Being your own boss has its benefits. However, one potential drawback of being self-employed is having to account for your own payroll taxes.
To help ease the tax burden faced by the self-employed, the IRS allows for several tax deductions. It’s important to understand how these deductions work, so you don’t run afoul of the IRS. Here are four commonly misunderstood deductions.
1. Start-up costs
Forming a business isn’t cheap. However, entrepreneurship is at the heart of the American dream. To encourage people to start a business venture, the IRS allows business owners to deduct a portion of their start-up costs. However, there are limits to what you can write off. It’s important not to exceed these limits lest you find yourself the subject of an audit.
2. Depreciation of work-related equipment
Accounting for the depreciation of work-related equipment can help you space out your deductions over the years. You need to be aware that if you sell off or even lease your business equipment, you could face depreciation recapture. This may not be a big deal if you’re selling an office chair, but for expensive pieces of equipment, you could find yourself facing a tax bill in the tens of thousands of dollars. It’s important to have a fundamental understanding of depreciation recapture before you decide to avail yourself of this type of deduction.
3. Automobile deductions
The IRS views non-reimbursed business travel much differently than using a dedicated business vehicle to make your trips. If you have a car that you use specifically for your business, you should understand that the IRS restricts how you can use the vehicle for your personal use.
4. Utilities and phone bills
If you have a phone that you use for business purposes, you can deduct a portion of the cost under business expenses. You can also deduct a portion of your utility bills. However, any utility deductions must be in the percentage that the utilities are actually used in the course of your business.
There are numerous rules and exemptions to the above deductions. You should work closely with a qualified tax professional to ensure that your accounting is above board.