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.
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?
Not every penny can be deductible for income tax purposes. If you run a small farm, paying for the nail shop wouldn’t be deductible for your farm business. Your expense has to be related and necessary to your farm business – e.g. horse feed, pickaxe, etc. What expense are then available to my business?
Personal vs Business Expenses
What is considered “personal expense”? According to the IRS, the personal expense is, “the cost of personal or family living”. Not all personal expenses aren’t tax-deductible – as long as it’s related to your business, some of them can be tax-deductible. It’s always very important to separate personal and business expenses and record them correctly. For example, if your business entity is an S or C corporation, it’s mandatory to have an accountable plan for reimbursements for meal, travel or car usage to claim them as a business expense on your business tax return.
Now, let’s take a closer look at possible expenses that are deductible for tax purposes!
Cost of Goods Sold
Cost of goods sold is the most popular and common business expense when it comes to manufacturing and retail industry. You buy (and put together, if it’s a manufacturing business) things that are initially categorized as inventory. When that inventory is sold, it is now converted to Cost of Goods Sold to calculate the genuine profit with that sales transaction. It is very important to track your inventory with the right amount so that your cost of goods sold can be figured correctly.
Home Office Deduction
Home office deduction is another popular business expense that you can write off on your tax return. It allows you to claim your home-related expenses such as mortgage interest, utilities, insurance, and depreciation of your office proportionally. Do you use part of your home for your makeup business? If so, you may be eligible to deduct expenses for the business use of your home. There are two ways to write off your home office expenses.
- The simplified option: Multiply the square footage of your office (up to 300 square feet) by the standard rate of $5.
- The actual expense method: Add up the expenditures related to your home office including:
- Direct expenses – office supplies and repairs to your office (e.g. paint)
- Indirect expenses – mortgage interest, insurance, and utilities. You’ll divide the total cost of these expenses by the percentage of your home that’s used for business.
Check out this article on if you should use the simplified method or actual for claiming the home office deduction.
Salaries and Wages (Payroll Expenses)
If you have any employees (including yourself if your business entity is an S corp), you can of course deduct your payroll amount as a business expense. If your employee spent his own money for your business, the reimbursements can also be your business expense if it’s related to your business activities. For example, if your employee used his car for business travel, you can reimburse for his car usage using the IRS standard mileage method when your business has an accountable plan for reimbursements.
If you lease a space for your business, you can deduct your rent as a business expense. The property you rent can’t be registered with your name, though. You can also claim a rent expense for a space where you stack your inventory or finished goods for shipping.
Office supplies & Software
Office supplies & Software is another common expense that most business owners can deduct. Especially in this pandemic situation, most businesses work remotely and so they need more software to control and manage their remote work environment. Common software expenses include Intuit, Adobe PDF, Zoom, and any cloud storage system.
Utilities for business use can be deductible. If utilities are billed to your business, it’s 100% deductible as most utilities used at your business premise are billed using your business name.
If your business borrow money to better run your business, the interest portion of mortgage payment is tax-deductible.
Training and Education
If you join any seminar or class that is related to any skills and knowledge that are needed for running your business, expenses for those class and seminar can be 100% deductible.
Repair and Maintenance
If your business property needs to be fixed or repaired, that cost is a business expense and it’s deductible. For example, you’re doing a dry-cleaning business and one of your washers is not working properly. You will need to hire a professional like a plumber and have the plumber to fix the washer machine. This kind of expense is categorized as repair and maintenance.
Advertising and Marketing Expense
Most businesses these days have their own websites and use SEO (search engine optimization) features to be more exposed to customers. All expenses related to these advertising and marketing efforts are deductible for tax purposes. Famous vendors can be google, godaddy, or wix.
If your business owns any property such as a building or vehicle, those assets are classified as a capital asset and they cannot be expensed in the year it’s purchased. Instead, it needs to be spread over a certain period to be expensed. This depreciation expense is 100% business deductible.
Postage and Delivery
If your business needs any shipping or delivery services to perform business activity, all postage, shipping, packaging, and delivery expenses can be deductible.
If your business spent money to hire either an employee or contractor for your business, any subscription fee for hiring websites such as Indeed or UpWork is business expense. Also, any expense for a background check for potential employee or contractor can be deductible as well.
Tax & License
Any license and tax related expenses for your business are deductible. Examples can be an annual LLC registration fee, state Franchise taxes, and payroll taxes, etc. Please be sure that any federal income taxes cannot be claimed as an expense on a federal level tax return. Penalties related to any government agency (e.g. traffic tickets or late-filing penalties paid on your tax return) cannot also be deductible at all.