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Tax HELP For Independent Contractors

Entrepreneurs and self-employed people who want to maximize their income tax deductions would do well to remember the acronym HELP at tax time. 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 do not maintain a storefront or office space for your business you could be entitled to deduct a portion of your home or apartment rent, plus heat, electricity and other household expenses at tax time. In order to qualify you will need to move off the dining room table and into a spare room designated only for business use. No fold-out couch for house guests, no off-season holiday decoration storage, or other non-business use is allowed 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, it too could get you a tax deduction. Household utilities would not be part of the deduction if this storage unit is not located inside your living space.

To take the home office deduction you will need to know the square footage of your home, as well as that of the office or storage room. The portion of your home that the office occupies becomes the percentage of the expenses you will be allowed to deduct at tax time. For example, if your room is 10′ x 20′ (200 square feet), and your home is 2,000 square feet total, your office would occupy 10% of the total space. That would make 10% of your shared household expenses a business deduction.

In case of a tax audit it’s handy to have a photograph of your office or storage space in use, as well as copies of all utility bills and receipts for the expenses that 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 of the supplies you need to operate that equipment. Equipment purchases would include the tablet you buy to keep up with business when you’re away from the office, the camera or cell phone you put on your credit card and use to take product photos, and furniture for your home office. Even equipment converted from personal use to exclusive business use is deductible at the current value.

Any business equipment you buy that has a life expectancy of two or more years, and costs more than $75, will need to be listed individually at tax time. Equipment supplies and small equipment purchases do not need to be itemized; these can be lumped together. Store the receipts for equipment and supply purchases with the rest of your income tax receipts; if you want to keep the original receipt with your warranty papers a copy will do.

Logbook

Entrepreneurs and small business owners often overlook the importance of logging auto expenses and business mileage. This logbook serves two purposes. It will get you bigger tax deductions and win I.R.S. audits. If you don’t write down every mile driven for your small business, as well as actual automobile expenses, you could end up paying hundreds of dollars in income taxes that you don’t owe. This includes all mileage for business errands run in the family car.

During the first year a vehicle is used for business you get to 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 elect to deduct mileage you cannot switch to deducting actual expenses. That’s why it’s important to add the car payment, gas, oil, repairs, insurance, licensing and other vehicle expenses together that first year, before selecting mileage as your deduction. Which is best will depend on how many miles you drive vs. your actual expenses.

Postage

It’s amazing how many small business owners use stamps purchased with personal funds to mail out their business bills. 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 you’re letting slip right through your fingers. Grab the receipt and stamps, circle the amount paid, and stick them both 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 just about everything you do in the name of business is deductible at tax time when you understand what the I.R.S. allows. Whether you employ an accountant to do your tax return or prepare it yourself, every independent contractor needs to take the time to learn basic I.R.S. small business rules. It will keep more money in your pocket, and make you audit proof at the same time.



Source by KiKi Canniff

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