Tax Saving Strategies For The
Self-Employed
Save when you rent your home office from your
spouse.
If you are self-employed and use space in your home for an office or other
business purposes, you can save self-employment taxes (Social Security and
Medicare) if you rent part of the business-use space from your spouse, even if
you file a joint income tax return.
This tax saver was given the "go" in a recent tax
court case. The case involved a self-employed taxpayer who owned a home jointly
with his wife and filed a joint income tax return with her. Instead of taking
the normal allowable home office deduction on his self-employed tax return form
(Form 1040 Schedule C), the tax-payer paid himself rent then took the rent
deduction on his Schedule C. The Tax Court disallowed him this tactic (you can't
pay yourself rent). However, the court surprised the IRS by allowing the
taxpayer to pay his wife rent on the portion of the home that belonged to her.
Since the husband and wife were joint owners, the wife was presumed to be half
owner, and one-half of the rent was allowed as a deduction on the husband's
Schedule C as a business expense.
This tactic won't save you income taxes, because
the rent deducted on the self-employed business form Schedule C must be taken
into income on the rental form Schedule E. So, for income tax purposes, the rent
transaction is a wash. But since deductions on the Schedule C also save
self-employment taxes (and no self-employment taxes are due for the Schedule E
rental income), and shifting from Schedule C to Schedule E (business expense to
rental income) will save you employment tax.
You can't deduct your full home office?
No problem. Deduct your phone expenses!
According to a recent Tax Court case, if you are self-employed you can deduct
your telephone costs, even if your home office expenses are not currently
deductible. This is great news for the start-up self-employed individuals, and
"sideline" self-employed individuals, who use a home office space but generate
little or no gross income from their business.
The cost of basic phone service for your home
phone cannot be allocated to business use. It does not matter how much you use
your phone for your business. It is best to have a second phone line installed
for business use because all costs associated with this second line are
deductible. If you do not have a second line installed, specific costs from the
first one are deducible and should be documented.
Deduct tax preparation fees as an expense.
Until a few years ago, the IRS required
that all tax fees be deducted as a miscellaneous personal itemized deduction on
Schedule A. It did not matter whether most of the fees were paid for preparing
business-related tax forms. But the IRS changed its position. Tax-payers who are
self-employed are now allowed to deduct the portion of their tax preparation
expense allocable to business-form preparation as a self-employed business
expense on their Schedule C.
If you are self-employed and pay a tax preparer to
complete your Form 1040 income tax return, make sure that you get an itemized
bill that shows the portion of the tax preparation fee allocated to preparing
your Schedule C (and any other related business tax forms attached to your form
1040). We can do this for you.
Replace nondeductible business interest with deductible business interest.
If you are self-employed, there is no
reason for you to pay nondeductible personal interest. Or, at least, you should
use your self-employed status to minimize your nondeductible personal interest
expenditures. You can do this by borrowing to meet your business expense
expenditures and using business receipts to pay off personal debt. Doing this,
you "replace" your nondeductible personal interest expense with deductible
business expense.
You can deduct lawn maintenance, landscaping and driveway repair costs.
If you run your business out of a home office, you probably already know that
you are allowed a business expense deduction for the home office portion of
expenses (like home mortgage interest, property tax, insurance, utilities,
maintenance and repairs, and depreciation). Don't shortchange yourself! If you
use a home office on a regular basis to meet customers, the home office portion
of any lawn maintenance, landscaping and driveway repair cost is deductible as a
home office cost.
Simple IRAs
A self-employed person can establish a
SIMPLE-IRA, for which the IRS provides model plan documents. To make
contributions to a SIMPLE-IRA, the plan must have been set up before
self-employment income was earned. The maximum annual contribution to a
SIMPLE-IRA is $8,000, or total compensation, if less (the maximum contribution
will be lower if net self-employment income is less than $200,000). In some
cases, the maximum contribution allowed for a SIMPLE-IRA would be more than the
maximum allowed under an SEP or Keogh plan. The elective contribution to a
SIMPLE-IRA is limited by the amount of the taxpayer's income, while both the SEP
and Keogh contributions are limited by a percentage of income.
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