Can I Take The Standard Deduction And Deduct Business Expenses?

As a self-employed worker with a small business this year, you might've spent quite a bit of money on it.  After you calculate your 1099 tax rate, you may be worried about how much you'll owe to Uncle Sam. Now, you would like to know what you can deduct so you can reduce your taxable income on your tax form and pay the least tax you can in a legal manner. After all, you have to worry about paying income tax and self-employment tax (Social Security and Medicare). 

A common question among independent contractors is: can I take the standard deduction and deduct business expenses still?

Long story short, the answer is yes.

I'll give you the rundown of  itemizing deductions and lowering your tax bill.

Standard Deduction vs Itemized Deduction  

There are two ways you can take deductions on your federal income tax return besides your business deductions – you can use the standard deduction or itemize deductions.  

The standard deduction is a fixed dollar amount that reduces your taxable income. Your standard deduction depends on your filing status - single, married filing jointly, head of household, married filing separately, and qualifying widow(er).

The Tax Cuts and Jobs Act (TCJA) was passed in 2017 and became effective as of the 2018 tax year. Ultimately, the act increased the standard deduction from $6,500 to $12,000 for individual filers.

If your allowable itemized deductions are greater than your standard deduction, you should itemize deductions. Itemized deductions include amounts you paid for state and local income or sales taxes, real estate taxes, personal property taxes, mortgage interest, medical expenses, health insurance premiums, and disaster losses from a Federally declared disaster. You may also include gifts to charity and part of the amount you paid for medical and dental expenses.

Form Schedule C

If you’re a sole proprietor or single-member LLC, Schedule C is a place to report the revenue from your business, as well as all the types of expense you incurred to run their business. After calculating your income and expenses for your business on Schedule C, you can report a profit or loss on line 7a of your form 1040.  This figure will then be added to your taxable income. It is important to note that only business-related expenses from Schedule C can be deducted while taking the standard deduction on your form 1040.  

Considerations

Your self-employed business deductions are computed with a Schedule C on Form 1040 and you still have the option to claim your standard deduction or, the sum of your itemized deduction, if your itemized deductions are higher. Remember, the IRS considers the business expenses from your self-employed business separately from your individual deductions.

What Can I Deduct?

To be a tax deduction, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.

It is important to separate business expenses from the following expenses:

  • The expenses used to figure the cost of goods sold,
  • Capital Expenses, and
  • Personal Expenses.

Cost of Goods Sold

If your business manufactures products or purchases them for resale, you generally must value inventory at the beginning and end of each tax year to determine your cost of goods sold. Some of your expenses may be included in figuring the cost of goods sold. The cost of goods sold is deducted from your gross receipts to figure your gross profit for the year. If you include an expense in the cost of goods sold, you cannot deduct it again as a business expense.

The following are types of expenses that go into figuring the cost of goods sold.

  • The cost of products or raw materials, including freight
  • Storage
  • Direct labor costs (including contributions to pensions or annuity plans) for workers who produce the products
  • Factory overhead

Capital Expenses

You must capitalize, rather than deduct, some costs. These costs are a part of your investment in your business and are called capital expenses. Capital expenses are considered assets in your business. In general, there are three types of costs you capitalize.

  • Business start-up costs
  • Business assets
  • Improvements

Note: You can elect to deduct or amortize certain business start-up costs. Please refer to chapters 7 and 8 of the Internal Revenue Service (IRS) Publication 535, Business Expenses for more information.

Personal Versus Business Expenses

Generally, a taxpayer cannot deduct personal, living, or family expenses from their business income. However, if you have an expense for something that is used partly for business and partly for personal purposes, divide the total cost between the business and personal parts. You can deduct the business part.

For example, if you borrow money and use 70% of it for business and the other 30% for a family vacation, you can deduct 70% of the interest as a business expense. The remaining 30% is personal interest and is not tax-deductible.

Business Use of Your Home

If you use part of your home for business, you may be able to deduct expenses for a home office or the business use of your home. Taking the home office deduction allows you to write off actual expenses such as mortgage interest, insurance, utilities, repairs, office supplies, and depreciation or the square feet percentage of your office.

If you use your car in your business, you can deduct car expenses. If you use your car for both business and personal purposes, you must divide your expenses based on actual mileage.

Other Types of Business Expenses

  • Employees' Pay - You can generally deduct the pay you give your employees for the services they perform for your business from your tax bill.
  • Retirement Plans - Retirement plans are savings plans that offer you tax advantages to set aside money for your own, and your employees' retirement.
  • Rent Expense - Rent is any amount you pay for the use of property you do not own. In general, you can deduct rent as an expense only if the rent is for property you use in your trade or business. If you have or will receive equity in or title to the property, the rent is not deductible.
  • Interest - Business interest expense is an amount charged for the use of money you borrowed for business activities (like your business credit card interest).
  • Taxes - You can deduct various federal, state, local, and foreign taxes directly attributable to your trade or business tax as business expenses.
  • Insurance - Generally, you can deduct the ordinary and necessary cost of insurance as a business expense, if it is for your trade, business, or profession.


Soo Lee

Soo Lee

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Soo has over 10 years of experience in publicly traded companies and public accounting firms offering tax, accounting, payroll and advisory services to clients in diversified industries including manufacturing, wholesale/retail businesses, construction, real estate development and investment, banking, finance and professional/legal consulting service. In Particular, when Soo was at Pricewaterhouse Cooper, Soo worked with many foreign owned U.S. companies and advised clients on a broad range of issues including federal and state tax minimization especially through R&D tax credit, determination of the optimal structure for new foreign investments, restructuring and reorganization for existing operations.

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Note: at Keeper Tax, we're on a mission to help freelancers overcome the complexity of their taxes. That sometimes leads us to generalize tax advice. Please reach out via email if you have questions.

Discover the tax write-offs you've been missing

Keeper Tax automatically finds tax deductions among your purchases. On average, people discover write-offs worth $1,249 in 90 seconds.

Download Keeper Tax→