Smart Tax Tips for Your Self-Employed Clients
This is a great time of the year to connect with your self-employed clients and share end-of-year tax tips and commonly overlooked tax deductions. As their trusted advisor, you can help them save vital tax dollars and improve their cash flow and bottom line.
After all, the self-employed workforce, which today accounts for 55 million Americans, or roughly 36 percent of the American workforce, is rapidly growing. Your self-employed clients are always heads down with their business operations, but it’s a good practice to take advantage of opportunities to coach them on some easy-to-digest tax topics.
Below are several tax tips that can benefit your self-employed clients as we enter the new tax year:
General. If you’re self-employed, that means the countdown is on to reduce your 2016 net income by making tax-deductible purchases related to your work. This includes educational expenses, like taking a class or buying materials related to improving your business. Also deductible are technical purchases for self-run businesses, like computers, mobile phones, and servers. Up to $500,000 in equipment is eligible for writing off on your taxes, but that amount is reduced if you put more than $2 million worth of new assets into service during one year.
Remember that a basic way to reduce your tax bill is to accelerate expenses and defer income before year end.
Gifts for business associates. Holiday gifts for clients, customers, and other business associates qualify as deductible business expenses. However, there’s a catch: A taxpayer can deduct only $25 annually for business gifts given directly or indirectly to any one person. Promotional items, such as calendars or pens, don’t count toward the $25 limit, if each item costs $4 or less, has the taxpayer’s name clearly and permanently imprinted on the gift, and is one of a number of identical items widely distributed.
Retirement plans. There are a variety of retirement plans available to small businesses. Contributions made by the owner for himself or herself and for employees can be deducted. Furthermore, the earnings on the contributions grow tax-free until the money is distributed. In general, contributions to these retirement plans can be made up until the due date of the tax return. Consequently, the small business owner can invest money in a plan after year end and still take a deduction on the 2016 tax return. The small business owner is also allowed a tax credit equal to 50 percent of the first $1,000 incurred in starting up a plan.
Commonly Overlooked Deductions
Deductible expenses. You’re allowed to deduct the costs of running your business as long as the expenses are ordinary and necessary. You cannot deduct personal, living, or family expenses. However, if you have an item that is used for both business and personal purposes, such as a vehicle, you allocate the expense and deduct the business portion (excluding commuting miles).
Be sure to document the expenses and retain any receipts. Assets must be depreciated, or deducted, over the course of their useful life if it extends beyond a year. Examples include automobiles, office equipment, and machinery.
Startup expenses: The government encourages people to open a new business by allowing a $5,000 write-off for startup expenses. Startup costs include amounts paid either to create a trade or business, or to investigate the creation or acquisition of a trade or business. Examples include advertising the opening of a business, employee training, and a market survey.
Business use of the home. If you use part of your home regularly and exclusively to perform administrative or managerial activities for your business, you can claim a home-office deduction for utilities, rent, mortgage interest, depreciation, and cleaning fees based on the square footage of your home used for your business.
Automobile expenses. If you travel for business, even short distances, you may deduct the dollar value of miles traveled. You can claim the actual expense incurred or use the standard mileage rate prescribed by the IRS, which is 54 cents as of 2016. The IRS’s allowable mileage rates should be checked every year because they can change. Air, bus, or train fare related to work can be written off, as well.
Health insurance premiums. You can deduct what you pay for medical insurance for yourself and your family, and it doesn’t matter if you itemize or what your adjusted gross income may be. Though keep in mind, you don’t qualify if you are eligible for health insurance through a spouse’s job.
Self-employment taxes. If you’re self-employed and have to pay the full 15.3 percent “self-employment tax” covering Social Security and Medicare taxes, you can write off half of what you pay. And you don’t have to itemize to qualify.
With a changing economy, there are many new-to-the-world, self-employed folks entering the business world every day, and this creates new opportunities for you to grow your practice by providing vital tax and business advice, as well as tax and accounting compliance services.
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Mike D'Avolio is senior tax analyst with the Intuit Professional Tax Group, he has been a small business tax expert for more than 20 years and serves as the primary liaison with the IRS for tax law interpretation matters, manages all technical tax information, and...