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Top 5 tips for maximizing your self-employment deductions

By Richard Close
With the deadline for filing personal tax returns closing in, you can’t put off

reviewing your 2010 receipts much longer. When it comes to filing taxes for self-employed individuals, you should take advantage of as many allowed deduction as possible. Maximizing these deductions will not only save you money, but will reduce the overall potential for tax liability.

A good rule of thumb is to eliminate any personal purchases, or anything that was used for personal use, from your receipts or logs. The Internal Revenue Service (IRS) code only allows for “ordinary and necessary” expenses in your business. This means if it was not used for specific use by your business, it is not an allowed deduction.

1. Vehicle expenses. As a self-employed individual, you can either deduct vehicle expenses by standard mileage or actual expenses. If you have not been keeping a mileage log, standard mileage may not be the option for you, as the log will be the only proof for this expense.

You can deduct interest paid on a car loan if the car is used for business purposes. If the car is only used for business 60% of the time, you can only deduct 60% of the interest paid that year.

2. Bookkeeping and accounting. Tax Preparation fees can be deducted from your Schedule C. Basically, you can only deduct the fee for preparing your self-employed portion of the return as a business expense. The rest of the tax preparation expense can be deducted from your Schedule A on your personal return. All bookkeeping and/or accounting expenses can be deducted as it pertains to maintaining your business records.

3. Travel, meals, and entertainment. When you’re preparing to deduct expense related to travel, meals, and entertainment, ensure they were for business use only.

Travel expenses are deductible when you are required to be away from your tax home (your primary residence) and are in need of rest or sleep while you are conducting business. This also applies for any meals necessary while you are traveling. More good news: Tips are also allowed as a deduction during travel.

Entertainment expenses are deductible only when you are entertaining a customer, client, or employee. The expense must be common or accepted in your field of business, and be considered helpful for your business. Beware: You can only deduct approximately 50% of your unreimbursed business expenses.

4. Office supplies. Most people make numerous trips to office supply stores for their everyday needs—sometimes more frequently than they would like (with big bills to prove it!).

Paper, ink, postage, computers, printers, and related office supplies are all necessary for you to keep your business running professionally and efficiently and thus are tax deductible. Always keep your receipts, and if you are purchasing business and personal supplies, it’s advisable to get your business purchases on a separate receipt. This can be a small gold mine in deductions, as most people do not realize how this can add up over the course of one tax year.

5. Business use of home. Be cautious when you are claiming portions of your home for business use. This is easily one of the most frequent places that tax payers can make mistakes.

The business portion of your home must be one of the three following:

•Your principal place of business;

•A place where you meet or deal with your patients, clients, and/or customers; or

•A separate structure not attached to your home.

The business portion of your home doesn’t have to be used exclusively for business. Examples include using the space to store products or using the space as a daycare facility.

Many people use portions of their home for business purposes, if not run their business out of their home. You need to know what size the space is in order to have a complete deduction, which can save you money in the long run.

Just the beginning

This is merely scratching at the surface of what items and expenses can be deducted when you file your Schedule C. Review your receipts and records for the 2010 tax year. If you have expenses not listed above, check out IRS Publication 334, available at www.irs.gov, to see if your deduction is an allowed expense.

Preparation of a self-employed tax return is not simple, and can cost you big when prepared incorrectly. If you do not feel comfortable preparing your return on your own or have a large amount of expenses, it is in your best interest to seek a licensed and qualified tax preparer or CPA.

This is a guest post by Richard Close, on behalf of the Tax Defense Network (888-248-9058 or www.taxdefensenetwork.com). As a former IRS Revenue Officer, Richard “stole” $10 Million for the IRS. Now he works to help American taxpayers. Richard writes IRS news and updates daily on his website, The IRS Hitman (www.irs-hitman.blogspot.com). You can find answers to common tax questions in his knowledge vault.


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