withhold social security and Medicare taxes from their wages. You are also not required to pay federal unemployment taxes on their wages until they reach the age of 21.

Only self-employed business owners can take advantage of this benefit. Partnerships are included in this category as long as the parents are the only partners. If your business is incorporated, the children are considered employees of the corporation, and are subject to the normal payroll taxes regardless of their age.

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