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Field Guide No. 5 THE SELF-EMPLOYED GUIDE TO TAX DEDUCTIONS WRITTEN BY TURBOTAX. BROUGHT TO YOU BY BSOLO. bSolo.com
Publisher: bSolo
Editor: Grace Xie
Authors: TurboTax
Designer: Meredith Lambert
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The Self-Employed Guide to Tax Deductions Updated for Tax Year 2018 2
This eBook was written by TurboTax, compiled by bSolo. The content covers
tax deductions for the self-employed, tax write-offs, home office deductions,
business vehicle deductions, cellphone deductions, and more. It’s a broad
overview but may be a helpful place to start.
We always love hearing from freelancers out in the world, but bSolo does not
provide tax advice. Please consult a tax professional for tax help. For other
comments, questions, or if you want to share tactics that have worked for you,
drop us a line. We’re on Twitter at @b_Solo, and building smart support for the
self-employed at bSolo.com
Want to do your own annual return the easy way?
Save $20 on TurboTax Self-Employed or TurboTax Live Self-Employed.
The Self-Employed Guide to Tax Deductions Updated for Tax Year 2018 3
Table of Contents
Write it off 5
Reporting Self-Employment Business Income and Deductions 6
Top Tax Write-offs for the Self-Employed 10
The Home Office Deduction 14
Business Use of Vehicles 19
Can Cellphone Expenses Be Tax Deductible with a Business? 25
Tips to Reduce Self-Employment Taxes 27
Outro from bSolo 29
Photo by Kyle Frederick on Unsplash
The Self-Employed Guide to Tax Deductions Updated for Tax Year 2018 4
Introduction
Write it off
When you’re accounting for every cost of your business, you want to make sure that you’re not leaving
money on the table when it’s tax time. If you’re making at least $400 in income as a freelancer, you’ll
have to file taxes. The perks of having your own business is you get to take deductions on business
expenses which may help you save on taxes.
The following articles are written by tax experts, TurboTax, to provide information on types of tax
deductions you may be able to take. It’ll cover top tax write-offs for the self-employed, including
educational tools you may use to get ahead in your field. It also goes over the specifics of office,
vehicle and cellphone deductions, and general tips on reducing self-employment taxes.
The Self-Employed Guide to Tax Deductions Updated for Tax Year 2018 5
Photo by Rawpixel on Unsplash
Reporting Self-Employment
Business Income and Deductions
Originally published by Intuit TurboTax
Overview
Self-employed taxpayers report their business income and expenses on Schedule C. TurboTax can
help make the job easier.
Schedule C: Consider income, expenses and vehicle information
Each year, sole proprietors have the chore of preparing and filing Schedule C with their 1040 to show
the IRS whether their business had a taxable profit or a deductible loss. (If your business expenses
were $5,000 or less for the year, you may qualify to file the short form, Schedule C-EZ.) Schedule C can
seem daunting, but filing will be easier if you plan ahead and keep good records. We’ve broken down
the form into sections, so you can see what the IRS expects from you and what records you’ll need at
tax time.
Part I: Income
In this section, you calculate your gross income.
Start by reporting gross receipts or sales for the year, including amounts reported on 1099 forms
that were issued by clients or others for whom you provided services. Other types of income you
must report include: the value of goods or services you received through barter transactions; any bad
debts you recovered if they were written off on prior-year tax returns; and interest on business bank
accounts. Total up these items and subtract your cost of goods sold (which is calculated in Part III and
explained below) to arrive at gross income.
The Self-Employed Guide to Tax Deductions Updated for Tax Year 2018 6
Photo by Tim Mossholder on Unsplash
Part II: Expenses
This is where good record keeping can really save you money on your taxes. You can write off a wide
variety of business expenses you paid during the year, including things like the cost of advertising,
commissions, supplies, legal fees, repairs and maintenance, and office expenses. You can also deduct:
Car and truck expenses: You can report these costs in one of two ways: Enter your actual expenses—
for gas, oil changes, repairs, insurance, etc.—if you have supporting documentation, or take the IRS
standard mileage rate. The rate for 2018 is 54.5 cents per mile.
Depreciation and Section 179 expense deduction: The law allows businesses to depreciate—or
gradually deduct the cost of —assets such as equipment, fixtures, furniture, etc., that will last more
than one year. For these assets, you first fill out Form 4562: Depreciation and Amortization, and enter
the result on Schedule C. You also use Form 4562 if you elect the Section 179 “expensing” deduction,
which lets you, subject to certain limits, deduct the full cost of assets (both new and used) in the year
they are placed in service.
Bonus Depreciation: Bonus depreciation has been changed for qualified assets acquired and placed
in service after September 27, 2017. The old rules of 50% bonus depreciation still apply for qualified
assets acquired before September 28, 2017. These assets had to be purchased new, not used. The
new rules allow for 100% bonus “expensing” of assets that are new or used. The percentage of bonus
depreciation phases down in 2023 to 80%, 2024 to 60%, 2025 to 40%, and 2026 to 20%. After 2026
there is no further bonus depreciation. This bonus “expensing” should not be confused with expensing
under Code Section 179 which has entirely separate rules, see above.
The 100% expensing is also available for certain productions (qualified film, television, and live staged
performances) and certain fruit or nuts planted or grafted after September 27, 2017.
50% bonus first year depreciation can be elected over the 100% expensing for the first tax year ending
after September 27, 2017.
The Self-Employed Guide to Tax Deductions Updated for Tax Year 2018 7
Photo by Elevate on Unsplash
Pension and profit-sharing plans: Only enter contributions you made for your employees on Schedule
C. If you also made contributions for yourself, report those on Line 28 of your 1040.
Travel, meals and entertainment: For business travel, deductible expenses include those for lodging,
transportation, tips, fax services, Internet connections, and certain other incidental expenses. You’ll see
that travel is reported separately from business meals and entertainment: That’s because for tax years
prior to 2018, meals and entertainment you can deduct only 50 percent of your allowable expenses.
For tax years after 2017, generally, only meals are 50 percent deductible while entertainment is not
deductible at all.
Wages: This category may seem straightforward, but is a little tricky if you produce and sell goods.
Here you report amounts paid to employees, such as bookkeepers, receptionists, salespeople, etc.
However, if you have production workers, you’ll report their wages as part of the cost of goods sold in Part III.
Expenses for business use of your home: You qualify for this deduction if you use part of your home
regularly and exclusively for your business. That means the home office has to be a separate area
in your home where you don’t mix business with other activities. It must be used for business on an
ongoing basis, not just once in a while. You calculate the deduction first on Form 8829: Expenses for
Business Use of Your Home and enter the result here.
Once you’ve entered all your deductions, subtract them from gross income to get your net Schedule
C profit or loss, which you enter on Line 12 of your 1040. But be careful. If you have a loss, you’re not
done yet. You have to go through some additional steps in this section before transferring that loss to
your 1040, because it may not be fully-deductible. You must declare whether you’re fully “at risk” for
amounts invested in the business. If you are, then you can go ahead and take the full write-off. If not,
you’ll have to fill out Form 6198: At-Risk Limitations to determine whether your deduction is limited.
The Self-Employed Guide to Tax Deductions Updated for Tax Year 2018 8
Part III: Cost of goods sold
This section is for any business that sells goods to customers, so skip Part III if you’re in a service
business—consultant, yoga teacher, software programmer, day care center owner, etc.
• Start by reporting the value of your inventory at the beginning of the year, which normally is
the same as what you reported for closing inventory on last year’s Schedule C.
• Next, report how much you spent to buy merchandise, but don’t include the value of anything
withdrawn from sale or for your personal use.
• If you’re in manufacturing or construction, you also report wages paid to production workers,
factory supervisors and the like, as well as expenses for supplies and other overhead.
• Add those costs to your beginning inventory.
• From that total, subtract the value of your closing inventory. The result is your cost of goods
sold. Enter that amount in Part I to reduce your gross income.
Part IV: Information on your vehicle
In this section, you give the IRS information about any vehicles for which you’re deducting expenses
in Part II. The IRS uses the answers in this section when reviewing your vehicle deduction to see if
it seems legitimate. So it’s important, for example, to be able to answer YES to the question about
whether you have written documentation for your deduction. If you answer NO, don’t be surprised if
the IRS asks you to justify the deduction.
Part V: Other expenses
You may incur many types of business costs that don’t fit into the categories listed in Part II, so you
detail them here in Part V and then enter the total on the line for “Other Expenses” in Part II.
Examples of other expenses:
• Membership dues for professional organizations
• Subscriptions to business publications
• Fees you paid to credit card companies for processing customer card transactions
• Business-related gifts to suppliers, clients, contractors, etc.
TurboTax Home & Business gives you step-by-step guidance on entering business income and
expenses—and helps you maximize your business and personal deductions for the biggest tax refund.
Photo by Brian Chan on Unsplash
The Self-Employed Guide to Tax Deductions Updated for Tax Year 2018 9
Photo by Tim Mossholder on Unsplash
Top Tax Write-offs for the Self-Employed Originally published by Intuit TurboTax
Overview
Whether you do contract work or have your own small business, tax deductions for the self-employed
can add up to substantial tax savings.
With self-employment comes freedom, responsibility, and a lot of expense. While most self-employed
people celebrate the first two, they cringe at the latter, especially at tax time. They might not be aware
of some of the tax write-offs to which they are entitled.
When it comes time to file your returns, don’t hesitate to claim the benefits you get for being the boss.
As a self-employed success story, you’ve earned them.
“ Many times an overlooked deduction is educational expenses. If one is taking courses or buying
research material to be more effective in their work, this can be deductible.”
The Self-Employed Guide to Tax Deductions Updated for Tax Year 2018 10Individual Retirement Plans (IRAs)
John L. Hillis, president of Hillis Financial Services in San Jose, California, said the best tax write-off for
the self-employed is a retirement plan. A person with no employees can set up an individual 401 (k).
“The individual can contribute $18,500 in 2018 as a 401(k) deferral, plus 25 percent of net income,”
Hillis said.
If you have employees, Hillis recommended a SIMPLE (Savings Incentive Match Plan for Employees)
IRA—an IRA-based plan that gives small employers a simplified method to make contributions to their
employees’ retirement. As of 2018, an employee may defer up to $12,500, Hillis said, and employees
over 50 may contribute an additional $3,000.
“A third retirement plan is Simplified Employee Pension IRA (SEP IRA),” Hillis said. “The employer may
contribute the lesser of 25 percent of income or $5,000 in 2018. If the employer has eligible employees,
an equal percentage of their income must be contributed.”
Hillis asserted that retirement plans are “absolutely the No. 1 tax deduction. The government is helping
fund retirement.”
Business use of home or dwelling
Accountant and consultant Jéneen R. Perkins, principal of Éclat Enterprises LLC, in Milwaukee,
Wisconsin, said most self-employed taxpayers’ businesses start as home-based businesses. Those
people need to know portions of business costs are deductible, she said, adding, “It is very important
that you keep track of expenses relating to your housing costs.”
If your gross income from your business exceeds your total expenses, then you can deduct all of your
expenses related to the business use of your home, Perkins said. If your gross income is less than your
total expenses, your deduction will be limited to the difference between your gross income and the
sum of all business expenses you would pay if the business was not in your home. Those expenses
could include telephone lines, the Internet, and other costs to do business.
You must also have a home office that is truly used for work. Hillis said the Internal Revenue Service
may require you to document this.
Deducting automobile expenses
If you travel for business, even short distances within your own city, you may deduct the dollar value of
business miles traveled on your tax return, Perkins said. The taxpayer may file the actual expense he
incurred, or use the standard mileage rate prescribed by the IRS, which is 54.5 cents as of 2018. The
IRS allowable mileage rates should be checked every year as they can change.
“If you decide to use actual car expenses, be sure to include payments, depreciation, registration,
insurance, garage rent, licenses, repairs and maintenance, and parking and toll fees,” Perkins said.
“If you decide to use the standard mileage rate, it would be in your best interest to keep a log—daily,
weekly or monthly—of miles driven to distinguish personal use from business use.”
The Self-Employed Guide to Tax Deductions Updated for Tax Year 2018 11Depreciation of property and equipment
Some self-employed people may purchase property and equipment for a business. If they expect that
property to last longer than one year, it should be depreciated on the tax return, Perkins advised.
Perkins said that claims regarding property, according to the IRS, must meet the following criteria: You
must own the property and it must be used or held to generate income. The property should have an
estimated useful life, meaning you should be able to guess how long you can generate income with
it. It may not have a useful life of one year or less, and may not be purchased and disposed of in the
same year.
Certain repairs on property used for business may also be deducted.
Educational expenses
Any educational expense is potentially tax-deductible.
“Many times an overlooked deduction is educational expenses,” Hillis said. “If one is taking courses or
buying research material to be more effective in their work, this can be deductible.”
Think about any books, web courses, local college courses, or other classes or materials that you have
purchased to improve your job or business. It’s easy to forget a work-related webinar or business
e-book that was purchased online, so remember to save e-receipts.
Perkins also mentioned subscriptions to trade or professional publications and donations to business
organizations, both of which are frequently necessary for the continuation and growth of your business.
Other areas to explore
Other deductions that can be easily missed are advertising and promotional expenses, banking fees,
and air, bus, or train fare. Restaurant meals and other entertainment costs may be written off as long
as they are necessary business expenses.
In addition, Hillis said to consider health insurance premiums, which in most cases represent a credit
rather than a tax deduction.
“A credit goes directly against one’s taxes, rather than a reduction of income,” he said.
Regardless of which expenses you discover that you may write off, the most important thing is to
keep accurate records throughout the year. Save receipts, including e-mail receipts, and file or log
them so you have easy access to them at tax time. Not only does keeping receipts, mileage logs, and
other expense records make filing taxes easier, but it also facilitates a system that allows you to track
changes from year to year.
The Self-Employed Guide to Tax Deductions Updated for Tax Year 2018 12Photo by Jacek Sniecikowski on Unsplash
Long-term tax-saving strategies
Don’t just look at last-minute write-offs when considering self-employment tax deductions. Think
about laying down some long-term strategies for money savings from year to year—particularly if you
are a high earner.
“Accountants typically tell you what you have to pay,” said Stephen K. Davis, chief investment adviser
for Safe Harbor Asset Management in Huntington, New York. “They don’t always tell you strategies to
reduce your payments.”
To reduce your gross taxable income, consider setting up a defined-benefit pension plan, Davis said.
This plan is based on your age and income: The older you are and the higher your earnings, the more
you are allowed to contribute. An alternative plan is an age-weighted profit-sharing plan, which is
similar and can benefit those who have several employees.
Another strategy for high-earning business owners who own their own building through a limited
liability company or similar business structure is to pay themselves rent, said Davis. This rent is used to
pay down the mortgage, but it is also considered a business expense for tax purposes.
Self-employed professionals required to have liability insurance should consider setting up their own
insurance company. A captive insurance company is one that insures the risks of the business—or
businesses, in the case of a cooperative. Its premiums can be tax-deductible.
But, Davis warned, if money accumulates and claims are minimal, the money taken out is taxable under
capital gains. Davis emphasized that this is not a retirement strategy, but that it can save you money by
allowing you to “pay yourself” instead of an insurance company and still deduct the premiums.
With any of these more complicated, long-term strategies, consult with a business attorney or financial
planner to ensure you have the best plan possible for your business.
The Self-Employed Guide to Tax Deductions Updated for Tax Year 2018 13Photo by Maggie Markel on Unsplash
The Home Office Deduction Originally published by Intuit TurboTax
Overview
Many people whose small businesses qualify them for a home office deduction are afraid to take it
because they’ve heard it will trigger an audit. But if you deserve it, take advantage. These tips can help
you determine if you qualify and rest easy when you do.
Take the deduction, carefully
Will a home office deduction trigger an audit? The answer is generally “no.” Changes in the rules in the
late 1990s made it easier for people who work out of their homes to qualify for these write-offs. So if
you qualify, by all means, take it.
NOTE: If you use TurboTax software to prepare your taxes, we’ll ask you a few simple questions to see
if you qualify, then calculate this deduction for you.
The Self-Employed Guide to Tax Deductions Updated for Tax Year 2018 14Exclusive use
The biggest roadblock to qualifying for these deductions is that you must use a portion of your home
exclusively and regularly for your business. The office is generally in a separate room or group of
rooms, but it can be a section of a room if the division is clear—thanks to a partition, perhaps—and
you can show that personal activities are excluded from the business section.
The law is clear and the IRS is serious about the exclusive-use requirement. Say you set aside a room
in your home for a full-time business and you work in it ten hours a day, seven days a week. Let your
children use the office to do their homework, though, and you violate the exclusive-use requirement
and forfeit the chance for home-office deductions.
The rule doesn’t mean you’re forbidden to make a personal phone call from the office, or that you
have to rush outside whenever a family member needs a moment of your time. Although individual
IRS auditors may be more or less strict on this point, some advisors say you meet the spirit of the
exclusive-use test as long as personal activities invade the home office no more than they would be
permitted at an office building. (Two exceptions to the exclusive-use test are discussed later.)
There’s no specific definition of what constitutes regular use. Clearly, if you use an otherwise empty
room only occasionally and its use is incidental to your business, you’d fail this test. But if you work in
the home office a few hours or so each day, you’d probably pass. This test is applied to the facts and
circumstances of each case the IRS challenges.
Principal place of business
In addition to passing the exclusive- and regular-use tests, your home office must be either the principal
location of that business, or a place where you regularly meet with customers or clients. If you are an
employee of another company but aslo have your own part-time business based in your home, you
can pass this test even if you spend much more time at the office where you work as an employee.
There is, though, the question of what constitutes a business. Making money from your efforts is a
prerequisite, but for purposes of this tax break, profit alone isn’t necessarily enough. If you use your
den solely to take care of your personal investment portfolio, you can’t claim home office deductions
because your activities as an investor don’t qualify as a business.
Taxpayers who use a home office exclusively to actively manage several rental properties they own,
though, may qualify for home office tax status—as property managers rather than investors. As with
the regular-use test, whether your endeavors qualify as a business depends on the circumstances. The
more substantial the activities, in terms of time and effort invested and income generated, the more
likely you are to pass the test.
What if your business has just one office—in your home—but you do most of your work elsewhere?
First, remember that the requirement is that the office be the principal place of business, not your
principal office.
As long as you at least use the home office to conduct your administrative or management chores
and you don’t make substantial use of any other fixed location to conduct those tasks, you can pass
this test. This rule makes it much easier to claim home office deductions for individuals who conduct
most of their income-earning activities somewhere else (such as outside salespersons, tradespeople,
or professionals).
The Self-Employed Guide to Tax Deductions Updated for Tax Year 2018 15If your home office is in a separate, unattached structure—a loft over a detached garage, for example—
you don’t have to meet the principal-place-of-business or the deal-with-customers test. As long as you
pass the exclusive- and regular-use tests, you can qualify for home business write-offs.
Day care facilities and storage
The exclusive-use test does not apply if you use part of your house to provide day care services for
children, the elderly or handicapped individuals. If you care for children in your home between 7 a.m.
and 6 p.m. each day, for example, you can use that part of the house for personal activities the rest of
the time and still claim business deductions. To qualify for the tax break, your day care business must
meet any applicable state and local licensing requirements.
Another exception to the exclusive-use test applies to a portion of your home used to store product
samples or inventory you sell in your business. Assume your home-based business is the retail sale
of home-cleaning products and that you regularly use half of your basement to store inventory.
Occasionally using that part of the basement to store personal items would not cancel your home
office deduction. To qualify for this exception, your home must be the only location of your business.
Business percentage of house or simplified square foot calculation
Your home office business deductions are based on the percentage of your home used for the business
or a simplified square footage calculation.
Percentage of your home method:
The most exact way to figure this proportion is to measure the square footage devoted to your home
office and find what percentage it is of the total area of your home. If the office measures 150 square
feet, for example, and the total area of the house is 1,200 square feet, your business percentage would
be 12.5% (150 ÷ 1,200).
An easier way is acceptable if the rooms in your home are all about the same size. In that case, you
can figure the business percentage by dividing the number of rooms used in your business by the total
number of rooms in the house.
Photo by Neonbrand on Unsplash
The Self-Employed Guide to Tax Deductions Updated for Tax Year 2018 16Special rules apply if you qualify for home office deductions under the day care exception to the
exclusive-use test. Your business-use percentage must be discounted because the space is available
for personal use part of the time. To do that, you compare the number of hours the day care business
is operated, including preparation and cleanup time, to the total number of hours in the year (8,760).
Assume you use 40% of your house for a day care business that operates 12 hours a day, five days a
week for 50 weeks of the year. That’s 3,000 hours out of the total of 8,760 hours in the year. That’s 34%
of the available hours, so your business write-off percentage is 13.6% (40% of 34%).
Simplified square footage method:
Beginning with 2013 tax returns, the IRS began a simplified option for claiming the deduction. This
new method uses a prescribed rate multiplied the allowable square footage used in the home. For
2018 the prescribed rate is $5 per square foot with a maximum of 300 square feet. The space must still
be dedicated to the business activity as described above.
With the simplified method, if the office measures 150 square feet, for example, then the deduction
would be $750 (150 x $5).
NOTE: With either method the qualification for the home office deduction is made each year. So you
might qualify one year and not the next, or vice versa.
The payoff
If you are eligible for home office deductions, the tax savings can be well worth the additional work
required to qualify. And remember, TurboTax makes it easy to determine if you qualify and how much
you can write off.
Here are some examples of key home office deductions using the percentage of your home method:
Direct expenses
Money spent to repair or maintain the business space is deductible. If you paint the room that is your
home office, for example, the entire cost can be deducted. Although no part of the cost of the first
telephone line in your home can be deducted, the full cost of a special line for your business and other
direct expenses—such as the cost of long distance business calls—can be written off.
Indirect expenses
These will probably be your most fruitful home office deductions. Because part of your home qualifies
as business property, part of the costs of running it can be converted from non-deductible personal
expenses to business write-offs. If your office space takes up 20% of the house, you can deduct 20%
of your bills for utilities, homeowners insurance, homeowners association fees, security, and general
repairs and maintenance.
Interest and property taxes
Mortgage interest and property taxes are deductible expenses if you qualify for home office deductions.
But with a home office you convert part of those expenses from personal itemized deductions to
business write-offs. Because business expenses reduce self-employment income, they can also trim
what you owe in Social Security taxes.
The Self-Employed Guide to Tax Deductions Updated for Tax Year 2018 17Photo by Rawpixel on Unsplash
Deducting rent, or depreciating
If you rent the home where your office is located, this computation is easy: you deduct the same
percentage of your rent as the percentage of your home devoted to your business. If you own your
home, you depreciate the business part of the house. Figuring the right amount to deduct can be
complicated (TurboTax will help) but you only have to do it once; then you’ll enjoy the savings year
after year.
Helpful hints
• If you include home depreciation as part of the home office deduction and eventually sell your
home at a profit, you will have to pay a capital gains tax on the total amount of depreciation
deductions you took while you were living there, assuming you sold the home for a profit.
• Limit on write-offs - the law puts a cap on how much you can deduct for the business use of
the home. Basically, your home office deductions can’t exceed your home-based business
income. In other words, home office expenses can’t create a tax loss to shelter other income.
The bottom line
• The home office deduction is not a red flag for an IRS audit.
• Whether you qualify for this deduction is determined each year.
• Deducting a home office is treated differently depending on your business type.
• The simplified method can make it easier for you to claim the deduction but might not provide
you with biggest deduction.
• TurboTax Home & Business can help you figure out if you qualify and calculate all your home
office deductions.
The Self-Employed Guide to Tax Deductions Updated for Tax Year 2018 18Photo by Brendan Church on Unsplash
Business Use of Vehicles Originally published by Intuit TurboTax
Overview
If you use vehicles in your small business, how and when you deduct for the business use of those
vehicles can have significant tax implications. It pays to learn the nuances of mileage deductions,
buying versus leasing and depreciation of vehicles. Special rules for business vehicles can deliver
healthy tax savings.
Some important questions
The deduction for using vehicles in your business can sometimes be significant, so it’s important to
make the following decisions:
• Is it better to use the standard mileage rate as your deduction or the actual expenses incurred
for a vehicle used for this business?
• Who should own the vehicle? The business, the business owner or the employee?
• Should the business lease or buy the vehicle?
Here’s a general overview
Business vehicles are cars, SUVs and pickup trucks that are used for business activities.
What does not qualify:
• Vehicles used as equipment, such as dump trucks
• Vehicles used for hire, such as taxi cabs or airport transport vans
The Self-Employed Guide to Tax Deductions Updated for Tax Year 2018 19Luxury Autos
Congress decided years ago that the taxpayers should not subsidize extravagant vehicles used by
business. To prevent that, the law squeezes otherwise allowable depreciation deductions for “luxury
cars.” But don’t think Rolls Royce or Ferrari. Congress has a much less extravagant view of luxury. For
2018, the maximum first-year depreciation write-off for a new or used car is $10,000 plus up to an
additional $8,000 in bonus depreciation. (These figures assume 100% business use.)
The limit is higher for SUVs with loaded vehicle weights over 6,000 pounds but no more than 14,000
pounds. For such vehicles put into use in 2018, 100% of the cost can be expensed using bonus
depreciation, assuming 100% business use.
Keep good records
The IRS is very fussy about writing off the cost of vehicles, so if you plan to take a vehicle deduction it’s
essential to keep a detailed log of your business miles and other expenses if you want to write them
off, too. We suggest that you pick up a vehicle expense log at an office supply or stationary store and
keep it in your car.
Standard mileage rate versus actual expenses
Whether to use the standard mileage rate or actual costs is a numbers game. Generally, the more
economical the vehicle is to operate, the more likely it is that the standard mileage rate will give you
the bigger deduction. Conversely, the higher the operating costs, e.g., gas, repairs, tires, etc. the more
beneficial the actual cost method is likely to be.
Standard mileage rate
The IRS allows employees and self-employed individuals to use a standard mileage rate, which for
2018 business driving is 54.5 cents per mile.
To determine the number of miles driven for business you need two numbers for each business vehicle:
• The total number of miles driven during the year
• The total number of miles driven just for business
Tracking your total mileage for the year is easy. Write down the odometer reading on the day that you
start using a vehicle for business and on the day the year ends. Business miles are the number of miles
actually driven for business, for example, to visit a customer or meet a client.
Remember that any miles driven to the bank, office supply store, computer store, to meet with your
accountant or to meet with your lawyer on business matters also count as part of your business mileage
deduction.
Some travel is not considered business-related:
• Driving from your home to your workplace and back is commuting. It’s not deductible on
either your business or your individual return.
• If you stop at the store on the way home from a business trip, the remaining miles from the
store to home are generally considered personal mileage, so you usually can’t include them.
The Self-Employed Guide to Tax Deductions Updated for Tax Year 2018 20Actual vehicle expenses
You can deduct interest on an auto loan, registration and property tax fees, and parking and tolls
in addition to the standard mileage rate deduction, as long as you can prove that they are business
expenses. Here’s a list of auto-related expenses you might incur.
• Gas and oil • Insurance
• Maintenance and repairs • Rental or lease payments
• Tires • Depreciation
• Registration fees and taxes* • Garage rent
• Licenses • Tolls and parking fees*
• Vehicle loan interest*
*Also deductible if you choose the standard mileage method.
The percentage of use (based on miles) that the vehicle is used for business determines the deductible
portion of these expenses.
Here’s how the math works:
Let’s say your gas, oil and repairs came to $3,000 for the year. Fees and taxes were $500. Loan interest
and insurance were $1,500. If it’s an old car, the is no depreciation write-off. Your total “actual” expenses
were $5,000.
Your total mileage was 18,000 and documented business miles were 16,200. The business-use
percentage is 90% (16,200 divided by 18,000).
If you use the actual expenses method, you could deduct $4500 (90% of $5,000).
If you use the standard mileage rate, your 2018 deduction would be $8,829 (16,200 x 54.5 cents). In
this case, the standard mileage method gives you the bigger tax benefit.
The business-use percentage usually varies from year to year. Operating expenses are annual expenses
and do not affect subsequent years.
Photo by Loubna Aggoun on Unsplash
The Self-Employed Guide to Tax Deductions Updated for Tax Year 2018 21Depreciation
This is the amount you can deduct over time for general wear and tear of the vehicle. The standard
mileage rate includes an amount for depreciation and reduces the adjusted basis of the vehicle when
you decide to sell or otherwise dispose of it. In the example above, it works out this way:
2018 Standard Mileage Deduction: 16,200 miles x 54.5 cents per mile = $8,829.
Equivalent Vehicle Depreciation included: 16,200 miles x 25 cents per mile = $4,050.
If you use the “actual” expenses method and the vehicle was acquired new in 2018, the maximum first-
year depreciation deduction, including bonus depreciation, for for an auto in 2018 is $18,000.
In the example above, your depreciation on an auto would be limited to the business-use percentage
of 90% times the maximum 2018 first-year maximum of $18,000, or $16,200.
Since depreciation accumulates, each year’s business mileage affects the adjusted basis of the vehicle.
The adjusted basis will, in turn, be used to determine the gain or loss when the vehicle is sold, so
keeping good records is essential.
Note: In order to use the standard mileage method, you must choose this method in the first year the
vehicle is placed in service. In later years you can choose to use the standard mileage rate or actual
expenses.
The ownership dilemma
Self-employed owner (sole proprietor)
The owner can choose to use either the actual expense method or the standard mileage rate method
subject to the rules outlined above.
If an employee uses a personal vehicle for business, the employer typically reimburses the employee
for the business mileage incurred at the standard mileage rate. The amount received for documented
business miles is not taxable to the employee and vehicle expenses are deductible by the employer.
Note: If you are a single-member LLC and file a Schedule C with your personal tax return (Form 1040),
you are considered a self-employed owner for tax purposes.
S Corporation/C Corporation
A vehicle used for business may be owned by the corporation or by an employee (even a shareholder
employee). The method of claiming the deduction will differ depending on the ownership of the
vehicle.
Vehicle owned by employee
An employee (or a shareholder employee) who uses a personal vehicle for business can submit a
request for reimbursement to the corporation, based on documented business miles. The corporation
can then reimburse the employee based on the standard mileage rate for business.
In this case, the corporation gets a deduction for vehicle expenses paid, and the reimbursement is not
reportable as taxable income to the employee.
The Self-Employed Guide to Tax Deductions Updated for Tax Year 2018 22Photo by Ed on Unsplash
If the employee has to pay his or her own expenses for travel on behalf of the corporation, for tax
years prior to 2018, the employee claims an unreimbursed employee business expense deduction as
a miscellaneous itemized deduction on Schedule A of Form 1040. The employee can use the actual
method or standard mileage method to calculate the deductible amount. For tax years after 2017,
unreimbursed employee expenses are no longer deductible.
Vehicle owned by the corporation
A corporation must determine the deduction for vehicles it owns based on actual operating expenses.
The corporation is also limited by the business-use percentage of the vehicle.
The corporation can deduct all of the operating expenses of the vehicle without regard to the business-
use percentage, if the personal-use percentage is treated as income to the employee. This is typically
the case when you get the use of a company car as an employee benefit. The corporation’s deduction
for the personal-use percentage is treated as a compensation expense.
One more thing: The employee’s income for personal use of a corporate vehicle is determined based
on the market value of the vehicle, not on the actual expenses or standard mileage rate used to
determine the deduction, for example, the cost to rent a vehicle.
Partnership/LLC
The rules are the same as an S Corporation, with one exception: A partner/member who has
unreimbursed auto expenses as a requirement of the partnership/LLC agreement can typically claim
the deduction on Schedule E of Form 1040 rather than on Schedule A.
Note: It’s generally less burdensome for a business to allow an employee (even a shareholder, partner,
or member) to use his or her personal vehicle and submit an expense reimbursement request. This
eliminates a substantial amount of record-keeping for the employer. The tracking of business mileage
cannot, unfortunately, be avoided or eliminated no matter what reporting choice you make.
The Self-Employed Guide to Tax Deductions Updated for Tax Year 2018 23Buy or lease?
The standard mileage rate can also be used for a leased vehicle. If you use the standard mileage rate,
you cannot switch to the actual expense method in a later year.
If you use the standard mileage rate for a leased vehicle, the lease payment amount is not deductible.
Leased vehicles are not depreciated. Instead, the business portion of the lease payment is deducted.
When the value of the leased vehicle is above a certain amount, you must also subtract an “income
inclusion” amount from the deductible amount. For vehicles first leased in 2018, the threshold is
$50,000. This income inclusion rule is an attempt to equalize the tax benefits from leasing and owning
business vehicles.
For example, a vehicle leased in 2018 that is valued at $60,500 and that is used 100% for business
would require an income inclusion amount of $30 to be subtracted from the 2018 lease payments in
arriving at the deductible amount for that year. In 2019, the income inclusion amount would be $66.
Higher income inclusion amounts would apply for 2020 through 2022.
The bottom line
• Keep detailed records.
• If you drive a lot for business and have few vehicle expenses, use the standard mileage rate to
determine your deduction.
• Business use of a vehicle is a legitimate deductible expense and should be claimed by the
taxpayer.
Photo by Roland Denes on Unsplash
The Self-Employed Guide to Tax Deductions Updated for Tax Year 2018 24Photo by Rob Hampson on Unsplash
Can Cellphone Expenses Be
Tax Deductible with a Business?
Originally published by Intuit TurboTax
Overview
Cellphones have become just as vital to business as a land line, which makes cellphone use a
legitimate, deductible business expense. But for most of us, cellphones are also inextricably linked
to our personal lives, so it’s a deduction that the IRS scrutinizes very carefully to make sure personal
electronics use isn’t being claimed as a business expense.
Cellphones have become just as vital to business as a land line, which makes cellphone use a
legitimate, deductible business expense. But for most of us, cellphones are also inextricably linked
to our personal lives, so it’s a deduction that the IRS scrutinizes very carefully to make sure personal
electronics use isn’t being claimed as a business expense.
Your cellphone as a small business deduction
If you’re self-employed and you use your cellphone for business, you can claim the business use of
your phone as a tax deduction. If 30 percent of your time on the phone is spent on business, you could
legitimately deduct 30 percent of your phone bill. In “Entrepreneur” magazine, writer Kristin Edelhauser
recommends getting an itemized phone bill, so you can measure your business and personal use
and prove your deduction to the IRS. Alternatively, you could get a second phone number and use it
exclusively for business.
The Self-Employed Guide to Tax Deductions Updated for Tax Year 2018 25Deductions for employees
For tax years prior to 2018, even if you’re working for someone as an employee, you may have to
use your personal cellphone for business. If you itemize deductions, the IRS allows you to claim
depreciation on your phone as an “unreimbursed business expense” if you use it regularly for your job
and your use is a common, accepted business practice.
You can deduct unreimbursed business expenses that amount to more than two percent of your
adjusted gross income. These expenses also include professional association dues, legal fees and
others listed in IRS Publication 529.
Beginning in 2018, these and other unreimbursed employee expenses are no longer deductible.
Cellphone depreciation
The Small Business Jobs Act of 2010 changes the way you calculate cellphone depreciation, according
to the Schneider Downs accounting firm. Under the old rules, if you used your cellphone less than 50
percent of the time for business, you could only depreciate it on a straight-line 10-year depreciation
schedule. Now, however, the law allows you to write off depreciation—the loss in value from wear and
tear—over a seven year schedule, in addition to making it easier to claim bonus depreciation.
Your cellphone as fringe benefit
If your employer provides you with a cellphone as part of your job, this could potentially increase your
taxable income. If you use the cellphone even slightly for personal calls, Schneider Downs states, that
constitutes a fringe benefit, which must be calculated as part of your gross income.
If you can prove that you carry a personal cellphone during business hours and make all your personal
calls on that, the IRS may decide the business phone is purely for business, in which case it won’t affect
your income.
The Self-Employed Guide to Tax Deductions Updated for Tax Year 2018 26Photo by Tran Mau Tri Tam on Unsplash
Tips to Reduce Self-Employment Taxes
Originally published by Intuit TurboTax
Overview
Self-employed? Aside from the income tax, you’ll need to pay self-employment taxes that support the
Medicare and Social Security programs. However, there are some ways you can reduce the amount
you owe.
There are many advantages to self-employment in comparison to being employed by someone
else, like being able to set your own hours and not having to punch in every morning. But, at the end
of the day, your tax obligations are similar to those of employees. Aside from the income tax, you’ll
need to pay self-employment taxes that support the Medicare and Social Security programs. These
tax obligations can be daunting, but there are some ways the self-employed can reduce the amount
they owe.
Self-employment taxes explained
Self-employment taxes exist solely to fund the Social Security and Medicare programs. Employees pay
similar taxes through employer withholding, and employers must make additional tax contributions
on behalf of each employee. The self-employed are required to pay all of these taxes themselves.
SE tax deduction
The Internal Revenue Service requires anyone making $400 or more in self-employment income to
file a tax return. The return must include a Schedule SE, which you use to calculate how much self-
employment tax you owe. However, when you are filling out your 1040, the IRS allows you to deduct a
portion of the self-employment tax payments you make as an adjustment to income. You can deduct
between 50 and approximately 57 percent of your self-employment tax payments. The precise amount
depends on how much self-employment income you earn.
The Self-Employed Guide to Tax Deductions Updated for Tax Year 2018 27S Corp savings
If you create a corporation or a limited liability company, making an S Corp election with the IRS might
present some opportunities to reduce your self-employment tax liability. With an S Corp, you generally
pay yourself a reasonable salary out of earnings. You can distribute any remaining profits to yourself
and any other shareholders or partners or leave the money in the business. In certain situations, the
money in excess of your salary is subject to income tax but not employment taxes.
For example, if you operate your business as a sole proprietorship and you earn $100,000 for the year,
self-employment tax is due on the entire amount. However, under the appropriate circumstances
with and S Corp, the amount that exceeds the reasonable salary you make is not subject to self-
employment taxes.
Reducing net profit
The Schedule C (or Schedule C-EZ) calculates your net profit from self-employment. You must include
this as income on your 1040 and use it on Schedule SE to calculate your self-employment tax. Your net
profit is equal to the gross receipts you earned minus your deductible business expenses. The lower
your net profit number is, the lower your self-employment tax bill will be.
Therefore, to reduce your self-employment tax, you should be extremely thorough when preparing
your Schedule C to ensure you deduct every possible business expense. Your business expenses need
to be ordinary and necessary to operate your business to be deductible. They cannot be personal in
nature. Common types of deductible business expenses include office rent, the cost of acquiring and
maintaining a business vehicle, telephone calls, office supplies and equipment.
When you use TurboTax, you will be asked about all of your self-employment income and expenses.
TurboTax will automatically use this information to calculate your self-employment tax for you.
It looks like there’s some good to filing taxes. The information above provides a general understanding
and overview of tax deductions. The content should not be construed as tax advice. These strategies
may not work for everybody. Please consult your favorite tax professional or www.irs.gov to help you
understand your personal situation.
The Self-Employed Guide to Tax Deductions Updated for Tax Year 2018 28Whether you self-file or go to an accountant, make sure you’re taking the right steps to get
the most out of your deductions. Having the general knowledge can help you save time and
money by being prepared and keeping track of your records throughout the year.
Once you have a game plan be sure to check out bSolo, the smart, quarterly, tax assistant, that
can help you auto-save and pay your taxes on time, every time. Check us out at bsolo.com
And, when it’s time to file your annual return, you can save $20 on TurboTax Self-Employed,
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The Self-Employed Guide to Tax Deductions Updated for Tax Year 2018 29Photo by Kevin Horstmann on Unsplash
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expressed in these articles are those of the author(s).
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The Self-Employed Guide to Tax Deductions Updated for Tax Year 2018 30You can also read
