Entrepreneurs and freelancers who want to maximize their personal income tax deductions would do well to remember the acronym HELP when filing taxes. It stands for Home Office + Equipment + Logbook + Postage, four of the best ways for independent contractors to reduce their taxable income.
home office deductions
If you don’t maintain a store or office for your business, you may be entitled to deduct a portion of the rent for your house or apartment, plus heat, electricity, and other household expenses at tax time. To qualify, you’ll need to move from the dining room table to a spare room designated for business use only. No folding sofas for house guests, off-season storage of holiday decorations, or other non-commercial use in a tax-deductible home office.
Inventory storage space also qualifies for the home office deduction, so if you use a room in your house just for inventory, you could also get a tax deduction. Household services would not be part of the deduction if this storage unit is not located within your living space.
To take the home office deduction you will need to know the square meters of your house, as well as those of the office or storage room. The part of your home that is occupied by the office becomes the percentage of expenses that you can deduct at tax time. For example, if your bedroom is 10′ x 20′ (200 square feet) and your home has a total of 2,000 square feet, your office will take up 10% of the total space. That would make 10% of the shared household expenses deductible for the business.
In the event of a tax audit, it helps to have a photo of your office or storage space in use, as well as copies of all utility bills and receipts for expenses you deducted. Homeowners can deduct household expenses without depreciating their home.
Equipment
Every piece of equipment needed to run your business is deductible, along with all the supplies you need to run that piece of equipment. Equipment purchases would include the tablet you buy to keep up with business when you’re out of the office, the camera or cell phone you put on your credit card and use to take photos of products and furniture for your home office . Even equipment converted from personal use to exclusive business use is deductible at current value.
Any business equipment you buy that has a life expectancy of two years or more and costs more than $75 will need to be included individually at tax time. Equipment supplies and small equipment purchases do not need to be itemized; these can be grouped together. Keep receipts for purchases of equipment and supplies with the rest of your income tax receipts; If you want to keep the original receipt with the warranty documents, a copy will do.
logbook
Entrepreneurs and small business owners often overlook the importance of recording car expenses and business mileage. This log book has two purposes. You’ll get higher tax deductions and win IRS audits. If you don’t write down every mile driven for your small business, as well as the actual car expenses, you could end up paying hundreds of dollars in income taxes that you don’t owe. This includes all business mileage done in the family car.
During the first year a vehicle is used for business, you can choose whether to deduct mileage or out-of-pocket expenses, as long as you use that car or truck 50% or more for business. Once you choose to deduct mileage, you can’t go on to deduct actual expenses. That’s why it’s important to add up your car payment, gas, oil, repairs, insurance, license, and other vehicle expenses that first year, before selecting mileage as your deduction. Which one is better will depend on how many miles you drive vs. your actual expenses.
Shipping costs
It’s amazing how many small business owners use stamps purchased with personal funds to mail their business invoices. It may seem easier when you tell the grocery store clerk to add that book of stamps to the total, but it’s a tax-deductible expense he’s letting slip through his fingers. Take the receipt and stamps, circle the amount paid, and post them in your office. You’ll reap the savings at tax time.
There you have it, real tax HELP for entrepreneurs. But don’t stop there, because almost everything you do on behalf of the business is deductible at tax time when you understand what the IRS allows. Whether you hire an accountant to do your taxes or prepare them yourself, every independent contractor should take the time to learn the basic IRS rules for small businesses. You will keep more money in your pocket and make it audit proof at the same time.
