Get Organized Now for Income Taxes
Posted by: Anna | 01/04/2017 at 09:30 AM
Being an independent consultant provides you financial freedom and work-life flexibility, which everybody loves. But every rose has its thorns, and the thorn for sole proprietors is having to file your own income taxes. You may pay them quarterly or annually, and either way the paperwork can get out of control. Using a CPA makes filing much easier, but because the cost can eat into profits, a lot of consultants choose to file income taxes themselves.
The good news is any business expense you can think of can be claimed by a sole proprietor if it is legitimately incurred for your business (not personal) use. Always have written documentation to support these deductions, especially where the line between personal and business use is hard to see (cell phones, vehicle mileage, etc.). There are even apps to help you track this sort of stuff!
Although the federal income tax filing deadline is months away, it tends to creep up fast. By organizing your files (or shoeboxes of receipts) now, you’ll be able to receive your tax return faster—or at least you won’t have to scramble to find deductions and paperwork at the last minute. Knowing what you can write off makes the process even faster. So, here are income tax tips to help you get organized.
If you are not sure about the deductibility of a particular item, please consult a tax professional or the IRS for more information.
- Business vehicle deductions: You can deduct a percentage of actual expenses for your vehicle when used for business. Keep track of all your expenses and mileage, and if you drove 20% of your miles for business, then you can deduct 20% of all expenses. That includes depreciation of your vehicle, insurance, repairs, gas, tolls, parking, etc. – or you can simply use the cents-per-mile method. (That rate can change annually, so always check the IRS website.) Either way, keep written records of business miles vs. total miles and keep all your receipts and invoices in one file.
- Home office expenses: Your home office business deductions are calculated similarly to the vehicle deductions. They will be based on the percentage of your home used to run your business. The IRS implemented a “simplified” rule a few years ago that allows you to multiply your square footage of business space by $5 and simply deduct that amount. You may deduct expenses directly spent on your office space (paint, carpeting), indirect expenses like electricity and insurance, and a percentage of your mortgage interest and property taxes. Gather all of your bills and receipts and get ready to calculate!
- Cell phone use: You can deduct the portion of your cell phone bill actually used on business calls. Find and keep your itemized bills.
- Business materials and supplies: Think about the paper you used to print flyers or mailers to your customers or downline consultants. Any costs you had for putting on seminars or hosting meetings can also qualify. Keep receipts and detailed notes of when and what you did.
- Business meals and entertainment: If you purchase meals or outings directly related to your business, you can deduct 50% of actual costs. However, you must diligently document the business purpose and names of all attendees, and of course, keep all receipts.
- Accounting or legal fees: If you get advice or help with your business, such as from a CPA or attorney, you can deduct your fees from your income. As always, find and organize your invoices and documentation of the help you received.
- Advertising/marketing costs: If you create a website, you can deduct the cost of design and development, as well as hosting costs. You can deduct more traditional advertising and marketing costs, as well.
- Depreciation of fixed assets: Office furniture, computers, printers, software, etc. all have a ‘useful life’ and lose value over time because of that. There are formulas to determine how much value remains, and you can deduct the portion that was lost from your income.
- Interest expense on business loans: Ambit consultants are very unlikely to have taken out business loans, but if you have other business interests, you may have. The interest paid annually on those loans can be deducted.
- Professional licenses required to conduct business: This deduction usually applies to lawyers, realtors, even plumbers and other tradespeople who are required by states to earn and hold licenses. If you’re required to pay for a license in order to conduct business, you can deduct the expense.
- Rent for office space, storage, equipment, etc.: If you conduct business outside your home and rent space to do so, you can deduct that expense when you’re a sole proprietor.
- Continuing education/training needs: Some sole proprietors are required to attend training regularly to learn about new rules, regulations, and developments in their industries. The cost of that training is deductible.
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