As a self-employed individual, you should have spent the past year making purchases, selling goods/services and collecting paperwork to support any and all transactions.
Unfortunately, many business owners are so caught up in the day-to-day operations of their business that the importance of maintaining their books can get lost along the way. If you are one of these individuals, it is time for you to start pulling together all the paperwork you will need to file your return and maximize your after-tax outcome.
This will include gathering invoices and receipts from all of your sales so that you can properly report your income for the year. In addition, you will want to locate receipts for all of your expenses so that you can maximize your tax deductions to lower your tax owing.
Below is a list of common expenses that can be used to create tax savings:
Operating expenses
Money spent on your business is considered a business expense and can be claimed on your tax return to reduce taxable income, and in turn, your tax payable. Expenses for advertising, professional fees, office supplies, internet, phone, advertising and even the interest and fees paid on borrowed money, may be eligible.
You can also claim many of your start-up costs.
Materials
If you manufacture your own product or offer a service that requires you to purchase materials, such as a home renovation or automotive repair, you can claim those materials as a business expense to further reduce your taxable income.
Office expenses
If you lease a commercial space for your business, you can deduct rent and any associated utilities or leasehold expenses from your business income.
If you work from home, on the other hand, you can make deductions for your home office. To determine what portion of your home utilities (electricity, heating, water), maintenance costs, property taxes, home insurance and rent can be deducted from your self-employment income you can use one of two methods.
Method 1: Divide the square footage of your home office by the square footage of your entire home. Multiply this amount by your total expenses.
Example – You spent $10,000 on utilities, rent, home maintenance, etc. Your home office is 100 sq. ft. and your home is 1000 sq. ft.
- Portion of home for office = 100 sq. ft. / 1000 sq. ft. = 0.10 or 10%
- Home office deduction = $10,000 x 10% = $1,000
Method 2: Divide the number of rooms in your home by the number of rooms used for business purposes.
Example – You have 10 rooms in your house and 2 are used for your home office (e.g. office and a workroom). You spent $10,000 on utilities, rent, home maintenance, etc.
- Portion of home for office = 2/10 = 0.20 or 20%
- Home office deduction = $10,000 x 20% = $2,000
To claim home office expenses, as a self-employed individual, you must use the space primarily for work purposes on a consistent basis and it must be your primary place of business.
Entertainment and travel expenses
If you travel for work, whether it is to perform a service, meet with clients, attend a convention or for another similar business purpose, you can deduct all of your travel expenses including public transportation, lodging and conference/rental space fees.
If you eat out while you are away on business or take a client out for dinner, you can claim 50% of these expenses. Similarly, entertainment can be claimed at 50%.
If you use your own vehicle you can also claim expenses related to the vehicle. If the vehicle is used only for business, you can claim all of the expenses. If, however, you use the vehicle for business and personal reasons, you can deduct a percentage of your expenses based on km driven for business.
Example – If you drove your car 30,000 km this year and 7,500 km was for business, you can claim 25% of your vehicle expenses, including gas, maintenance, etc.
Remember, if you use your vehicle for a combination of business and personal reasons, it is important that you keep a logbook.
Other expenses
The above are the most common expenses that can be deducted from self-employment income but there are others that can be claimed. These include but are not limited to:
- Interest on vehicle payments
- Cleaning supplies for your office/home office
- Deductions for bad debt allowances
- Cost of collections
- Bank charges
- Parking fees
- Dues and membership fees
- Private health plan premiums
- Capital Cost Allowance on capital purchases (equipment, vehicles, buildings, etc.)
- Business licenses and fees
- Prepaid expenses
- Salaries, wages and contractor costs
For more information about deductions and tax credits available for self-employed individuals, contact us today. We look forward to helping you optimize your tax return.
