A Guide to Sole Proprietor Tax Write-Offs

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A Guide to Sole Proprietor Tax Write-Offs

Sole proprietors simply need a business license to launch their ventures. As a sole proprietorship, you are what’s known in the tax world as a “pass-through entity.” Your company is not a separate entity, and any profits or losses will be passed onto your taxes.

You’ll use Form 1040 for your personal income, such as if you take a salary and Schedule C to report your business’s numbers.

With 70% of America’s businesses being sole proprietorships, understanding tax write-offs can save you thousands of dollars.

How the Tax Cuts and Jobs Act Impacts Your Taxes

The Tax Cuts and Jobs Act (TCJA), passed under the Trump administration, was a game changer regarding how taxes work for these types of businesses.

Under the act, some businesses may be able to deduct 20% of their business income. However, not everyone is eligible for this option. It depends on several factors, such as total business income, business type, and the size of your taxable income.

You can write off most business expenses, but not all of them. You must discuss the issue with a tax professional to ensure that you fully comply with the latest regulations.

What You Can and Can’t Write Off

Various fees and expenses will be eligible for write-offs. It’s one of the advantages of running a small business. However, you need to be aware of how much you can write off and some of the things that would not allow you to take a tax deduction.

Let’s look at what you can and cannot write off.

Office Space

A designated home office, a storefront, or an industrial facility can all be deducted because you’re wholly using it as a space for doing business. Rental costs are always included, but you can even deduct expenses like office stationery and décor.

Be especially careful when taking a home office deduction. According to the latest IRS guidance, the area must be strictly used for work purposes. In other words, you cannot deduct your entire home rent just because you use your kitchen counter to answer emails occasionally.

Insurance Premiums

Any insurance policies you hold for your business are eligible for write-offs on their premiums. It includes your business liability and business continuation insurance policies. Any industry-specific policies, such as malpractice insurance, would also fall under this definition for sole proprietors.

Like other deductions, be aware that the expenses cannot be combined with your personal needs. Only your business and its employees may take advantage of the insurance policies you’re making deductions for.

Transportation Costs

You can also reclaim mileage costs for client meetings, voluntary commitments, and any other business trips you need to take. The standard mileage deduction for business use and charitable use changes every year, so make sure you calculate the current rate.

You may also avoid taking the standard mileage rate and calculate the actual cost of using your vehicle, but the mileage rate is far easier to calculate.

Note that you must keep accurate documentation on mileage used. Also, you cannot deduct mileage for any trips that are either part of your usual commute or for personal trips.

Business Travel

Beyond trips you need to make around your local community, you can also claim for long-distance trips. For example, if you need to fly to another city to meet a client or monitor a project, you can recoup the costs of hotel stays, food, and transport.

You can only deduct costs for business days, so if you extend the weekend to incorporate a trip with your spouse, this has to come out of your own pocket.

Professional Development

Not many people know that they can also claim professional development costs. If you take a course to learn a new skill, that’s a deductible expense. The only rule is it must be relevant to your current business. Learning a new skill to embark upon a new career must come out of your own pocket.

There are no limitations on the types of professional development avenues you can deduct for. Whether it’s books, webinars, or formal online classes, you can claim it. The IRS even allows you to deduct subscription fees to industry-relevant newsletters.

Business Expansion Costs

The above deductions pertain to the day-to-day costs of doing business, but any investment you make into expanding your business will make up your biggest deductions of the year.

Whether purchasing a more extensive facility, hiring new employees, or purchasing equipment, they’re all deductible in full.

Tech Costs

As a small business owner, the chances are you spend money on the tech side of your business every year. If you have a website and pay for hosting, that’s deductible. You may also spend money on social media ads or pay a social media consultant to do it for you. These costs are deductible in full.

Cloud storage and computing costs also fall under the banner of tax-deductible expenses. Just remember that you must only use these functions for business use.

Always Contact a Tax Professional

There are two reasons to consult a tax professional when the time comes to file. Firstly, you need to ensure that you’re taking every deduction you’re entitled to. They can comb through your current accounts and figure out if you’re leaving money on the table.

Furthermore, the rules on tax deductions are not always straightforward. The IRS is largely ambiguous on when an expense is claimable and when it may raise eyebrows. Talking to a professional ensures you can explain a deduction if you’re unlikely enough to get audited.

Conclusion

Tax write-offs free up your cash flow and ensure that you keep more of your money come tax filing season. With so many small businesses struggling to turn a profit, knowing which deductions you’re entitled to could be the difference between keeping your head above water or falling behind.

Invest in the services of a tax professional who can figure out what you’re entitled to deduct and remain tax compliant. Remember, the costs of a tax professional are also fully deductible!

Have you started thinking about your tax affairs yet?

A Guide to Sole Proprietor Tax Write-Offs
Brian Wallace

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