Sole Proprietorship Tax Deductions You Need to Know About

sole proprietorshipA Free Money Wisdom reader recently emailed me and asked about available tax deductions for a sole proprietorship.  When he first asked me about it, I was clueless!  I’m not a tax professional and have had to only worry about W-2s in the past.

Although I didn’t know how to answer his question at first, I set out on a quest to find the answer.  As I researched, I found some truly cool tax deductions for this type of tax filing.  Before we get into the tax deductions I found, lets go over some bullet points regarding a sole proprietorship and how you file:

-A sole proprietorship does not constitute a legal entity, it’s simply a name for a person who runs a business and is responsible for all debts.

-Any contact or business agreement is done with the person’s name, not the company name.

-Filing a tax return is a piece of cake due to only having a two page process!

-No need to pay a third party company to audit your books.

-As a sole proprietorship, you are only taxed on the profits.  That is your total revenue minus your operating expenses.

-You’re allowed to deduct things such as travel expenses, computer rental, and start-up costs (more on this below).

So, when it comes to actual deductions you can file for, I’ve compiled quite the list for you.  Some of the following are well known deductions and others will surprise you!


Meals with Clients

If you’re  constantly  meeting new people and the talk was mainly about your business, then you can write off meal expenses.  Take someone out to dinner?  Write the dinner off.  Went out to breakfast and signed up a new supplier because of it?  Write the breakfast off.  Be careful with this though because the IRS only allows you to deduct 50% of the bill.   In other words, the IRS wants you to pay for your meal and not deduct it…


Travel Costs

Traveling can really add up between client visits and going on errands for your business.  Thankfully, the IRS lets you write these costs off.  The IRS gives you two options for this: deduct using the standard mileage deduction or deduct what you can back up with receipts.  What you choose should depend on how organized you are.  I’d rather just take the standard deduction, can you imagine how many receipts I’d have to keep track of?


Health Insurance

If you buy health insurance as an individual, these costs can be deducted.  This cost can also be deducted for any spouse or dependents you might have.  Now, if you were paying for  insurance  through an existing employer, then this deduction would be off limits.


Home Office Deductions

Many people steer away from this because they are nervous about whether or not they are eligible.  The IRS is expecting you to write this bad boy off so do it!  Plus this is one of the bigger deductions you can have.  You are allowed to deduct a portion of your rent, home repairs, utilities, and insurance.  You can even deduct that new mop you bought for cleaning around the house!  Keep good records and you can deduct these things with confidence.


Business Equipment

Section 179 of the IRS code is very specific about this deduction.  If you use things like computers, printers, and foxes exclusively for your business, you can deduct all of the expenses!  This  alleviates  some hesitation with buying more expensive equipment.  You might as well because you can write off the full amount.  Spend, spend, spend!


Company Phone

If you use a phone  strictly  for your business you can deduct every expense  associated  with it.  This includes the purchase price of the phone and the monthly costs.  If you decided to opt out of a dedicated phone, you can choose to deduct the long distance calls and other misc. services like three way calling.


Tax Preparation Costs

Although you really shouldn’t need to pay someone to prepare your taxes, in the event you do, you can deduct the tax consultant’s itemized bill.


Retirement Savings

Very few people know about this nugget of gold.  If you’re investing for your retirement, anything you put away can be deducted on your tax return.  If you’re someone who’s maximizing a SEP IRA, this is just common sense!


Sole Proprietorship = Big Tax Deductions

Now you know the many tax deductions that the IRS allows for a sole proprietorship!  This has been a learning experience for me and hope you can take away a little something from this article.  Remember to file your taxes, the deadline is fast approaching!

FYI, if you haven’t filed your taxes yet, I recommend Turbo Tax.  You can click on the banner below: