Thomas Vincent Cuomo, EA, CTC – Self employed? Use these pointers at tax time

self-employed-main-promoDetermine what’s deductible
Under IRS rules, deductible business expenses for the self-employed must be “ordinary” and “necessary.” Basically, these are the costs that are commonly incurred by businesses similar to yours and readily justifiable as needed to run your operations.

The tax agency stipulates, “An expense does not have to be indispensable to be considered necessary.” But pushing this gray area too far can trigger an audit. Common examples of deductible business expenses for the self-employed include licenses, professional fees, equipment, supplies, legal expenses and business-related software, along with related auto expenses and educational expenses

Always keep an eye on the rules related to these deductions and be sure to keep receipts and careful records. For example, the IRS will only allow you to deduct 50 percent of the cost of entertaining customers or clients.

Remember your home office
You wrote that you work from home, which likely means you maintain a home office. You may deduct many direct expenses (such as business-only phone and data lines, as well as office supplies) and indirect expenses (such as real estate taxes, maintenance, and depreciation) associated with your home office. The tax break for indirect expenses is based on just how much of your home is used for business purposes, which you can generally determine by either measuring the square footage of your workspace as a percentage of the home’s total area or using a fraction based on the number of rooms. If the recordkeeping for the home office expenses is too onerous, there is a simplified method that allows a deduction of $5 per square foot (limited to 300 square feet).

The IRS typically looks at two questions to determine whether a taxpayer qualifies for the home office deduction: Is the specific area of the home that’s used for business purposes used only for business purposes, not personal ones? As well as, is the space used regularly and continuously for business? If you can answer “yes” to both of these questions, you’ll likely qualify for home officer-related deductions.

Self-employed retirement plan
As a self-employed individual, you might be able to make significantly larger retirement contributions than you would as an employee. If you are searching for 2016 deductions you can still set up a SEP plan that will enable you to save for your retirement and reduce your current tax bill.

These aren’t the only filing considerations that the self-employed should consider, and many may be industry-specific. Do your research, and if it gets confusing, we encourage all of our readers to work with a tax professional to ensure your 2016 return is filed correctly and in a timely manner.