Easy tax deductions for the self-employed in 2013

Maximize your small business tax breaks with these great deductions and tips offered exclusively to the self-employed.

Brandon Lafving
by Brandon Lafving, IRS contributor (@TechDragoon)

Self-employment is not so bad… once you figure out how to take advantage of the {tax benefits to Wait… there are tax benefits for the self-employed?} and the full list of deductions. At some point, you recognize there are some tremendous incentives to help you reinvest your profits back into real business growth. Deductions are a first step toward reducing you overhead.

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The following list discusses those deductions available to you, which do not tend to trigger audits.  

Self-Employment Tax Deduction

After the expiration of the payroll-tax holiday, self-employment tax takes up a substantial percentage of your profits this year (15.3%). That is exactly double what employees pay because their employer pays the second half for them. What you might not realize is that the second half of your self-employment tax is deducted from your business profits, just as it is from an employer's. So you really only pay taxes on 92.65% of your profits.

Home Office

The home office deduction might be a sore spot for many taxpayers, who have been audited and burnt by the IRS in the past. Historically, the home office has been a red flag because most people will claim parts of their house, which are used for other purposes in addition to work.

On top of that, the intensive reporting requirements and calculations made the deduction prohibitive. But this year, the IRS is offering a simplified home office deduction, involving much fewer computations.

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This seems like a white flag, to me. By taking the simplified option, you lower the risk of an audit and save yourself time, but you cannot claim as much credit. The flip-side of that is: anyone who does not take the simplified option will stick out even more.

A Note on Business Expenses

Of course all business expenses can be deducted from your profits. These include miscellaneous costs and utilities, including Internet, phone, as well as any publications.

Keep in mind, however, that your costs must be justifiable. That is, they need to be directly relevant to your current business operations. You cannot justify a subscription to the New York Times because the publication is general. It might keep you updated on some things relevant to your business, but you could also read it for entertainment. A trade publication for your business' trade would count, however.  

The same applies to other utilities. Your house's Internet Service Provider bill would not be covered, but if you had a separate office you used exclusively for business, the office's Internet bill would be deductible.

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Basically, if you would even consider paying for the service without your business, then you cannot mark it as a deduction.

The same principle applies to education. If your Modified Adjusted Gross Income (MAGI) is less than $80,000, or $160,000 if married filing jointly, then you can deduct up to $4,000 of tuition costs. I have written in more detail on this topic here.