Business owners have access to a unique set of tax deductions not available to the general worker. For example, the Internal Revenue Service (IRS) generally allows the self-employed the ability to deduct the following:
- Mileage or vehicle expenses. In most cases, the self-employed can either take a standard mileage deduction or deduct their actual operating expenses if using a vehicle for business purposes. In either case, it is wise to have records to support the deduction. A mileage log will often suffice in the event of a tax audit.
- Home office expenses and supplies. Those with a dedicated home office, a space used only for business, can deduct a portion of home expenses. In most cases, the IRS allows for $5 per square foot of space. The agency will also allow the deduction of supplies, like printer paper and ink. However, it is important to keep the actual receipt outlining how much was spent on the specific supply to back up this deduction.
- Start-up costs. Business owners who incorporate their business or otherwise invest in their business can generally deduct up to $5,000 in startup costs.
- Retirement savings. Workers under the age of 50 can generally deduct up to $6,000 in contributions made to a traditional IRA. Those who are self-employed have an added option: the SEP IRA. In this situation, the self-employed can deduct 25% of their earnings. The IRS caps the deduction at $56,000 in 2019.
The self-employed are at a higher risk of a federal tax audit when compared to the general public. As a result, it is a good idea to keep organized and detailed records to back up claimed deductions.
Whether these records are present or not, those who are the subject of an audit are often wise to seek legal counsel. An attorney experienced in federal audits can represent your interests and better ensure your business enterprise survives the experience.