Tax Tips for the Self Employed

Those of you who are self employed, and you know who you are …. Yes, it’s terrific that you escaped corporate America, work for yourself, and are able to make your own hours … but unfortunately you, like all of us; cannot escape tax time.

Tax time can be challenging since legislation and tax deductions often change. For instance, the Small Business Jobs Act of 2010 recently went into effect. For those self employed, the legislation contains tax provisions designed to encourage investment and provide access to capital for businesses. Yes, good news.

Here are just some of the changes self-employed professionals should be aware of:

• Standard mileage rates adjusted — The deduction for using your vehicle for company business is 51 cents per mile driven; the rate for medical miles driven is 19 cents per mile; and charitable miles is 14 cents per mile. (Beginning this year, a taxpayer may use the business standard mileage rate for vehicles used for hire, such as taxis.)
• AMT exemption increased —The Alternative Minimum Tax exemption for a married couple filing a joint return is $72,450, and $47,450 for single filers. Of course, these are subject to change when Congress does its Christmas list (i.e., last minute tax changes) at the end of the year.  (Look at Line 45 of your tax return to see if you were “hit” by AMT.)
• Contribution limits for individual retirement plans — When an IRA contributor who is not covered by a workplace retirement plan is married to someone who is covered, the deduction is phased out if the couple’s income is between $167,000 and $177,000.
• Increase in start-up expense deduction — The deduction for new business start-up expenses was increased to $10,000 (from $5,000).
• Maximum Section 179 deduction increased — Small businesses received an additional incentive to invest in new equipment with the increase of the maximum allowable deduction under Code Section 179 from $250,000 to $500,000. At the same time, the limit for the phase-out of the deduction was increased to $2 million from $800,000.

Deductible expenses

As you know, I recommend keeping track of expenses such as mileage and out-of-pocket expenses all year round. In addition, you can deduct expenses related to your home office, including a portion of the mortgage, utilities, home insurance, property tax and maintenance. However, you should base your expenses on the percent of your home that is reserved for work. Your phone and internet line can also be deducted but make sure that it is the portion that you use for work.

The IRS is auditing more and more individuals and businesses this year. So, it is important that you maintain appropriate records.