Federal income tax returns are due soon, and when you’re self-employed, it’s crucial to minimize your tax burden. What’s more, understanding the variety of deductions available can significantly impact your financial situation. So, if you wonder how to maximize your tax deductions for tax year 2023, here are 15 you don’t want to miss! 

Qualified business income 

For qualifying business, you are allowed to deduct a maximum of 20% of your qualified business income or the net taxable income earned through a qualified trade or business; and up to 20% of eligible publicly traded partnership income and dividends from real estate investment trusts. 

Vehicle and mileage expenses 

When using one or more vehicles for business purposes, deductions can be made using either the standard mileage rate or the actual cost method. 

If eligible for the standard mileage rate, multiply the business-driven miles by the specified rate. For 2023, the standard mileage rate is 65.5 cents per mile for both self-employed individuals and businesses. 

Alternatively, utilizing the actual cost method involves totaling eligible car expenses and deducting the cumulative amount. These expenses cover licenses, depreciation, gas, lease payments, oil, tolls, parking and registration fees, insurance, tires, garage rent, and repairs. 

In cases where eligibility exists for both methods, the IRS recommends calculating deductions using both approaches to determine the more advantageous option. 

Retirement Savings 

Contributing to your future savings can also help with tax benefits. 

• 401(k), 403(b), and 457 Plans: Allow you to contribute up to $23,000 annually for 2024 ($30,500 if over age 50). Moreover, contributions done pre-tax won’t show up as part of your annual income.   
• Traditional IRA: You can contribute up to $7,000 for 2024, with a $1,000 catch-up contribution limit for people over age 50. These contributions can be made before April 15th, which marks the tax filing deadline.  
• Roth IRA: Includes no required minimum distributions (RMDs), tax-free withdrawals after age 59½, and the ability to pass wealth tax-free to your heirs. The contribution limits are the same as traditional IRAs, however, Roth IRAs have income restrictions and you may not be able to open an account outright if you are above certain limits.  

You should be aware that while contributions to workplace 401(k) accounts must be made by the end of the calendar year, tax-deductible contributions can be made to traditional IRAs up until the tax-filing deadline. 

Insurance Premiums 

• Business liability insurance. 
• Business credit insurance. 
• Malpractice insurance. 
• Auto insurance for business vehicles. 
• Business interruption insurance. 
• Personal medical insurance. 
• Personal dental insurance. 
• Insurance covering damage from fire, accidents, storms, theft, etc. 

Also, if you are on Medicare and are self-employed, you can deduct it as self-employed health insurance. Many people miss this deduction! 

Office supplies 

Don’t forget about all the materials and office supplies you bought for your business throughout the year! As long as you can prove having a dedicated workspace in your home, the materials and office supplies, such as paper, pens, printer ink and packaging supplies; you can deduct them.  

Home office expenses 

With a dedicated workspace in your house, you can deduct home office expenses: repairs, utilities, rent, maintenance, and mortgage interest.   

The IRS offers two calculation methods for the home office deduction:  

• Simplified method: $5 per square foot, up to 300 square feet.  
• Regular method: An amount based on your expenses and the percentage of your home that you dedicate to business use.  

We recommend calculating the deduction using both methods to find out which yields greater tax savings. 

Phone and Internet costs  

You can deduct a portion of phone and internet expenses used for business purposes. Note that basic local telephone service for the first phone line at your home office is generally not deductible. 

Credit Card and Loan Interest  

Interest charges accrued from using credit cards or loans for business purposes are often deductible. However, the deduction is subject to limitations based on taxable income, adjusted taxable income, or floor plan financing interest expenses for the year. 

Startup expenses 

Startup costs incurred before commencing business operations can be deductible, up to certain limits. Additional deductions may be available for organizational costs, but these deductions are subject to specific thresholds. 

Education 

If you continuously invest in education to improve your knowledge and skills for your business, you can include them on your list to deduct. Books, tuition, transportation and more can be deductible if you’re self-employed.  The IRS also offers resources to determine if your education expenses qualify. 

Self-Employment Tax 

Self-employment tax, comprising Social Security and Medicare taxes, can be hefty. The good news is that you can deduct half of it when calculating your adjusted gross income, reducing your income tax liability. 

Advertising 

Costs associated with advertising or marketing your business, like running ads, building a website, or hiring a social media manager, are typically deductible if they are common and necessary in your industry. 

Subscriptions and Memberships 

Business-related subscriptions, such as industry magazines or online research tools, may be deductible. However, dues for social clubs or organizations are generally not deductible. 

Business Travel 

When travel is essential for business, expenses like plane tickets, meals, and lodging may be deductible, provided they are reasonable. Keep in mind that the assignment must be temporary, not requiring you to be away from your primary residence for more than a year. 

Business Meals 

Business meals are deductible if a business owner or employee was present, the meal was purchased from a restaurant, and it wasn’t “lavish or extravagant.” Typically, you can deduct 50% of the cost of qualifying meals from 2023. 

Navigating the world of self-employment taxes can be complex, but understanding the deductions available to you can help minimize your tax liability. Be sure to consult with a tax professional or financial advisor to ensure you’re taking advantage of all available deductions and maximizing your tax savings. 

 

Disclaimer: The blog articles are intended for educational and informational purposes only. Nothing in the content is designed to be legal or financial advice.