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Sole proprietors who work as independent contractors pay taxes differently than people who work as hourly or salaried W-2 employees. If you’re a sole proprietor, you have one very important tax advantage that W-2 employees don’t have: the opportunity to write off a variety of business expenses in order to lower your taxable income.
“What can I write off?” is probably the most common tax question sole proprietors ask us. Here are some of the write-offs sole proprietors often overlook when filing their tax returns.
Sole Proprietor Write-Offs You May Be Overlooking
Are you overlooking these tax write-offs that are available to you as a sole proprietor? If so, consider making a change when filing your next tax return.
Your Home Office
Many sole proprietors work from home. If you are a sole proprietor who works from a home office, you can write off a portion of your mortgage or rent. Although the IRS outlines several scenarios for deducting home office space, the simplest way is to deduct $5 per square foot. For example: If your home office is 200 square feet, that’s a $1,000 deduction. You can also deduct expenses related to maintaining this office, such as repairing a broken window or replacing worn-out carpet.
Hot tip: In 2018, carpeting became eligible for the 100% bonus depreciation rule that allows it to be deducted in one year.
Your Phone and Internet
Where would we be without our smartphones? As a sole proprietor, you’re probably using it all the time. The IRS understands that business owners need mobile phones, and that’s why phones are a reasonable expense to deduct. Writing off your cell phone bill is a deduction available to sole proprietors of any industry. The same applies to the monthly charge you pay for internet service. If you use the internet for business (and who doesn’t?), you can claim this deduction.
Hot tip: In addition to deducting your monthly phone bill, the IRS also allows you to deduct a new phone purchase.
Your Vehicle Expenses
This is one to pay close attention to, because the best way to write off vehicle expenses often depends on specifics for each individual. When it comes to deducting car expenses, many sole proprietors go straight to the standard mileage method of deducting 57.5 cents per mile driven for business. Sometimes, that is the best method. For example, someone who travels for business extensively – let’s say they drive 50,000 miles a year – can use this method to significantly lower their taxable income. Here’s the formula:
50,000 miles x 57.5 cents a mile = a $28,750 deduction
On a smaller scale, let’s look at the deduction for a sole proprietor who uses their vehicle to drive to local clients. In this example, the person has a part-time housesitting business on top of their full-time W-2 employment; however, they’re afraid to claim the part-time income for tax reasons. It seems ironic, but that decision might cost them. Often, we guide those clients to claim their part-time, sole proprietorship income because the vehicle expenses can offset the full-time income. Bottom line: We have seen clients for whom the mileage writeoff makes a big impact.
But what if you’re someone who works from home without significant mileage driven for the year? In this case, you may opt to claim the actual cost of the vehicle instead (in addition to gas, oil changes and other maintenance). What does “actual cost” of the vehicle mean? If you contact us for a complimentary tax consultation, we will be happy to explain. We have helped many clients substantially lower their taxable income with this method.
Hot tip: We advise people based on their specific vehicle scenarios. It’s best to contact us for personalized guidance on vehicle deductions.
The Goal of Sole Proprietor Write-offs
With any sole proprietorship, the goal should be to lower your overall taxable income. If your tax return is structured correctly, you may be able to offset the income brought in by your full-time W-2 employment or your spouse’s income. If your expenses exceed the income you’ve made, you can claim a loss that makes a big difference in lowering your taxable income — which means lowering the amount of money you give away to the government.
Sole proprietors can lose up to 20% of their income to taxes. When we help sole proprietors structure their tax returns, our goal is to lower this figure to 5% or less. The only way to find out if this is possible for you to is consult a knowledgeable tax consultant.
To discuss the best way to structure your tax returns as a sole proprietor, contact us today. We will be happy to give you a complimentary tax consultation.
About End2End Solutions
End2End Solutions is a Southern California financial services company that offers affordable, customized tax preparation solutions for people like you. Our team works year-round to meet the needs of individuals and small businesses who need professional tax service and financial consulting. We provide clients with personalized coaching and other wealth building strategies to empower financial prosperity.
