Hey, it's Wes Roth. Let's talk self employed tax deductions for 2021 and beyond.
If you are self-employed or a business owner, you know that there are lots of juicy deductions that you can take to keep more money in your pocket and minimize how much taxes you have to legally pay.
The more you can save, the more you can invest, and taxes are the BIGGEST expense for most self-employed people, so if you get this right, that can go a long way towards growing your money every year.
In this article I will share with you the biggest self employed tax deductions you should be taking advantage of to save money, how to apply them to your business as well as some things you can do to avoid red flags with the IRS so you can avoid the hassles of audits and penalties.
Now of course all of this is 100% legal and legit, I’ve used many of these strategies to save tens of thousands per year in taxes myself. But of course, make sure to talk to your accountant, none of this is financial advice, I’m just sharing my own experience and your situation will be different.
So let’s get started, we will start at the most common and largest deductions and slowly move into the more “exotic” ones.
Home Office Deduction
If you work from home like me, then your home or at least a part of it, is your office. Just like you would write off your expenses for renting or owning an office, you can write off expenses for your home office.
What things can you write off?
Well, a portion of your mortgage or rent, property taxes, the cost of utilities, repairs and maintenance
This is mainly for self employed people, if you are working from home as an employee this likely will not apply to you.
The way this deduction works is that you take the percentage of you home’s square footage that you use exclusively and regularly for business related activities.
And those are the IRS's words “exclusively and regularly”. The key here is that this can’t be shared space. So if you have a home office, but also a bed in that office that you sleep on at night, that might raise some flags. The space has to be for business only.
So if your house is 2,000 square feet and you have a room that is your office that is 500 square feet, then that would be 25% of your space that is reserved for business use and therefore you will be able to write off 25% of your rent or mortgage.
Another thing you can do is to Choose the simplified option.
This is where you deduct $5 per square foot of home used for business, up to 300 square feet.
This makes it easier, you don’t have to keep as many records, you are less likely to have to justify your decisions to the IRS, but it also might be less money, so do the math.
Car aka Vehicle Deduction
If you drive a car for business related purposes, this can be a big one. Whether you drive to meet vendors, clients or haul inventory around, deduction your driving expenses can be a big deal.
Now there are two different approaches here that you can do.
The first one thanks to the Tax Cuts and Jobs Act and it allows 100% first year bonus depreciation of qualifying new and used vehicles.
This means that if you purchase a $50,000 dollar vehicle, you can write off the full $50,000 dollar of depreciation off in the first year. That vehicle can be new or used, but it has to be new to YOU, meaning you have to acquire it from someone else.
You have to use if 50% or more for you business and you can only deduct the percentage that you use for your business. So if you use it 60% for business, for example, then you would only deduct 60% of the cost.
The other catch is that it has to be a heavy vehicle.
To qualify as a “heavy” vehicle, an SUV, pickup or van must have a manufacturer’s gross vehicle weight rating above 6,000 pounds.
You can usually find that by googling the name of the vehicle or looking at the manufacturer label which is on the inside edge of the driver’s side door.
Examples of heavy vehicles include the Audi Q7, Buick Enclave, Chevy Tahoe, Ford Explorer, Jeep Grand Cherokee, Toyota Sequoia, and most full-size pickups.
One of the reasons I drive a Ford F150 is because the government graciously paid about $10,000 of the cost for me in the form of a tax break.
As it stands right now, we are expecting this deduction to start being phased out in 2023 by 20% per year. So to take full advantage, buy a car this year or 2022. Often these programs do get extended, so maybe they will vote to keep it around for longer.
There are other cars and vans that qualify for smaller deductions, you have to speak with your accountant about what exactly is right for you, also if you sell the truck at a later time, you do have to give back some of that money because of something that’s called “depreciation recapture”, but we won’t go into that here, basically know that when you sell that truck, be prepared to buy another business vehicle to depreciate OR be ready to pay some of that deduction money back.
If you are deducting depreciation this is referred to as “deducting actual car expenses” and it means you can also deduct things like licenses, gas, oil, tolls, parking fees, garage rent, insurance, lease payments, registration fees, repairs and tires.
It’s either this OR deducting the mileage, which is a more common way of deducting car expenses.
How deducting mileage works is At the end of the year, you tally the number of miles you drove in the car for business, multiply that by the IRS’ standard mileage rate
Which is 56 cents per mile in 2021, for example — and deduct the total.
Be sure to keep a mileage log; you’ll need it if you’re audited. There are apps that can help with that or you can do paper and pen, just keep it in your glove box and add trips as they happen. The auditors like seeing that you added the trips as they happen and not all at once in a last minute panic, just fyi.
If you are leasing, you can deduct the full cost of the lease as an ordinary business expense. It’s probably the most straightforward way to deduct car expenses.
Retirement savings and IRA accounts
This one is huge because it’s actually not an expense, you are basically just setting money aside for later AND taking a deduction on it now.
As a business owner or self employed person, you have some amazing retirement accounts that the common folk, “the peasants” just don’t have access to.
For example take the sep IRA, it’s available for employers and self employed people.
Now a normal IRA has a contribution limit of $6,000 that is the total amount you are able to put away, and not pay taxes on if you are an employed person setting up and IRA.
If you are self -employed and you open up a SEP IRA, you can contribute $58,000 in 2021. You can’t contribute more than 25% of your net income, but if your income is high enough, you can put away almost $60,000 away and not pay taxes on it.
Qualified Business Income Deduction.
This one is another one that is a new addition, thanks to this deduction, created by the 2017 Tax Cuts and Jobs Act, this allows eligible self-employed and small-business owners to deduct up to 20% of their qualified business income on their taxes.
In general, total taxable income in 2020 must be under $163,300 for single filers or $326,600 for joint filers to qualify. In 2021, the limits rise to $164,900 for single filers and $329,800 for joint filers.
This is for people who have “pass through income” which you likely have if you are a Sole proprietorship, Partnership, S corporations or Limited liability company.
Those are the big ones, and for me were some of the biggest deductions that I was able to get.
Other Self Employed Tax Deductions
The other self employed tax deductions that you should be aware of and talk to your accountant about are
Health Insurance if you purchase health insurance.
continuing education for business related training and education.
Office supplies like computers, stationary, phones etc.
Credit card and loan interest.
Business travel and meals.
And phone and internet costs.
Keep in mind that as a self-employed person you have some of the best tax avoidance strategies available to you, if you are able to intelligently take advantage of these, invest the money you save, the compounding effects over time can be massive.
The way that wealthy people get that way is often with businesses, tax reduction strategies and intelligent investing. So these strategies are the foundation for being a “have” and not a “have not”.
My name is Wes Roth, check out my YouTube channel here.
Until next time and thank you for reading.