Let me share a short story with you… A self-employed friend of mine came into may office the other day to have me do his taxes. He has been doing his taxes using a software program for years. In the past, he did his own return for 2 reasons: one it is cheaper and 2) he likes to spend a weekend going through his information.
Every year he usually asks me a few questions about his taxes and I usually can tell he is fairly confused but since he is a friend I am not going to preach to him about having a professional do his returns.
So back to the story, when he came into my office, he no longer wanted to waste his weekend going through his information and was feeling a little less confident as the IRS has sent him a letter about something he did wrong on his tax returns.
Well, I did a review of his previous year’s returns and after spending 15 minutes with him discovered several deductions he had missed. Consequently, he was overpaying his taxes for years. To add salt to the wounds, the missed deductions by far outweighed the cost of my preparation.
I wish I could say this is a unique story but it is not. In fact, most new clients that come into my office typically have missed deductions. The reasons vary and in some cases it is not just the software prepared returns — sometimes people have paid tax professionals to help them miss deductions.
The point of this article is to highlight common deductions that self-employed people miss. This article obviously can not include everything but hopefully it will cover the deductions that are easy to miss. This article is not a substitute for professional guidance.
I have compiled the following list of deductions self-employed people typically miss. Now keep in mind, there are various rules involved with taking these deductions so make sure you understand the rules before you start deducting.
Advertising and Promotion – this includes media, internet and any other advertising that promotes your business. This would also include novelty items such as coffee cups, t-shirts and pens with your company name on them.
Dues and Subscriptions – This would includes magazines and periodicals that are necessary for your business.
Licenses and Permits – If your city requires a business license this would be deductible here.
Internet Fees – If you use the internet for your business or have a web page, there is a good chance some or all of the internet costs are deductible.
Cellular and Telephone Expense – The calls for business purposes are all deductible.
Office Supplies – Office supplies used for your business are deductible.
Meals and Entertainment – Do you take clients out to lunch or dinner and discuss business with them? If so, 50% of this cost is deductible.
Travel – Business related travel is deductible.
Auto Expenses – There are couple of ways you can deduct your auto expenses. The details are beyond the scope of this article but business related auto expenses are deductible.
Electronic Equipment – Equipment such as computers, cellular phones and palm pilots all can be partially or fully deductible.
Outside Services – Costs related to your business such as tax and accounting help or any other guidance is typically deductible.
Let me add one more item, if you are newly self-employed person, you may not be aware that you will be responsible for a new tax. It is called self-employment tax. It can add to your tax bill quickly, so make sure you understand how the tax is computed and plan your cash flow accordingly.
In closing, next time you think about your taxes, make sure you feel comfortable not only preparing the returns but also
planning for the tax. If not, hire a qualified professional and you will feel better knowing your are not overpaying your taxes.
About the author
Tyler Martin is a Certified Public Accountant with a practice in San Jose, California. He provides tax and QuickBooks guidance to individuals and business owners. For more information about Tyler and his practice go to: www.4cpa.biz.