Tax Benefits and Deductions for the Self-Employed

The process of filling in tax forms can be complex and difficult to understand. For the salaried employees, it is still straightforward as they can easily copy their Form 16. However, for self-employed and freelancers, it can be quite challenging to keep track and maintain all the expenses. Be it a salaried employee or a self-employed, it is essential for each citizen to be self-compliant and pay their taxes on time. Every individual would want to reduce their overall taxes.

Most self-employed individuals and freelancers are often not well-versed with the deductions they are entitled to. Continue reading to know about some of the common tax benefits and deductions for self-employed people that can help you reduce your taxable income. Even if you’re hiring someone for filing your taxes, you should be aware of these basic aspects. It will help you maximize your profits and help get rid of unnecessary taxes.

Tax Benefits

1. The Home Office Deduction

If you’re operating from home and using it regularly for operations, you can consider the home office deduction. You can calculate it as a home office expense, irrespective of the fact you own the space, or it is on rent. It is a complex deduction, and you should have proper proofs to show it.

You should consider having a proper diagram and exact measurements of the space you’re using. For instance, if your office space takes around 30% of your house, then 30% of your overall expenses will be deductible. 30% of your electricity bills will be deductible and so on. Those who own the space can even take into account the costs associated with home depreciation.

There are two methods for calculating these types of deductions: the simplified one and the standard one. For the latter method, you will have to keep records of all your home’s office expenses.

In the previous simplified method, you can calculate by taking square footage into the consideration. You can even consider calculating the taxes via both methods to get a better understanding and learn which method can help you save more.

Read Related Blog: How to Design Your Own Space to Work from Home

2. Internet Connectivity and Phone Bills

You can deduct bills related to phones, fax, and an internet connection even if you’re claiming the house deductions. The idea here is to claim all the expenses that you may have spent on your business-related activities. However, you should have a separate phone line dedicated completely to your business.

You may not be entitled to the deductions if you’re using the same line for your home as well as your business. In other cases, you will even have to prove the percentage that has been dedicated and used for your business. Therefore, you must consider these costs if you’re running your operations from home only.

3. Business-related Supplies

Whether it is a bundle of pens or paper, everything that you use for your business purposes can be claimed. You can always deduct the amount of all the supplies that you may have spent on. However, for items such as desktops, laptops, you can only deduct the amount once a year. You can even deduct the cost of depreciation of these items in the future.

Therefore, you must maintain a record of all the items that you purchase for your office purposes. You should always keep the office and home supplies separate to get better clarity on all the items that can be claimed for the tax deductions.

4. Travel and Meals

You may go outstation to attend some meetings or events. There will also be expenses related to food and meal you may have. All these can likely be deducted from the taxes. However, you must have complete proof that your expenses were used only for your business purposes. You may land up in trouble if you try to show wrong expenses to save on your taxable incomes.

Many accountants and self-employed individuals even consider the amount of a standard daily meal allowance instead of recording the expense of every meal. We know it can be difficult to track the expense of each meal. It will even be confusing and may lead to multiple different entries. Therefore, one can consider recording standard expenses of meals.

Your bills related to flights, hotels, transportation, and meals will be deductible. You should note that meal is tax-deductible only when it was legitimate for travel and business purposes. Your business trip should last for more than a day, requiring you to take a place for your stay. However, you must note that you won’t be able to deduct any kind of lavish expenses for hotels and meals. It should not even be a cheap one. You should choose wisely and plan your business trips ahead of your time.

If your spouse or any other family member is traveling along, you will only be able to deduct the transportation costs.5

5. Vehicle Usage

If you’re using your vehicle, you should note that your expenses for that will be deductible. However, you should avoid counting and claiming your personal car trips for that. You should consider making a record of all the business car trips. Maintain a record of the number of miles driven and a record of all the dates. You can use a standard mileage rate to calculate the overall deductible amount.

6. Training and Education-related Expenses

If you’re spending on any training program to improve or enhance your skills further, you may be able to deduct those taxes. However, if the training program is related to a new skill, you may not be entitled to deduct it.

For instance, if you are in the video editing field, you plan on learning more advanced and latest software. In this case, the amount will be deductible from the taxes. However, if you wish to learn any computer language or something which is not related to your field, you cannot deduct that amount.

If your educations are work-related, you can even deduct costs related to books, tuition, transportation, and other fees. Ensure that the training is related to your field only and helps enhance your skills.

7. Health Insurance Premiums

All the self-employed and freelancers can deduct the amount of health insurance premiums that they may be paying. This kind of deduction is even applicable to your spouse and children. If you’re sharing a health plan with them, you can deduct that from the taxable income. You can deduct premiums for children only if they are under the age of 27.

8. Credit Card and Loans

The interest payments on your credit cards and loans are also deductible. To avoid confusion, you must always keep your credit cards and loans separate. You should use a different credit card for business purposes as well as your personal purposes.

It may get difficult to claim if you’re using the same card for both purposes. You should keep a record of all the expenses and interest for a better understanding. If the entire loan was not used for your business purposes, you will have to show the percentage that was dedicated to your work.

9. Publication’s Deduction

You might have subscribed to any book or magazine for your daily updates. All amount related to publication and subscription is tax-deductible. However, a daily newspaper will not be taken into consideration. It should be a niche-specific magazine or a specialized e-book.

10. Startup and Advertising Deduction

We all invest a certain amount in our startups. All the major expenses can be deducted over time. In the first year, there is a limit to the amount that can be deducted. Besides that, you can even deduct the cost of marketing collaterals or advertisements that you may have done for promotional purposes.

These are some of the operational costs that you can deduct from your income. Keep a record of all the expenses and consult a tax professional for better guidance.

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