Yes, it’s tax time again. As a self-employed business owner, it’s important for you to have a handle on your business and know what is deductible and what isn’t.
Invariably when I talk about taxes with creative entrepreneurs, someone will tell me they have an accountant. “Terrific,” I say. “But what does she know about your business in particular?” You go to an accountant because she knows taxes. She can be very knowledgeable about small businesses, but she cannot know the nuances of every type of small business. She works with what you give her. That’s why it’s important for you to do your own research, understand tax strategies and keep track of deductions to which you are entitled. Here are nine tips for maximizing those deductions. To be sure that these apply in your particular instance, be sure to discuss with your accountant.
Keep better track of your mileage
According to research, when you estimate, you actually underestimate. Over the years, I’ve used theQuilt Engagement Calendar in conjunction with the trip meter in my car. I set the meter to zero at the start of my trip and then enter the mileage in the calendar at the end, along with a notation as to the purpose of the trip. Today my go-to app for this is MileIQ. It tracks every trip you take and all you have to do is classify the trip as business or personal. You have the option of categorizing the purpose. The IRS doesn’t care how you track your mileage, just that you have written logs. You can also track your public transportation costs in the same log.
Group your errands
The IRS allows business owners to deduct business mileage. For 2016, the rate was 54 cents per mile. (For 2017, the rate is 53.5 cents.) If you have personal errands, do them at the same time as your business errands, and you can deduct the mileage.
Use Per Diem rates
The IRS has established per diem, or by the day, allowances for meals that self-employed individuals can use. At your option you can use either the per diem or actual costs, depending on which gives you the greater deduction. In most cases, the per diem is better. Remember, that you can only deduct 50% of the per diem or actual meal costs. For per diem rates, refer to IRS Publication 1542, Per Diem Rates.
Hire your children.
If you operate as a sole proprietorship, consider hiring your children aged 18 and under. You can get a deduction for their wages, and in most cases your children do not have to pay taxes on the wages. Details: IRS Publication 15, “Circular E, Employer’s Tax Guide.
Set up a retirement plan
It may not be too late to set up a retirement plan for yourself to shelter some of your income. Talk to your accountant about your options.
Consider a home office deduction
You have two options if you choose to take a home office deduction. You can take what is called the original home office deduction where you keep track of direct and indirect home-related costs that affect your home office. This requires a Form 8829. Or you can use the simplified home office deduction where you use worksheets with your Schedule C. This allows you to dedcut the square footage of your home office at $5 per square foot up to a maximum of $1,500. You accountant can help you determine which is the best option for you on a yearly basis.
Deduct professional publications and dues.
Don’t forget about all the professional publications your read and the dues for your membership organizations. These are deductible if you use them to grow you business. All the art and many other magazines that you buy are deducible if you use them in your business. Your ICAP dues are also deductible, as is your trip to the Creative Arts Business Summit.
One hundred percent of your health insurance premiums are deductible if you are self-employed. The deduction is limited to your net profit and you can’t be eligible for other health care coverage, for example, under your employed spouse’s medical plan. If you are self-employed and pay your own medical insurance, you should also look into a Health Savings Account, as that’s also a tax-saving strategy.
Vow to do a better job in 2017
If your books weren’t up-to-date or you are a shoebox records filer, vow to do better this year. Lots of artists think they are not good with money. That’s really not true. It may not be as exciting as doing art, but it’s not hard. If you take the time to keep track of the money you bring into your business, it will grow. Keeping up with your tax situation should be a regular part of your business, not just something you look at as April 15 draws near. An added bonus is that it will be easier and less stressful to do your taxes next year. If you need help with basic bookkeeping, check out our resource, Bookkeeping: A Practical System.
For more information, you can refer to IRS Publication 334, Tax Guide for Small Business. Also recommended is 475 Tax Deductions for Businesses and Self-Employed Individuals by Bernard Kamaroff, CPA.
It’s your turn!
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