Tax Consequences for Self-Employed Individuals

February 6th, 2019

Owning your own business can be very rewarding, both personally and financially. Being the sole decision-maker for this important undertaking can also be overwhelming. Business owners have many choices to make, and these decisions involve tax consequences that are not always foreseen. Identifying and maximizing business deductions, getting guidance on substantiation of expenses, and exploring tax planning alternatives that are uniquely available to the self-employed are important strategies.

You may wish to carefully examine your records to determine if you may be missing any of these deductions.

  • Home Office Deduction. If you use part of your home as a home office, you may be entitled to deduct expenses related to the home office based on the percentage of square footage the home office occupies. Related expenses include mortgage interest, property taxes, utilities, and repairs, etc.
  • General Business Expenses. If you use your personal funds for business expenses such as office supplies, these are qualifying business expenses, which you may deduct.
  • Meal Expenses. Business meal expenses that you pay with your personal funds may qualify as a business deduction, subject to limitations.
  • Personal Assets Converted to Business Use. If you have contributed personal assets, such as a computer, the fair market value of these assets qualify as a business deduction, subject to depreciation limitations, beginning with the date of conversion.
  • Self-Employed Health Insurance. As a self-employed taxpayer, you may deduct 100 percent of health insurance premiums for you, your spouse and your children. The deduction may also include eligible long-term care premiums for a long-term care insurance contract.
  • Communications Expenses. Expenses related to the business use of your personal telephones, cellular phones, and internet connections may be deducted.
  • Automobile Expenses. Mileage and other related automobile expenses may be deducted when your personal vehicle is used for business purposes.

In addition, there are multiple benefits when you employ your spouse, child, or other family member in the business.

Tax planning for retirement can also include deductible contributions to a Keogh plan, traditional or Roth IRA, SEP plan, SIMPLE plan or a one-person 401(k) plan. You may wish to consider implementing one of these plans for yourself and/or your employees to benefit from a current tax year deduction and accumulate tax-deferred retirement savings. However, each of these plans has advantages and disadvantages, and some may not be applicable to your situation.

Prior to 2018, owners of partnerships, S corporations, and sole proprietorships – as “pass-through” entities – paid tax at the individual rates, with the highest rate at 39.6 percent. The Tax Cuts and Jobs Act allows a temporary deduction in an amount equal to 20 percent of qualified income of pass-through entities, subject to a number of limitations and qualifications. This deduction can have a significant impact on your tax liability.

Complex rules and calculations are involved in many of the planning opportunities that are available to you.

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