What are tax deductions? The thought of any subtraction from your money does not sound so good, right? Probably, you have heard terms like ‘deductible expenses’ and complaints such as, “You can’t deduct that!” These are phrases that people say so many times when the word tax is mentioned.
To answer that, there are specific insights that are worth highlighting:
- Tax deductions are subtracted from a person’s income and the remainder is subject to the federal and state income taxes.
- The Business Dictionary defines a tax deduction as a fixed percentage or amount authorized by taxation bodies that taxpayers can take away from their regulated gross income to get to the taxable income.
- Typically, deductions include allowances for home repair costs, payment of home mortgages, and higher study tuition.
- They should not be mistaken for deductibles, which entail a fixed amount of an insurance claim, which is the responsibility of the party insured.
- They decrease the amount of income tax an individual would have owed by reducing his or her taxable income.
- A lot of deductions offer motivation for people to engage in initiatives that benefit the society as a whole.
- Many people relate deductions with the wealthy; however, massive tax deductions as well as credits are accessible to the lower- and middle-income taxpayers.
Tax Deductions and the Independent Contractors
If you work from home, or you are self-employed, you qualify to be called an independent contractor.
Even though there are many gains derived by operating from the comfort of your living room or front porch, the challenge is that it is quite costly.
For example, there is a need for high-speed and reliable internet to ensure a stable connection with your clients.
Luckily, the government acknowledges this limitation and provides tax deductions for people who work from their residences.To discover what you may qualify for if your home is your office, read on.
1. Home Office
This is a work station or room that is set aside in your home, and it only serves business functions.
A fraction of it can be deducted from particular home expenditures for it. You could be thinking that fixed partitions are required like walls or doors. Well, that may not entirely be the case. Nonetheless, you need to have a clear identification of your home office as a distinct space.
If your home office takes up 10% of your residence’s square footage, you can subtract that percentage from the following:
- Utilities- electricity, internet, heat.
- Rent (excluding monthly mortgage payments).
- Homeowners insurance.
- Property taxes.
- Mortgage interest.
Thought Nugget: For remote workers, a home office can only be deducted if your boss requests you to operate from your residence for his or her convenience. In case it is in the interest of your personal schedule, it is not factored as a tax deduction.
2. Office Materials
Tax deductibles can include staples, printing papers, pens, and envelopes or any other office items.
Thought Nugget: When it comes to larger items such as furniture, caution should be exercised. Two perspectives are crucial here:
- The supplies you deem significant to your business, including cabinets, chairs, and desks, can be deducted.
- Trivial items like seat cushions, wall hangings, and curtains may not be categorized as tax deductibles.
Machinery meant for business operations, for instance, printers, computers, and devices like web cameras and headphones, in addition to any repairs concerning these items, can be deducted.
Thought Nugget: In case you are in a field like photography that necessitates special apparatus like cameras, tripods, lenses, and other gear, they are also eligible.
By the virtue that you work from home, you could be having freelance clients. Any software that you are using for functions like invoicing can be deducted.
Others can include PDF, word processing, and graphic design software. These, too, are eligible for tax deductions as long as they are used only for business.
Thought Nugget: Any software you buy or pay for every month meets the criteria of tax deductions.
5. Travel Charges
In case you may need to see a client or participate in a workshop or seminar in person, you can deduct the fare you use for an air ticket or the mileage of your car.
Besides, if you pay for your accommodation, parking fees and other expenses associated with traveling, they can also be tax deductions.
Thought Nugget: According to the Tax Cuts and Jobs Act (2018), if you fall under the category of an employee, you cannot deduct the expenditures, which cannot be reimbursed for travel and entertainment.
6. Entertainment and Food
This is an area that calls for a lot of concern. Resist the urge to deduct business meetings that are not purely meant to serve commercial functions.
For instance, a lunch meeting with a potential customer to pitch your products can apply as a tax deduction.
On the other hand, dinner with a group of colleagues with a business talk of only a few minutes doesn’t count as a deductible.
Thought Nugget: As part of the regulation, you can anticipate that the IRS will restrict your tax deductions to 50% of entertainment costs associated with a business. Therefore, it is crucial to moderate your expectations and deductions.
7. Professional Education
Do you need to enhance your expertise, but the costs seem to deter your dream? Here is some good news; training and other forms of acquiring knowledge to operate or expand your enterprise can be classified as tax deductions.
Thought Nugget: Do not continue pushing away your ambitions. Enroll in that course and take your business to a new horizon.
8. Promotional Activities
Engaging in advertising and marketing initiatives can be deducted. This can include attending trade fairs and distributing flyers or business cards.
Thought Nugget: There are also some costs that are incurred if you have a website tailor-made for your business that promotes the services you offer. Such charges can include hosting fees.
Working from home, despite its costs, can be beneficial with these insights about tax deductions in mind.
Warrior Trading and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors for professional advise.