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  • Fabiola Litherland, CPA

Tax Year 2020: The Ultimate Tax Deductions List for Self-Employed Business Owners



Self-employed tax deductions are the superheroes of your business taxes. They swoop in, lower your tax bill, and save your wallet from some serious destruction. But before you can reap the benefits of tax write-offs, you need to know what expenses are tax-deductible if you work from home.


That’s where we come in. We’ve put together an epic list of self-employed deductions. And while not every deduction will apply to you, knowing what’s deductible can help you plan your future expenses.

But first…


Who Can Claim These Tax Deductions?


If you’re self-employed, then you can claim these tax deductions. The IRS defines self-employment as carrying on a trade or business as a sole proprietor, independent contractor, single-member LLC, or as a member of a partnership.


Even if your business isn’t making money, as long as you’re engaged in an activity that’s “profit-driven” (in other words, your goal is to make money eventually), then you’re still considered self-employed.


You also don’t have to be in business for yourself full time. If you have a side hustle and a part-time job, you’re still considered partially self-employed.


Self-Employed Tax Deductions


Advertising & Marketing

The cost of telling the world about what you do can quickly add up. The good news is that you can write off advertising expenses such as:

  • Online ads, like ad placements on websites and Google Ads

  • Social media advertising, like ads on Facebook, Instagram, Twitter, LinkedIn, and Pinterest

  • Sponsored content

  • Print advertising in newspaper, magazines, and industry journals

  • Business directory listings

  • Email and social media marketing software

  • Content marketing costs

  • The cost to attend networking events


Auto Expenses

Even if you work from home, you still have to venture out into the world. If you drive your car for work, then you can write off your business driving and other costs associated with the trip. Driving to meet vendors, make pickups and woo clients can be hard on your car, but a few self-employment tax deductions might help you recoup some of that wear and tear.


What you can deduct: Deduct your “actual car expenses” instead. These include depreciation, licenses, gas, oil, tolls, parking fees, garage rent, insurance, lease payments, registration fees, repairs and tires. You may have to do this anyway if you’re using five or more cars in your business. If you’re leasing your car, check out IRS Publication 463 for rules about the amount of lease payments you can deduct.


Business Mileage

There are two ways to write off the use of your car, through the mileage reimbursement (this is the most common method for home-based businesses) and the actual cost method.


Mileage reimbursement: Every year, the IRS sets a standard mileage rate. For 2020, the rate is 57.5 cents per mile. The way the reimbursement works is that you multiply your total annual business mileage by the standard rate. The result is your tax deduction.

Total business mileage x Standard mileage rate = Tax deduction

Let’s say you drive 1,200 business miles this year. When you do your taxes, you’ll multiply 1,200 by 57.5 cents:

1,200 x $0.575 = $690

In this example, you have a $690 deduction.


Actual cost: With the actual cost method, you write off a percentage of your total vehicle expenses. The percentage is calculated by dividing your business mileage by your total annual mileage.


Business mileage / Total mileage = Deductible percentage


For example, if you drive 1,200 business miles in a year and 6,000 total miles, then you’ll write off 20% of your car expenses. Car expenses include gas, insurance, car washes, oil changes, and repairs.


Let’s say your total annual car expense is $7,500. Here’s how you’ll figure out your deduction:


$7,500 x 0.20 = $1,500


Regardless of what method you use, it’s essential to understand what counts as business mileage. Business mileage is anywhere you drive for business that’s not to or from your principal place of business.


Your principal place of business is where you conduct most of your business. If you work from home, then your principal place of business is your home. If your principal place of business isn’t your home, then any drives from your home to that location are nondeductible.


But, don’t despair. All other business driving counts as business mileage, including driving to:

  • Visit clients or job sites

  • Meet with colleagues or contractors

  • Workshops and other educational events

  • Run errands for your business

  • The airport for business travel

What happens if your principal place of business is your home? Then anywhere you drive to and from for business is tax-deductible!


At the end of the year, tally the number of miles you drove in the car for business, multiply that by the IRS’ standard mileage rate — 57.5 cents per mile in 2020 — and deduct the total. Be sure to keep a mileage log; you’ll need it if you’re audited.


Bank Fees

Got fees? No worries. You can deduct them if you only use your bank account for business.

  • Monthly maintenance fees

  • Overdraft fees

  • ATM fees

  • Late fees

  • Credit card membership fees

  • Loan setup costs

Business Insurance

Protecting yourself isn’t cheap, but you can write off the cost of your premiums for business insurance, employee accident and employee health insurance.


Contractors

As business owners, we can’t do everything ourselves. Sometimes we need to outsource a job to an independent contractor, like a graphic designer or virtual assistant.


Anything you pay a contractor is tax-deductible, with one important caveat. If you pay someone more than $600 in a tax year for business-related services, you must file a Form 1099-MISC. The only exception is if you pay your contractor via credit card or PayPal. Then, the credit card processing company (or PayPal) is responsible for filing a 1099-K.


Commissions

Commissions paid to affiliate partners are tax-deductible. Just be sure to file a Form 1099-MISC if someone earns more than $600 in commission, since affiliates are considered independent contractors.


Computer & Tech Equipment

From laptops and tablets to desktops and webcams, if you’re using a computer and other tech equipment for your business, you can write them off. And don’t forget about the small stuff, like replacing the laptop charger your dog chewed or swapping out your mouse for a snazzy new trackpad.


Dues & Memberships

Professional membership groups are a great way to stay connected with others and beat the work-at-home blues. Plus, you can write off the dues that you pay to be part of a professional organization.


Generally, you can’t club memberships in clubs (especially country clubs and travel-related clubs). However, the IRS carves out exceptions for memberships to boards of trade, business leagues, chambers of commerce, civic or public service organizations, professional organizations such as bar associations and medical associations, real estate boards and trade associations.


Equipment Rental

Renting equipment for occasional use? Keep track of those costs because equipment rental, including vehicles, is tax-deductible.


Event Costs

If you host events for your customers, you can write off the costs associated with throwing an event. You can write off:

  • Food and drinks

  • Entertainment costs

  • Supplies, like paper goods and flatware

  • Rentals, such as tables, chairs, and linens

  • Event staff, such as hiring a bartender

  • Venue rental

Furniture & Decor

No matter what you do, working in an empty space isn’t fun or practical. You can deduct the cost of furnishing and decorating your home office, offsite office, or other workspaces. The types of expenses you can write off are:

  • Furniture, such as a desk and chair

  • Shelving

  • Lighting

  • Decorative items, such as curtains, rugs, throw pillows, plants, and artwork

Health Insurance Premiums

Writing off your health insurance premiums as a self-employed business owner is a little tricky. You don’t write this off as a business expense. Instead, you write it off as a personal deduction.

And, this write-off isn’t limited to just health insurance. You can also deduct your dental and long-term care premiums.


To qualify, you must meet two requirements:

  1. You aren’t eligible for an employer-sponsored health plan. This means you didn’t have an employee job that offered you health insurance. It also means your spouse didn’t have the option to enroll you in their employer-sponsored health plan. Even if your spouse chooses not to enroll you, if the option is there, then you can’t take this deduction.

  2. Your business has net profit. Your business must have some taxable income to qualify for this deduction. How much profit your business earns determines how much of your health insurance you can deduct. If your business’s profit is more than your total premiums, then you can write off 100% of your premiums. If your business’s net profit is less than your total premiums, then you can only write off the amount equal to your net profit.

Home Office

Ah, the coveted home office deduction. While home business tax deductions can add up to a significant write-off, there’s a lot to know about taking these deductions properly.


First, what counts as a home office?

You must use the home office “regularly,” which means, for example, you can’t see a client once in your home and call it a home office. But you don’t have to use your home office daily. It just needs to be used on an ongoing, consistent basis.

You must also use the office exclusively, meaning you only use the space for business and it’s clearly defined from your personal living space. That means you can’t claim your dining room table, couch, or bed as a home office.

If you have a qualifying home office, then there are two types of expenses you can write off: direct and indirect expenses.

Direct expenses: These are expenses that only relate to your home office and not your entire home. Direct home office expenses are fully deductible, and you’ll track them just like any other business expense.


Indirect expenses: These expenses are shared between your personal living space and your home office. You’ll write off a percentage of these expenses. To calculate the deductible percentage, divide your home office square footage by your home’s total square footage.


Home office square footage / Total home square footage = Deductible percentage


For example, if your home is 1,500 square feet and your home office is 300 square feet, it would look like this.

300 / 1,500 = 0.20 or 20%


You can write off 20% of your indirect home office expenses.

Indirect home office expenses include:

  • Rent

  • Mortgage interest and property taxes

  • Homeowners or renter’s insurance premiums

  • Homeowners association fees

  • Utilities, such as gas, electric, water, and garbage

  • Security system

  • House cleaning

  • Repairs made to your entire home, such as reflooring

Let’s say your total home expenses are $40,000. Here’s how you would calculate your deduction:

$40,000 x 0.20 = $8,000


In this example, your home office deduction is $8,000!


Interest

No one likes paying interest, but if you have to do it, at least you can write off the interest you incur on business loans or credit cards.


You don’t necessarily need to have a business credit card to deduct qualifying interest charges. If you use a personal card exclusively for business expenses, for example, you can generally still deduct the interest charges.


Licenses & Permits

Most businesses are required to obtain specific licenses and permits to operate legally. You can write off:

  • Business licenses

  • Professional licenses

  • Permits from local, state, and federal agencies

Meals

The most important thing to know about the meals category is that it’s only 50% deductible. While you’ll pay for the whole meal through your business, you can only deduct 50% of the total cost.

The types of meals you can write off are:

  • Business meals with clients or colleagues (you must pay for the entire meal)

  • Travel meals (for you or an employee)

  • Office snacks and employee meals

  • Meals for meetings with employees

Merchant Processing Fees

If you accept credit cards, then you’re probably paying merchant processing fees. These are the 2–4% fees you pay your credit card merchant to process cards for you. You can write off processing fees from merchant processors like Square, Stripe, PayPal, and Authorize.Net.


Payroll Taxes & Expenses

If you hire employees for your business, then you know that payroll taxes make a serious dent in your bank account. Luckily, your local, state, and federal employer payroll taxes are tax-deductible.

You can also deduct the cost of your payroll software and your workers’ compensation insurance.


Photography & Videography Equipment

Investing in photography and videography equipment not only helps you capture that Instagram-worthy shot of your product, but it’s also a tax write-off. You can deduct the cost of:

  • Cameras

  • Lenses

  • Lighting equipment

  • Audio equipment

  • Backdrops and props

  • Supplies, such as SD cards, batteries, and cables

Depending on the cost of the equipment, you may choose to write it off all in one year or spread out the deduction by depreciating the expense over time.


Professional Fees

Sometimes you just have to consult an expert. Luckily, the costs of working with a lawyer, accountant, bookkeeper, and other legal and financial professionals are deductible.


Professional Development

In a perfect world, we would start our businesses armed with all of the knowledge that we need to succeed. But, in reality, there’s a lot to learn when you’re self-employed. That’s where professional development comes in. Whether your learning about your industry or how to run a business, you can write off:

  • Classes, training, and workshops (online and in-person)

  • Conferences

  • Printed and digital books and audiobooks

  • Journals, magazines, and newspapers

  • Events that improve your skills or knowledge of your industry

Office Supplies

Even the most mundane office supplies can have a significant impact on your taxes. You can deduct supplies such as:

  • Paper

  • Pens,

  • Notebooks

  • Sticky notes

  • Printer Ink

  • Staples

  • Postage

  • Similar items that you use day-to-day to run your business

Rent

Even if you have a home office, you can still write off other business space that you rent. That includes:

  • An office where you see clients

  • Workshop space

  • Storage unit

  • Co-working space

Repairs & Maintenance

The costs of keeping up your rented space are tax-deductible. From painting your office to paying for ongoing cleaning, you can write off your maintenance costs.


Salaries & Benefits

Your employees not only help keep your business running, but they also give you a nice tax deduction. You can write off your employees’ wages, bonuses, and the cost of their benefits, like health insurance and retirement contributions.


Software

For self-employed business owners, software has become a crucial part of running a business. You can deduct the cost of:

  • One-time software purchases

  • Ongoing software subscriptions, such as scheduling, task management, and accounting software

  • Cloud-based storage

  • Apps that you use for business

Supplies

“Supplies” sounds super vague; I get it. But it’s unclear for a reason. This category is all about the supplies that you need to do your job. Supplies for a therapist are very different from supplies for a personal trainer.

The key to writing off supplies is to make sure that it relates to your industry and what you do.


Example: An interior designer may need to buy fabric swatches to show a client. While this expense makes perfect sense for a designer, it doesn’t apply to a dog walker. But a dog walker could write off dog treats and toys, while a designer couldn’t.


Telephone & Internet

When you’re self-employed, you can write off a portion of your personal cellphone and home internet bill. The deduction is based on how much you use your phone or internet for business use versus personal use.


Example: If you use your cellphone 50% of the time for business, then you’ll deduct 50% of your phone bill. If your monthly phone bill is $100, then the deductible portion is $50.

The same goes for your home internet. You’ll write off a percentage of the bill based on how much you use your home internet for business.


Travel

If you travel out of town or in your local area for business, then rejoice, because you can write off your travel expenses. Let’s break it down.


Out-of-town travel: This is travel that you do outside of your tax home. Your tax home is the city or general vicinity where your primary place of business is located. That means your tax home isn’t where you personally live, but where your business lives.

If you travel outside of your tax home for business purposes, you can write off expenses like:

  • Airfare and baggage fees

  • Lodging

  • Car rental

  • Taxis, public transportation, and Lyft or Uber rides

  • 50% of your meals while traveling

Local travel: This is business travel that you do within your tax home where you’re not using your car to get around. If you have a client lunch meeting and take a Lyft to the restaurant, for example, the cost of the Lyft is tax-deductible.

When writing off local travel, the same rules that apply to business mileage apply to local travel. You can’t write off trips to and from your principal place of business.

Examples of local travel are:

  • Taxis

  • Ride-sharing apps like Lyft or Uber

  • Public transportation

Website Expenses

All website-related expenses are tax-deductible. You can write off:

  • Website hosting

  • Domain name registration

  • Themes and plugins

  • Subscription website builders, such as Squarespace, GoDaddy, etc.

  • Stock photography

  • Website help, such as hiring someone to design your site or do ongoing maintenance (just remember that this person is an independent contractor and may need a 1099)

Continuing Education

You have to stay smart to run a growing business, and there are self-employment tax deductions for that.


The costs of “qualifying work-related education,” including things such as tuition, books, supplies, lab fees, transportation to and from classes and related expenses.


The expenses are deductible only if the education “maintains or improves skills needed in your present work.” In other words, if you’re taking classes to change careers or you're working toward the minimum educational requirements for a trade or business, this probably won’t work for you. But you can qualify even if the education leads to a degree. Review IRS Publication 970 for the requirements.


Retirement Savings

You might have more options than you think when it comes to retirement-related self-employment tax deductions. One popular choice is the solo 401(k).


Contributions to a solo or one-participant 401(k) plan of up to $57,000 in 2020 ($64,500 if you're 50 or older) or 100% of earned income, whichever is less.

Similar to a standard, employer-sponsored 401(k). For traditional solo 401(k)s, your contributions are pretax, and distributions after age 59½ are taxed. You can contribute as both an employee (of yourself) and as the employer, with salary deferrals of up to $19,500 in 2029, plus a $6,500 catch-up contribution if you’re 50 or older. And you can add approximately 25% of net self-employment income, not exceeding $57,000 in 2020.


Self-Employment Taxes As Self-Employment Tax Deductions

Weirdly, one of the most common self-employment tax deductions is self-employment tax itself. The self-employment tax rate is 15.3% of net earnings. That rate is the sum of a 12.4% Social Security tax and a 2.9% Medicare tax on net earnings. Self-employment tax is not the same as income tax.


You can deduct half of your self-employment tax on your income taxes.


So, for example, if your Schedule SE says you owe $2,000 in self-employment tax for the year, you’ll need to pay that money when it’s due during the year, but at tax time $1,000 would be deductible on your 1040. If you form an LLC or a C Corp, you'll have a different tax situation.


Start-Up Costs

You may be able to get self-employment tax deductions for the cost of going into business.


Start-up costs generally include the costs to get your business up and running before it opens, such as grand opening advertising, salaries and wages for employees in training, travel to obtain suppliers or customers, or consulting fees.


You may be able to deduct up to $5,000 of business start-up costs and $5,000 of organizational costs (the costs to set up a legal entity for your business, such as an LLC). However, not everyone gets this deduction. The $5,000 deduction is reduced by the amount your total start-up or organizational costs exceed $50,000.


Business start-up and organizational costs are generally capital expenditures, which means they're treated like assets rather than expenses. In turn, you may be able to depreciate your start-up costs over time, and that depreciation is typically a deductible business expense. The rules are a little complicated; IRS Publication 535 has the details.


The Qualified Business Income Deduction

One of the newest self-employment tax deductions out there, the qualified business income deduction (QBI) allows eligible self-employed and small-business owners to deduct a portion of their business income on their taxes.


If your total taxable income — that is, not just your business income but other income as well — is at or below $163,300 for single filers or $326,600 for joint filers, then in 2020 you may qualify for the 20% deduction on your taxable business income.


The qualified business income deduction is for people who have “pass-through income” — that’s business income that you report on your personal tax return. Entities eligible for the qualified business income deduction include Sole Proprietorships, Partnerships, S-Corporations and Limited Liability Companies (LLCs).


If your income is above the limit, you might still be able to claim the pass-through deduction depending on the precise nature of your business (the deduction phases out for some businesses).


Now that you know the dos and don’ts of self-employed tax write-offs, it’s time to start keeping track of your expenses. Be sure to log and track all of your tax deductions, so come tax season, your write-offs can do what they do best: protect your business from an expensive tax bill.


Charitable Donations


As part of the Coronavirus Aid, Relief and Economic Security (CARES) Acts, individuals and corporations that itemize can deduct much greater amounts of their contributions. Individuals can elect to deduct donations up to 100% of their 2020 AGI (up from 60% previously). Corporations may deduct up to 25% of taxable income, up from the previous limit of 10%. The new deduction is for gifts that go to a public charity.


Call Us If you have any questions or need assistance with your tax return.




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