Life as an entrepreneur is exciting. You can control your lifestyle, your career and your finances. When you raise money, life cannot improve. However, as a taxpayer, you should remember to reserve some of your earnings for the federal government.
Paying taxes on your income is a relatively simple process if you work for an employer. However, it can be difficult to understand if you are a business owner or an independent worker. If this is the first time you file a tax return with the IRS, good luck. It is possible that compiling your statement is confusing and frustrating if you do not know what you are doing.
However, as a business owner or independent person, you can cancel a portion of your expenses in your statement. The IRS and the US government. UU. They realize the importance of stimulating the growth of small businesses in the United States. As part of the backbone of the US economy, the government and tax authorities issue tax exemptions to help business owners continue to grow.
Withdrawing your expenses is fantastic if you have profitable businesses. You can get a depreciation of the value of your vehicles and assets; You can cancel some of your home office costs and much more.
In this short guide, we will analyze what expenses you can cancel on your return and how to submit it correctly.
Tax deductions explained
Newbies who file their taxes may wonder what a tax deduction is and how it benefits their finances.
The Internal Revenue Service understands that companies have expenses and that it affects the profitability of companies. Therefore, to stimulate the economic growth of business in the United States, the IRS allows you to deduct certain expenses from your annual adjusted gross income.
This benefit allows you to reduce the taxable income you owe the IRS, keeping more of your money in your pocket. Deductions also influence your AGI, and sufficient deductions could mean that you fall into a lower tax bracket, reducing your tax liability.
United States law offers tax deductions in two categories; Detailed deductions and standard deductions.
Most taxpayers use the standard deduction rate when filing their tax returns. This deduction consists of a flat rate that the IRS allows you to deduct from your gross income. If you follow the standard deduction, the IRS accepts it. However, if you exceed the standardized threshold for deductions, you may have to face an audit by the IRS.
In 2019, the standard deduction increases to $ 12,200 for individual taxpayers and $ 18,350 for household heads. Surviving spouses and married couples who show up together receive a standard deduction of $ 24,400. This deduction is already a significant refund that generates your cash back in your bank account when you file your taxes.
However, if you are a business owner or freelancer, then you should consider opting for the detailed deduction option. Detailed deductions allow you to save even more on your tax bill. You can claim other expenses that would not otherwise be valid through the standardized route.
As a business owner or freelance worker, you most likely have a series of expenses that are part of doing business. If you can prove that these expenses are related to the business, the IRS will allow you to deduct a specific percentage of these costs from your tax return.
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Why is it so complicated to file my tax return?
The freedom that comes from working on your own or having a business is one of the best advantages that entrepreneurs enjoy. Unfortunately, when the tax season arrives, it presents one of the most important financial challenges of the year.
Employees who file W-2 returns do not have many problems, since the employer deducts taxes from their salary. Individuals who work on their own must submit a quarterly statement, or run the risk of incurring fees and fines for late payment.
One of the biggest drawbacks of the quarterly presentation as a freelancer is that you have to cover a part of Social Security and Medicare that would otherwise be covered by an employer. The taxes paid by the self-employed in relation to Social Security and Medicare are "self-employed taxes."
These taxes also create a significant burden for business owners who employ a large number of staff. As an employer, you have an extended tax responsibility to manage your employees and ensure that the IRS receives your cut. As a result, you should take advantage of as many tax exemptions as possible to increase your results.
By using deductions, you can reduce what you owe the IRS. By detailing your deductions, you compensate those deductions from your adjusted gross income and your taxable income is left over.
Making use of tax deductions depends on how you earn your income and your true business expenses. Some people may deduct more expenses than others, depending on the nature of their business and how they spend money related to operating costs.
It is for this reason that tax deductions for freelancers can be complicated. Most likely, you have difficulty identifying all the areas where you can take a deduction. Therefore, we recommend that you work with a professional accountant when you file your tax return as a freelancer.
However, if you are not a freelancer, then submitting your statement is not that complicated. As a self-employed person, you can take advantage of the cancellation of expenses that fall into any of the following three categories.
- Expenses related to commercial operations.
- Expenses related to the costs of doing business outside their offices or facilities.
- Expenses related to your business facilities, otherwise not related to operations.
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Tax deductions for self-employed people
We will unpack the expenses that the IRS allows you to deduct from your tax return as a freelancer. This list will be relevant for anyone who works as a freelancer. However, we still suggest that you work with an accountant at the end of your return.
If you are a driver of a shared travel company, you can claim your mileage reimbursement and, if you are a writer, you can claim the expenses of the home office. These types of deductions can also be applied to other industries. Professions, such as photographers, housewives, consultants, designers and any other professional occupation in which you work to generate income, can use deductions.
Here are the standard deductions allowed by the IRS on your tax return.
Your home office
As a freelancer, one of the best advantages of work is that you can work from home. You don't have to spend hours in traffic or money on gas. As a freelancer, you have the benefit of canceling your "home office" expenses.
So what is a home office and what expenses can you deduct from your taxes? The IRS sees your home as a commercial premise and allows you to deduct a percentage of your mortgage costs from your taxable income. The same goes for people who pay the owners rent. You will also have the advantage of canceling your property taxes.
To qualify for a home office, you must have a specific area of your home dedicated to an office space. You cannot use this space for any other task, except work. Therefore, the IRS prefers if it is a real office and not the dining room you are using for work purposes.
When you claim a home office, calculate the value of the deduction using the simplified or regular deduction of the home office.
Travel and accommodation expenses
As a freelancer, you can deduct your travel expenses, such as plane and train tickets. Deducting your mileage if you drive away is a different expense and requires extensive calculation.
However, any other travel and accommodation expenses incurred as a result of doing business is a valid deduction. The costs of attending trade fairs are also another expense that you can deduct from your tax return, along with your hotel bills.
The IRS allows a 50 percent deduction on meal expenses related to business functions. However, you cannot deduct the costs of leisure and tourism activities while you are away.
Professional Courses and Development Programs
As a freelancer, you probably invest in yourself when you have the opportunity. You can cancel any cost you incur for personal and professional development courses. These expenses include the costs of attending seminars, as well as any purchase you make for self-development courses.
Professionals can also cancel any subscription membership costs to professional organizations.
If you own business premises, you can cancel 100 percent of the cost of your public services against your taxable income. However, if you are a freelancer who works from home, you can only deduct a certain percentage.
The percentage of home office costs canceled on your return depends on the portion of your home occupied by your home office. In most cases, the IRS will allow a deduction of 20 to 25 percent.
Freelancers can also deduct the costs of air conditioning, heating and internet services. It is important to keep in mind that you cannot claim public services if you are using the simplified deduction option.
Marketing and publicity
It costs money to promote your business. The IRS allows you to deduct the marketing and advertising costs of your company and its products. The costs of web advertising, Facebook advertising campaigns, flyers and business cards count towards the marketing expenses that qualify for a deduction.
As a freelancer, your computer is your source of income. The IRS allows you to deduct the costs of any software tool you use from your taxes. If your malware, editing and grammar checker costs money, you can deduct them from your tax bill.
The costs of doing business on the Internet is another area where you can save on your tax return. The IRS allows you to cancel the costs of development, hosting, domain costs and maintenance of the website.
Gas and mileage
If you drive to meet with customers or leave sales, you can deduct your gas costs and mileage from your taxes. The IRS provides two types of vehicle deductions on your tax return. The first option is standard mileage. This option allows you to claim miles traveled for commercial purposes.
The second option is the real mileage deduction. With this tax exemption, you can cancel actual fuel costs, as well as maintenance, toll fees and other expenses related to the car, such as car washing. You will have to add them yourself, and it is better if you use your counter to help you make an accurate deduction.
Health Insurance Deductions
Individuals who work on their own and who meet specific criteria may receive a special tax deduction that allows them to deduct 100 percent of all health care premiums from their gross income. These medical expenses also include the costs of vision, dental care and long-term or short-term care at medical facilities. The IRS also allows deduction for the costs of medical care for your spouse and children, as well.
The IRS does not recognize this as a commercial deduction. Instead, it is a special personal deduction allowed for independent workers. Therefore, this special deduction only applies to federal, state and local taxes, and not to your self-employment tax.
At closing – Filing paperwork
It is better to check with an accountant which deductions apply to your self-employment status and the nature of your business. When the time comes to submit an application, you must include your deductions in Part II of Schedule C, tax form 1040. Anyone who works on their own with less than $ 5,000 in deductions can use Schedule C-EZ.
The final date for returns is April 15, and if this date falls on a weekend, the date changes to Monday or the following Monday if there is a holiday.
If you have a problem handling your tax return or calculating your deduction, talk to a qualified accountant for help. An accountant will identify all areas where you can claim deductions without triggering an audit.
Disclaimer: The opinions expressed herein are only those of the author, not those of any bank or credit card issuer and have not been reviewed, approved or endorsed by any of these entities.
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