Self-Employed: Is This Tax Deductible?

If you’re self-employed, chances are you’re familiar with September 15. It’s one of four estimated tax due dates, and it’s the last one for the calendar year.

While the amount you should pay may have been determined back when you filed your tax return, it can serve as a good reminder that the year is coming to an end. If you want to reduce your tax liability next year, start thinking about what you can do today. You have until December 31st, but last-minute decisions are rarely optimal, especially if you are able to plan ahead of time.

What strategies can you focus on that will be tax deductible and lower your tax liability for the coming year?

1. Retirement Plan Contributions

With IRA and SEP IRA plans, you can make contributions to your plan as late as the filing date for your tax return. That will be until the April tax deadline for most taxpayers.

But certain other retirement plans, such as 401(k) plans, require that you make any contributions no later than December 31. And even with certain types of solo 401(k) plans, you may be required to make contributions by year-end if you want those contributions to be tax deductible in the current tax year.

2. Major Purchases of Business Related Assets

Normally, major business asset purchases will need to be expensed (depreciated) over several years for income tax purposes. However, the IRS Section 179 provision allows you to expense the entire purchase price of major business assets in the year of acquisition. If you’d like to take advantage of this deduction, you will need to complete the purchase by the end of the year.

You can deduct up to $1,160,000 of assets purchased and put in use before December 31, 2023. The equipment must be primarily for business purposes, and both new and used equipment qualify. If the Section 179 deduction exceeds your net income for the year, you can carry it forward to reduce your tax liability in future tax years.

3. Home Office Deduction

The IRS allows you to make a home office deduction, and if you do, make sure that you make any year-end payments on your home before December 31.

That includes your mortgage payment since mortgage interest, real estate taxes, and private mortgage insurance are generally tax deductible on your personal tax return. But when it comes to the home office deduction, you may also be able to deduct a portion of other expenses, including utilities, insurance, homeowners association fees, lawn maintenance and even repairs and maintenance. Just make sure that you make all of your payments for these before year-end.

4. Business Use of Your Car

The IRS requires that you have documentation to support the business use of your car. Unfortunately, this is a weak spot for a lot of business owners – they don’t keep receipts or record mileage on personal vehicles. It’s September, so you still have at least three months to get all of that straightened out. Start gathering your records now so that you can reap substantial tax savings when you file your taxes. QuickBooks Self-Employed can help you easily track your business mileage.

5. Make Your Tax Estimates On Time – Delay or Underpayment Can Cost You

This point is so obvious, which is why it’s often forgotten. As a business owner, you’re constantly trying to manage cash flow, so it can be tempting to either delay, reduce, or totally ignore an upcoming estimated tax payment. But if you do, the IRS may impose both penalties and interest on the late, reduced, or missing payments. While it may save you some money now, it will cost you more when you file your income taxes.

TurboTax can help you easily figure out your estimated taxes. When you use QuickBooks Self-Employed for your business, the program does the math for you and helps you figure out your estimated taxes so you can easily make the estimated tax deadline. At the end of the year, QuickBooks Self-Employed gives you the ability to export your Schedule C information from QuickBooks Self-Employed to TurboTax to make your annual tax filing easier.

6. Start Lining Up Those Non-business Deductions Too!

Even if you don’t use your home or your vehicle for business purposes, you can still get the benefit of certain tax deductions on your personal income tax return. This, of course, includes mortgage interest and real estate taxes – make sure that your January 1 payment is paid before December 31; that way, the additional interest paid can be deducted when you file your taxes.

In addition, make sure that you document charitable contributions, and while you’re at it, start assembling your medical expenses for the year. This can include health insurance premiums paid, long-term care insurance, unreimbursed medical expenses, copayments and deductibles. It all adds up.

7. Make Additional Tax Moves to Lower Tax Liability

There are some additional moves you can make to generate business deductions that will lower your current or future income tax estimates.

Some deductions that can lower your current tax estimate include higher-than-expected retirement plan contributions and major purchases of business assets, where you can deduct the entire purchase price. These are the types of strategies that can lower your taxable income – and your tax liability – substantially. And they just might make it possible for you to lower your tax estimates in the current year.

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