What are the tax rules for business expenses if I'm self-employed?

IRS Guidelines for Deductible Business Expenses for Self-Employed Individuals

Deductible Business Expenses Overview

Self-employed individuals can deduct business expenses that are considered ordinary and necessary for their trade or business. According to the IRS, an expense is ordinary if it is common and accepted in your trade or business. An expense is necessary if it is helpful and appropriate for your business.

Categories of Deductible Business Expenses

1. Home Office Expenses

  - Deductions for business use of your home are available if you use part of your home regularly and exclusively for business activities [Guide to Business Expense Resources].

2. Travel Expenses

  - Deductions for travel expenses are allowed if the travel is necessary for your business. This includes transportation, lodging, and meals subject to the 50% limit on meals [Understanding business travel deductions].

3. Car Expenses

  - If you use your car for business, you may deduct car expenses. You can choose to use the standard mileage rate or actual car expenses [Publication 463 (2023), Travel, Gift, and Car Expenses].

4. Insurance Premiums

  - Premiums for business insurance are deductible. This may include health insurance if you are self-employed [Guide to Business Expense Resources].

5. Retirement Plans

  - Contributions to retirement plans for the self-employed are deductible [Small Businesses Self-Employed].

6. Interest

  - Interest on business debts is deductible [Guide to Business Expense Resources].

7. Taxes

  - Various business taxes, including self-employment tax, are deductible [Guide to Business Expense Resources].

8. Education Expenses

  - Work-related education expenses may be deductible if they maintain or improve skills required in your current business [Topic no. 513, Work-related education expenses].

9. Depreciation and Section 179

  - Depreciation on business assets and the Section 179 expense deduction for the purchase of qualifying business equipment are allowed [Guide to Business Expense Resources].

10. Employee Pay

   - Wages and salaries paid to employees are deductible business expenses [Guide to Business Expense Resources].

11. Rent Expense

   - Rent paid for property used in your business is deductible [Guide to Business Expense Resources].

12. Other Expenses

   - Other expenses may be deductible if they are ordinary and necessary for your business. This includes advertising, bank fees, and more [Guide to Business Expense Resources].

Recordkeeping for Deductions

Maintain accurate records and receipts to substantiate your deductions. The IRS requires that you keep documentation that supports the income, deductions, and credits on your tax return [What kind of records should I keep].

Filing Requirements

Self-employed individuals typically report their business income and expenses on Schedule C (Form 1040) or Schedule F (Form 1040) if they are farmers. Deductions reduce the net income from the business, which in turn reduces the amount of tax owed [Small Businesses Self-Employed].

Additional Considerations

- Some deductions may have limits or specific requirements.

- The home office deduction has strict criteria that must be met.

- Travel expenses must not be lavish or extravagant and must be directly related to the business.

- The IRS has specific rules for deducting meals and entertainment expenses.

For more detailed information on business expenses and deductions, refer to the IRS publications and resources provided.

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Sources:

Publication 334 (2023), Tax Guide for Small Business 2024-07-31

Publication 463 (2023), Travel, Gift, and Car Expenses | Internal Revenue Service 2024-08-04

Publication 502 (2023), Medical and Dental Expenses 2024-08-03

Topic no. 513, Work-related education expenses | Internal Revenue Service 2024-08-02

Guide to Business Expense Resources | Internal Revenue Service 2024-08-01

Businesses | Internal Revenue Service 2024-07-29

Self-employment tax (Social Security and Medicare taxes) 2024-08-03

What kind of records should I keep | Internal Revenue Service 2024-08-03

Understanding business travel deductions | Internal Revenue Service 2024-08-04

Small Businesses Self-Employed | Internal Revenue Service 2024-08-03