By: Jessica Zimmer, Debt.com Financial Fitness Trainer
If you are self-employed, you can take a number of deductions for business expenses. Before doing all of the calculations, you may ask, should I do this work, or skip it and take the standard deduction? The answer depends on whether the sum of your deductions will be equal to or greater than the standard deduction. The 2011 standard deduction, raised from 2010 for inflation, is $5,800 for singles and married individuals filing separately; $11,600 for married couples filing a joint return; and $8,500 for heads of household. If you think that you will come out ahead by itemizing your deductions, do the math using IRS Schedules C and SE.
In order for you to claim a cost as a business expense, the IRS requires that the cost be ordinary and necessary. Ordinary is defined as an expense that is common and accepted in your field. Necessary is defined as an expense that is helpful or appropriate for your business. For example, if you were an independent plumber, new tools to replace worn-out tools would be an ordinary and necessary business expense. Since small businesses vary to a great degree, pose questions to an accountant as well as several small business owners in your field.
If you maintain a home or commercial office, you should be able to deduct costs relating to this space as a business expense. A home office is defined as a space in the home that is only used to conduct business. If you determine the percentage of your home that you use for your home office, you may be eligible to deduct a portion of your rent or mortgage interest, utilities, and homeowner’s insurance. You are also allowed to deduct purchases for an office, such as furniture, including desks and filing cabinets; and necessary equipment, including computers and shredders. If you have a second phone line that you use only for business, you can deduct the cost of all calls made on this line.
A self-employed individual can also deduct the cost of office supplies, even without maintaining a home office. You can deduct the costs relating to business-related mileage; advertising; licensing fees; required or necessary continuing education; mailing; professional organization dues; and travel, including 50% of business-related meals. In addition, you can deduct health insurance premiums, retirement contributions, computer software, and industry magazine subscriptions. If you hired contractors, you can deduct their labor costs. You can deduct one-half of your self-employment tax, using Schedule SE.
When you acquire property, determine whether it is an item that decreases in value due to use. This is called depreciation. If you purchased property that you expect to last more than a year, you cannot deduct the whole cost of the item in the year you bought it. You must spread the cost over several years using Schedule C. Depreciable property is defined as property that you own, which wears out and eventually becomes unusable, and is not disposed of in the year in which it was purchased.
© February 16, 2012 // Copyright all material 2/16/12 by Jessica Zimmer