But did you know self-employment means you have access to tax credits and deductions that can help decrease your tax liability.
Here are some of the most common tax deductions you will want to make note of this tax filing season.
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 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 well 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 log book.
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:
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.