We’re asked all the time about what tax deductions that the self-employed and/or independent contractors can take when it comes to preparing their tax return. We’ve compiled a list of the most common tax deduction categories. As always, be sure to ask your CPA which ones apply to you! For more details, please refer to IRS Publication 535.
Advertising
For example, Facebook ads, printing of swag, mailers, Google Adwords, and even hiring of freelance copywriters.
Business insurance
For example, general liability insurance.
Car and truck expenses
If the vehicle is in the business name and used 100% for business use, then the payment for the vehicle, itself, and the use of it is totally deductible.
If the vehicle is in your personal name and used partly for business use, there are two ways to calculate:
a. Deduct the expenses of operating your vehicle. For example: gas, maintenance, insurance and depreciation.
b. Deduct a standard rate on each “business” mile driven. In 2019, the rate is 58 cents per mile.
Commissions, Fees, and Contract Labor
These are payments made to non-employees for marketing purposes, or those hired as independent contractors. For example: graphic designers, sales reps, or marketing channels and platforms like Amazon.
If the size of the commission or contract labor exceeds $600 for each individual vendor, then you will have to file Form 1099-MISC.
Tip: Be sure to capitalize any commissions paid for the sale of property, unless you are the one acting as the real estate broker.
Depreciation
Depreciation is the way we calculate wear and tear on certain assets. For example: vehicles, large furniture purchases, and large electronics like expensive computers.
Tip: Section 179 outlines ways that you can deduct the full purchase price of certain business assets within the year that you bought them. You can read more about Section 179 here.
Home office expenses
There are two ways to calculate the tax deduction:
a. Use Form 8829 to itemize the various expenses involved in using and maintaining your home office
b. Determine the percentage of square footage dedicated to the home office and then multiply all of your home expenses by this percentage to determine the amount paid on maintaining the home office.
Interest payments
There are two types of interest payments: mortgage and loan interest.
a. The mortgage has to be on a property that is used primarily for business.
b. Other loans have to be business related. Specifically, for vehicle loans, you should only deduct the portion of interest that relates to the business usage of your car.
Legal and professional services
You can deduct any fees paid to licensed professionals such as attorneys. However, you can no longer includes fees paid for tax advice or tax return preparation, thanks to the new tax law.
Office expenses
For example: expenses related to a dedicated office like maintenance and cleaning.
Rent or lease payments
For example: rent of your office space, rent of vehicles, or rent of any equipment for your business.
Repairs and maintenance
For example: repairs and maintenance to machines, equipment, or office upkeep.
However, do not include:
a. The value of your own labor
b. Substantial improvements that add to the property’s value or prolong its life. Declare these under “Depreciation”. Also, capitalize any money spent on restoring or replacing lost property (make it an asset).
c. Car maintenance and repairs go under “Car and Truck Expenses”
Supplies
For example: materials that you actually used in that tax year, deduct the portion of the amount used, not the total amount you spent. Also, “incidental” supplies for general office use (such as paper clips) can be fully deducted.
This can also include professional instruments, books and equipment, but only if they will be useful for a single year. If they will be useful beyond one year, then report them under “Depreciation”.
Taxes and licenses
For example: incorporation fees and business licenses. Taxes are slightly more complicated. Some are deductible and some aren’t.
These are deductible:
a. State and local sales taxes (for goods and services to be resold)
b. Property taxes on business assets
c. Federal highway use tax
d. Payroll taxes
These taxes are not deductible:
a. Federal income taxes, including your self-employment tax
b. Taxes on personal use property
c. State and local property sales taxes
d. Sales taxes that you collected from buyers of your goods or services, which you remit to the state or local governments.
Travel, meals, and entertainment
Some travel costs are tax deductible if the trip is:
a. Overnight
b. Primarily for business
c. Away from your tax home
d. Shorter than one year
For meal expenses, you can either choose to deduct the actual cost of your meals, or use the standard meal allowance specified by the General Services Administration.
Meals and entertainment expenses can either be fully, partially, or non-deductible, depending on the situation. For more information, we recommend reading this handy Bench article: When Are Meals 100% Deductible?
Utilities
For example: office utilities like power, water and internet. You can also write off the portion of your cell or home phone bill used for business.
Tip: A simple way to do this is to track your phone usage for a month, then multiply that by 12.
Other expenses
Any other ordinary and necessary business expenses not included elsewhere can be declared in this category.
For example:
Costs for acquiring or defending trademarks and trade names, bad debt, and business start-up costs (up to $5,000 and not to exceed $50,000.)
