Mary Kay, Lia Sophia, Silpada, 5Linx, Pampered Chef, to name a few … These are just a few of the freelance consultants in the world of work. Many of them are sole proprietorships who have little or no understanding of the associated tax implications, the tax deductions available to them, or what they must do to file taxes.
It is extremely important not to mix deductible expenses with personal expenses. Opening a bank account for the business will help keep expenses separate. This should be one of the first things on your “to do” list when starting a business. A special tax treatment is applied to start-up expenses-expenses incurred before the opening of the business. Therefore, these receipts should be kept separate from general operating expense receipts.
One type of deduction that helps reduce your overall tax liability is the automobile expense deduction. Auto expenses are deductible using the standard mileage rate or actual expenses. The standard mileage rate is the easiest method, as it simply multiplies the current rate ($ .555 for 2012) by the total number of miles. When using the standard mileage rate, a mileage record will need to be submitted in the event of an audit to substantiate the deduction. The actual expense method requires that you keep detailed records that reflect the actual cost of related expenses, such as gasoline, oil, insurance, repairs, maintenance, licenses, car washes, and depreciation. If you use a vehicle for business and personal purposes, the expenses must be divided proportionally.
While most business owners are aware of the deduction for meals and entertainment, they must take care to keep accurate records when claiming deductions for these expenses. Records should contain the date of the meal or event, the name of the person you met with, and the topic of conversation when possible. Meals consumed during the daily course of business activities are not deductible. However, generally 50% of the cost of meals consumed when traveling on business can be used to reduce taxable income.
The IRS allows a home business deduction for self-employed taxpayers if they meet certain requirements. The home must be used regularly and exclusively for commercial purposes. By taking advantage of home-based business deductions, a percentage of other home-related expenses are also deductible. The amount of deductible expenses is subject to specific limitations and ordering provisions. Consult a tax professional for guidance.
This article contains general tax information for taxpayers. Every tax situation may be different, so do not rely on this information as your sole source of authority. Seek professional advice for all tax situations. Tax professionals are experts who stay up-to-date on changes in tax laws. They can save you time and provide information on how to use the tax breaks available to you.
