In part one of our discussion on deductions we were able to define a broad definition of what makes an expense tax deductible. It is important to understand what makes an expense deductible because it can vary depending on your facts and circumstances. In part two of our discussion, we will be reviewing general deductions, the criteria that makes specific expenses deductible, and how to deduct them properly.
Health and Dental Insurance
Bottom line: health and dental insurance premiums are tax deductible. However, depending on how your business is structured, you will report the deduction differently. If you’re a sole proprietor, you will deduct the cost directly on your 1040. If you’re an S corp owner, the cost of the health & dental insurance premiums should be paid through the business. It will be included on your W-2 at the end of the year, but you’ll be able to deduct it on your personal return.The costs for doctor or dentist visits should be paid through your personal account and will only be deductible at year end if you have expenses in excess of 10% of your AGI. Please note, you cannot deduct health insurance premiums if you receive the insurance through your spouse’s employer.
Entertaining Clients
When entertaining current or prospective clients, you can deduct meals and entertainment if it occurs in one of 2 situations. If it’s directly related to your business and business is discussed during (IE a catered lunch at your office), or if it’s associated with your business, taking place immediately before or after a business discussion. It is important to make a note of the specific business purpose on the receipt.
Charitable Contributions
If you have a partnership, LLC or an s corporation, your business can make charitable contributions and have the deduction pass through to you, for you to claim on your individual tax return.
Education & Training
As an independent contractor it’s important to improve on your skill set. Any education expenses can be deducted as long as they are related to your current business, or occupation. The expense has to be made to maintain or improve skills required by your current employment. For example ongoing education, seminars, classes etc. If the expense is to prepare you for a completely new field (e.g., going from being a LYFT driver to an IT consultant), it is not deductible.
Equipment
Items like computers, printers, fax machines, copiers, and furniture for your business are all tax deductible. If your business is profitable, you can either take 100 percent of the deduction up front using section 179, or depreciate over the course of a few years, depending on the assets.
Clothing or Uniforms
If a specific uniform is required by your occupation, your uniforms may be deducted. However, if you are a business man, you can’t go out and buy an expensive suit, simply because you plan on deducting it. Deductible clothing must be purchased for the specific purpose of using it for work. Health care workers, union workers, warehouse workers etc.
Professional, Legal, and Financial Services
Any expense paid to a legal or tax professional for advice and services related to your business are fully tax deductible during the calendar year paid.
Click here to view the infographic on deductions.
This is just a simple summary of common deductions, and there are so many possible deductions that can be utilized, we barely scratched the surface. The process of identifying what and how to file deductions is a complicated task, and in every situation, it is completely dependent on your facts and circumstances. It is highly recommended you talk with a tax professional about what deductions should be applied to your taxes, in order to maximize your deductions and keep more money in your pocket.
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