To save money in taxes, have a successful business and/or avoid an IRS agent from knocking at your door, think about taxes year round. This rings especially true for small business owners, business income is taxed at a higher tax rate. Self- employment income is imposed the self-employment tax of 15.3% and the ordinary income tax rate.
Tax Tips for the Self- Employed
1. Car expenses- If you use your automobile for business , you may be able to write the expenses off. Use either the actual expense or standard mileage method. Usually, the standard mileage method is more advantageous, depreciation is included in standard mileage rate. For TY 2013, the standard mileage rate is 56.5 cents per mile. If you drive 10,000 business miles , $ 5,650 can be deducted from your business income, a huge tax savings.
2. Business use of home- Taxpayers with a home office may be able to take the home office tax deduction.Calculate business use percentage by dividing the square footage of your home office by the square footage of your home. Home expenses are ten multiplied by the business use percentage to figure deductible expenses. Utilities, home repairs, insurance, home mortgage interest, rent , property taxes qualify for home office tax deductions.
In order to take the deduction, the area must be exclusively used for business. If you let an overnight guest sleep in your home office, you are no longer eligible for your tax deduction.
3. Depreciation - Depreciation for office equipment and business asset are tax -deductible expenses. Additionally, taxpayers with a home office can deduct home's depreciation based on the business use percentage.
4. Interest - Taxpayers who borrow money to finance a business may be able to claim a tax deduction for interest paid on the loan.
*Tax Charm blog is not to be used for legal or professional advice.