Home-Office Deductions
Whether you are fully self-employed or do some freelancing in addition to your job as an employee, if you work at home the government might subsidize what are generally considered personal expenses. The key to the home-office deduction is to use part of your home or apartment regularly and exclusively for your money-making endeavor. Pass that test and part of your utility bills and insurance costs can be deducted against your business income. You can also write off part of your rent or, if you own your home, depreciation. Many work-at-home taxpayers skip this break, either because they don’t know about it, are afraid claiming it will trigger an audit, or are put off by the recordkeeping hassle necessary to back up the deduction if challenged. In recent years, though, the IRS has come up with a simplified method that allows taxpayers to deduct $5 for every square foot that qualifies for the deduction. If you have a 300-square-foot home office (the maximum size allowed for this method), your deduction is $1,500. You get this tax-saver every year you have a qualifying home office.
Health Insurance Premiums
Although medical expenses are deductible, relatively few taxpayers really get to deduct them. First, you have to itemize to get this break (and most taxpayers do not); second, you get a deduction only to the extent your expenses exceed 10% of your adjusted gross income (7.5% for those age 65 and older). But there’s a big exception for the self-employed. You can deduct what you pay for medical insurance for yourself and your family whether or not you itemize and without regard to the 10% threshold. You don’t qualify, though, if you are eligible for employer-sponsored health insurance through your job (if you have one in addition to your business) or a spouse’s job.
Expensing
When you buy equipment for your business, you have two choices of how to share the cost with Uncle Sam.The first is to depreciate the cost, deducting the expenses over the number of years the IRS figures is the “life” of the equipment. A computer has a life of five years, for example, so you can write off the cost over five years. But it’s not as simple as claiming 20% of the cost each year. For that computer, for example, you’d deduct 20% of the cost in the year you put it into service, 32% in year two, 19.2% in year three, 11.52% in year four, 11.52% in year five and the final 5.76% in year six. (Don’t ask why it takes six years to write off five-year property.) Expensing (also known as the Section 179 deduction) lets you deduct 100% of the qualifying cost in year one. Is there any wonder why it’s the choice of many self-employed taxpayers? For 2014, up to $500,000 worth of equipment is eligible for the immediate write-off of expensing. (The limit for 2015 is currently $25,000, but Congress is likely to act to restore it to $500,000.)