Being an entrepreneur is unique. You can:
- set your own hours
- work from home
- make connections all over the world
But if you’re used to the 9-to-5 grind — and the financials that go along with that — you probably haven’t thought much about the tax benefits for entrepreneurs.
If you’re an employee, taxes are fairly straightforward. That’s because your employer deducts taxes from your paycheck before you ever see it. So when you finally get your payout, you’ve paid about 20 percent to the government.
However, if you’re an entrepreneur, the tables are turned. You get 100% of your wages and then pay the government.
Here’s the upside of that. Since you deduct taxes from your own pay, you can take advantage of several tax benefits that are only available to business owners so that you can pay less taxes.
That means before you ever pay taxes, you can reduce the amount you owe by using these tax breaks.
So are there tax breaks for entrepreneurs? Are there tax deductions for entrepreneurs?
In this article, we’re going to provide 6 tax benefits for entrepreneurs.
Before we go any further, it’s important to note that we’re not financial advisors, so on the topic of tax advice for entrepreneurs, ensure that you consult with your CPA about all tax-related questions.
Ready to learn the tax benefits for entrepreneurs? Let’s get started!
Tax Deductions For Entrepreneurs
Being an entrepreneur comes with its fair share of benefits, especially when it comes time to do your taxes. There are tax benefits for entrepreneurs — if you know how to utilize them. This article will show you how to do just that so that you can pay less taxes.
1. Deduct Your Home Office (And The Expenses That Come With It)
One of the first tax benefits for entrepreneurs: deducting a home office.
This tax perk gets a lot of air time, but despite that, many entrepreneurs don’t actually take advantage of it.
The bottom line is that if you work from home, this is one write-off you absolutely should take advantage of.
How do you qualify for the deduction? It’s simple: you simply have to have a home office –– that is, a portion of your residence that is solely used for business.
But if you do business both at your home office and elsewhere, don’t worry.
As long as you use your home office “substantially and regularly to conduct business,” you’ll be fine.
There are two methods that you can use here:
- the “simplified” option
- the “regular” method
The Simplified Option
The simplified option “can significantly reduce the burden of record keeping by allowing a qualified taxpayer to multiply a prescribed rate by the allowable square footage of the office in lieu of determining actual expenses,” according to the IRS.
- A standard deduction of $5 per square foot of home used for business (the maximum 300 square feet).
- Allowable home-related itemized deductions claimed in full on Schedule A.
- Keep in mind that no home depreciation deduction or later recapture of depreciation for the years the simplified option is used.
You can read more about it here.
The Regular Method
When you use the regular method, you can deduct the actual expenses of your home office.
According to the IRS, these expenses might include:
- mortgage interest
So if your home office has a fair share of deductible expenses, the regular method will be much more beneficial for you.
If your home office is significant in size — for example, if you use an entire room or even a large section of a room — you’ll see nice returns from this deduction.
2. Deduct Your Business Expenses
Another tax benefit for entrepreneurs: your home office.
Your home office isn’t the only thing you can deduct. You can also deduct your business expenses.
The tricky part is knowing what you can deduct. This is where consulting a knowledgeable CPA will come in handy.
Still, if you’re aware of all the possible deductions, you can get a better idea of which ones you’re eligible for.
To take full advantage of this perk, you’ll need to do a fair amount of research.
Not all deductions are obvious; for example, you may be able to deduct some entertainment expenses (like the cost of taking a client out to a promotional event) but the IRS doesn’t broadcast that information.
The key here is to read through IRS Publication 535 on “Business Expenses”. This resource lists the various expenses that can be deducted.
While it’s a hefty amount of content, the handy sidebar will help you navigate the document.
You owe it to yourself to take some time and research your deductions. You might be surprised at just how much you can deduct.
3. Reduce Your Taxable Income By Saving For Retirement
Another tax benefit for entrepreneurs: getting a tax write-off just for saving up for retirement seems too good to be true, but thankfully it isn’t!
There are a couple layers to this one. First, when you put money toward your IRA, it generally won’t be taxed until it’s distributed. This is the case for traditional IRAs, while qualified distributions from Roth IRAs are actually tax-free.
But let’s talk about the more immediate benefits.
If you have a traditional IRA, you may be able to deduct your contributions up to a certain level. Your total contributions can be up to $5,500 if you’re under 50 and up to $6,500 if you’re 50 or older.
Go over those limits, and you may be taxed on the excess, so be mindful of that. (Note that this only applies to traditional IRAs; Roth IRA contributions aren’t deductible.)
Again, the key to making the most of this benefit will involve reading the fine print, but it’s definitely worth it.
You’re not just shaving dollars off your tax owed — you’re investing in your future.
4. Deduct Your Out-Of-Pocket Health Insurance Costs
When it comes to tax benefits for entrepreneurs, this is one of the best.
You’ve likely paid a good amount of health insurance costs out of pocket, and if you have, you may be able to deduct them.
Insurance all may be eligible for this perk, including:
Even better, you may be able to deduct insurance costs you paid for yourself, your spouse, or your dependents.
The IRS has more information available in this section of Publication 535.
Business Structuring Benefits
5. Lessen Your Tax Liability By Choosing The Right Legal Entity
Depending on how long you’ve been an entrepreneur, you may or may not have a specific legal entity set up. Choosing the right entity is another one of the tax benefits for entrepreneurs.
Did you know that this can have a big effect on the taxes you pay? It’s true.
There are several basic business entities types. Each type of entity deals with taxes differently, so if you’re not using the right entity for your situation, you could wind up paying more in taxes than you need to.
If you choose the entity that best fits your business, you can substantially save on taxes. Again, consulting with a CPA or even an attorney will be invaluable. A qualified professional will be able to help you choose the right entity for you and save the most on taxes.
So what are the types of entities?
A sole proprietor is the default structure when you don’t register your business as anything different.
A partnership is formed when two or more people run a business, and they both share management and profits.
Limited Liability Company (LLC)
When you file for an LLC, your business becomes a separate entity, meaning that the owners are not personally liable for the company’s liabilities. In terms of taxation, LLCs have the ability to decide to be taxed as a partnership, a sole proprietor (if there’s only one member), or an S Corp.
Similar to an LLC, when you file as an S Corporation, you’re personally protected from liabilities. For tax purposes, you’re both considered an employee and an owner.
With a C corporation, unlike an S corporation, the owners and the business entity are taxed separately.
6. Get The Most From Your Profit By Paying Yourself
Being your own boss is one of the best and most challenging things about being an entrepreneur.
For example, it can be odd to think about paying yourself. But often, entrepreneurs pay themselves last.
It’s crucial to know how to pay yourself, and there are a lot of factors that come into play here.
First, your business entity will greatly affect your options — all the more reason to choose the right entity for you.
Second, for best results, separate your personal and business finances. This means opening up a new business account with a bank (and maybe even a credit card or two).
Finally, decide the best way to pay yourself. As strange as it may seem, paying yourself a salary is an excellent option in most cases. Just make sure you’re paying yourself in a structured fashion.
Start Saving Money On Your Taxes
Being self-employed means getting more tax breaks, but you have to work for them a little.
Getting personalized advice from a CPA is best, but first, it’s worth doing some research on your own.
The best tax advice for entrepreneurs is simple: know the tax benefits that you qualify for based on your business, and utilize them to pay less taxes legally.
Tax Benefits For Entrepreneurs Continued Learning
Now that you know the 6 tax benefits for entrepreneurs, don’t stop there! Continue your financial education with these free resources:
- Learn how to maximize your charity tax deductible donation
- Is this your first time filing small business taxes? If so, here’s a guide so that you don’t miss a step
- Find out how to build business credit so that you can qualify for low interest rate loans
- Discover IRS audit red flags so that you can avoid being audited
- Are you in control of your personal finances, from budgeting to saving, retirement and more? If not, learn how to master your personal finances right here