Top 8 Tax Deductions for Small Businesses and Consultants
One of the great things about owning an independent small business is that you can deduct a lot of things that were not deductible when you were an employee.
Here are eight often overlooked tax breaks for consultants, solopreneurs, and other small-business owners:
1. Startup Costs
Did you recently start your business? All expenses you incurred to launch your new small business can be deducted – as much as $5,000. The costs can also be amortized over time if you spent more than $5,000, potentially giving you deductions in future years as well.
2. Health Insurance Premiums
Did you pay for your own health insurance? This deduction is one of the big ones. If you bought medical insurance, you may be able to deduct 100% of the cost to cover you and your family. And, if you’re older, you can deduct the cost of Medicare and supplemental Medicare insurance.
3. Education and Training
The cost of classes, books, webinars, subscriptions, and the like can be fully deductible if the expense is related to business education or training.
4. Retirement Plans
Retirement plans often can amount to big tax deductions. In essence, the government is trying to prompt and reward you for taking steps to plan for your retirement by not taxing you on your contributions (that is, until you eventually withdraw it).
Some things to consider:
- If you’ve set up a 401k plan for your business, or more likely either a SEP IRA or a Traditional IRA, the money you put in and any costs associated with managing those accounts are tax deductible.
- For 2022 taxes, the 401k contribution limit is $20,500, or $27,000 if you’re over 50. The limit for a SEP IRA is $61,000 for 2022.
- And, the 2022 limit for a traditional IRA is $6,000, or $7,000 if you’re over 50.
- A bonus on traditional IRAs is that you can make a 2022 tax-deductible donation until April 18, 2023.
Read about the rules and limits for retirement deductions, including SIMPLE IRAs and qualified plans here or talk to your tax advisor.
5. Interest Payments
Interest paid for business expenses (e.g., credit cards, loans) is an often-overlooked tax deduction. Keep track of these expenses.
6. Vehicle Costs
- Keep track of all the driving you do for business—these miles can go toward your business auto-expense deduction.
- Many small business owners forget about this one, but it can really add up.
- In 2022 the rate for mileage deduction was 58.5 cents per mile between January 1 and June 30, and 62.5 cents per mile between July 1 and December 31.
Of course, miles driven for personal use are not deductible.
7. Self-Employment Taxes
Because being self-employed means you are both employer and employee, you can deduct 50% of Social Security and Medicare taxes on your personal IRS Form 1040.
8. Home Office Deduction
There are a lot of tricky catches to this deduction, which is probably why only about a third of all self-employed individuals claim it. There are two main criteria that the IRS looks for:
- A dedicated space in your home must be used as your primary place of business, AND
- This space must be used regularly and exclusively for the business.
If these two criteria are met, you can deduct the portion of expenses like mortgage interest, rent, homeowner’s insurance and utility fees related to the space.
Let’s face it, doing your taxes may never be fun, but at least there are tricks to make it a little more rewarding.
Steve Strauss is often called “the country’s leading small business expert.” A best-selling author and USA TODAY’s small business columnist, Steve is a thought leader, global speaker, spokesperson, content creator, and author of 18 books.
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