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November is National Entrepreneurâ€™s Month, and a good time to look at some of the tax implications of being self-employed. There are actually quite a few ways that an entrepreneur can legally reduce their tax burden and this applies both to those that own and operate a full time business and those that do it part time on the side.
Here are 7 of the most important tax deductions entrepreneurs should be aware of:
Home Office: Entrepreneurs that maintain a home office are eligible to deduct a portion of their housing costs, based on the amount of space used for the office. For example, if your office encompasses 20% of the space in your home, you are eligible to deduct 20% of the rent/mortgage, utilities, property taxes, homeowner insurance, and maintenance/repairs. You are also able to deduct 100% of the supplies you purchase to maintain your home office, such as computer paper, ink cartridges, file folders, etc.
To prove that you actually have a home office, it is best to take photos and measure the dimensions, then keep this data in a secure folder either on your computer or in a file cabinet. This will keep you protected in the event of an audit. Finally, do not forget to include one of your bathrooms as part of your home office, the government does allow for the need to have these facilities available while operating your business.
Communications: Aside from whether or not you take the home office deduction, it is likely that your business needs a dedicated phone and fax line, Internet connection, mobile phone, and perhaps all of the above. Communication used exclusively for business purposes is entirely a tax deduction.
Automobile Usage: Entrepreneurs that use their vehicles for business purposes can take the standard mileage deduction, which is 56.5 cents per mile in 2013. As always, make sure to keep meticulous records of business miles driven so you can be covered later. It is best to keep a mileage log in your vehicle at all times and log each business trip.
Travel and Entertainment: Business owners are able to deduct part or all of certain costs related to overnight business travel throughout the year. In general, you can deduct 100% of transportation costs such as airfare, train, bus, car rental, etc. and lodging. You are only allowed to deduct 50% of the cost of meals and entertainment. If attending a conference or seminar while traveling, you may also be eligible to deduct this expense, as long as the event is directly related to your business.
Health Insurance: Entrepreneurs who are not eligible for health insurance through their spouseâ€™s employer are usually able to deduct the cost of health insurance premiums paid to cover themselves and family members.
Business Loan Interest: If you have a business loan or line of credit, interest paid during the year is tax deductible. In addition, credit card interest may be tax deductible if the card is used for business expenses.
Self-Employment Tax: Many entrepreneurs are not aware that they are able to deduct a portion of their self-employment tax from their net income. This helps reduce the burden business owners incur having to pay all of their self-employment tax.
There are several other ways for entrepreneurs to keep their taxes lower. Consult with your accountant to determine how best to structure your entity to realize the maximum possible tax savings.