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Entrepreneurship, self-employment, and side hustles come in all shapes and sizes. Whether you’re already a business owner and want to add new streams of income to your mix, or you have a day job but are working on making your side hustle into your sole focus, one thing is for certain: you must contend with tax filings.
Small business taxes can seem intimidating at first. It’s not as simple as having taxes taken out of your paycheck, you now need to take responsibility for figuring out how much you owe the IRS based on both what you earned and what you can deduct. But once you become familiar with the types of small business tax deductions that are available to you, building a recordkeeping system to differentiate and track these expenses isn’t that difficult.
Small Business Tax Deductions Checklist PDF
Small Business Learning offers three FREE small business tax deductions pdf checklists that can be used as guides tailored to three types of self-employment: rental property owners, e-commerce businesses, and freelancers, consultants, and coaches. We recommend that you take a look at these guides based on which category you fall under! There is also a lot of overlap between these groups as far as eligibility goes, as the tax code applies to all business owners. But if you’re not ready to peruse the guides yet, here’s an overview of the types of tax deductions that you can learn about.
Tax Deductions for Freelancers, Consultants, Solopreneurs, Influencers, and Other Self-Employed Individuals
Self-employed individuals can have very simple freelancer taxes or more complex financial transactions as a solo business owner. When it comes to self-employed individuals, this encompasses a variety of people like freelancers who earn money primarily from services, professional coaches, influencers who receive products and sponsorship money for collaborations, and creatives who both offer services and sell their work like art, books, music, and video games.
Generally speaking, you can deduct most of the expenses that help you generate income or would be considered “ordinary and necessary” for running a small business. Many freelancers tend to be afraid of the IRS and thus feel hesitant about taking certain deductions because they aren’t sure they actually qualify. But the following items are very common deductions that freelancers shouldn’t have any issue taking.
Whether you make a living online or through engagements done in-person, chances are that you are working out of your home to save money on renting an office or co-working space. Renting such spaces is deductible, but so is a portion of your actual housing expenses.
This is generally based on your rent or mortgage payment and utilities and prorated to the space used, which can be harder to calculate if you live in a small apartment, but it’s still an accepted deduction if home is your only fixed workplace.
It’s a good idea for freelancers to have their own liability coverage. In some cases, it’s required to get certain gigs or funding for your own projects. You can deduct your business insurance by the annual or monthly premiums, in addition to any specific one-time insurance purchases like travel insurance for business trips or policies for your equipment and electronics that you need to make a living.
Phone and Internet
It’s almost impossible to earn a living today without being online and easily accessible by phone. If you’re using your personal phone, data, and Internet plan, you can usually deduct half the cost or prorate based on actual business usage that you can prove.
You can also purchase an Internet or data plan in your business name instead to deduct 100%. Additionally, you may also be able to deduct all or part of the cost of a new phone if you need it for business. If it’s totally separate from your personal phone– such as if you need more advanced photography capabilities for your business phone, but don’t mind if you have a less robust model for personal use– you can deduct the entire cost.
Marketing and advertising expenses are deductible, and not limited to buying ad space. If you need a logo and other branding graphics designed for you, that’s a deductible marketing expense. Printing business cards, having stickers made, paying for sponsored content, and having a professionally-done website with your own domain name also all count as deductible branding efforts that help get your name out there and build a professional image that gets clients to pay you more.
Tax Benefits for E-Commerce Business Owners
E-commerce powers small retailers on the Internet, whether you have your own freestanding website, sell on established platforms like Etsy or eBay, or sell with a combination of digital storefronts. As e-commerce infrastructure has become more robust over the years, processes have been streamlined for recording sales income and related expenses. If you’re thinking about selling handmade goods on the side or looking to scale up production to produce and sell larger capacities, the tax benefits available to you are similar.
Inventory and Supplies Storage
Because so many e-commerce businesses utilize drop-shipping, smart logistics, and print-on-demand services, not all e-commerce businesses have inventory on hand. However, for many small storefronts that sell hand-picked niche items or handmade goods where materials, inventory, and shipping supplies need to be kept on hand, your home may not offer sufficient space if that’s where you work. Storage units, shared warehouse space, and container rentals are deductible if you need them for storing and accessing inventory.
Payment Processor Fees
Unless a customer pays you directly in cash, chances are that you need to pay to have your payments processed and sent to your bank account. Fees paid to receive your payments, administer them, prevent chargebacks, or otherwise expedite the process are all deductible. Whether you pay through a subscription model or per transaction, payment processor and bank charges (such as sending and receiving wire transfers) are allowable business expenses.
If you absorb chargebacks, they are deductible since you have a quantifiable loss for the goods sold and shipping fees paid.
Shipping and Handling
Shipping products to customers, and samples to influencers and potential wholesale buyers, is a cornerstone of e-commerce. If you directly ship your inventory to customers, you can deduct your costs related to shipping and handling separately. This would include purchasing labels and label printers, packing supplies and boxes, and the actual postage or fees paid to the shipper.
If you use a third-party fulfillment service for shipping, their services are deductible as well.
If your e-commerce business just launched in the past tax year, you likely had several expenses before making your first dollar in sales. You can deduct up to $5,000 each for business startup expenses, which is almost everything related to operations before your first dollar was earned. You can also deduct a maximum of $5,000 in organizational costs, which relates to expenses incurred for your business entity to exist.
Since this topic gets more complex, we recommend checking out our e-commerce tax savings guide.
Small Business Tax Deductions for Rental Property Owners
Buying a property strictly to rent it out for profit works a little differently than renting out a spare room in the home that you live in. You’d need to report rental income and expenses in both cases, but there are some additional benefits when it’s considered business property and not personal. If you are a real estate professional, like a real estate broker or full-time landlord, there’s also some special rules that apply.
But whether this is your first property meant to provide some passive income or you have a few rental properties in your portfolio, keep the following tax deductions in mind.
Cleaning and Maintenance
Maintaining rental property is important for protecting your investment and complying with landlord-tenant laws. Repair work on the actual structure and appliances is deductible, along with cleaning services such as arranging for deep-cleaning between tenants or specialized cleaning services like mold abatement or power-washing.
While rental property is frequently referred to as passive income, it’s still a type of business that carries administrative burdens. While you cannot take a deduction for unpaid rent, you can deduct fees charged by property managers for going after delinquent rent in addition to the percentage they charge for ministerial services.
If you incur expenses to screen prospective tenants through background and credit checks, these are also deductible administrative expenses.
You need tenants in order to generate income from the property. Fees paid to advertise your property locally or through the Internet, or in working with property managers and real estate agents who can find a tenant for you, are deductible even if you don’t initially have success with these methods. Any expenses incurred to land a tenant, then screen them, are allowable rental activity deductions.
Because real estate transactions and rental activity is treated slightly different under the tax code compared to having your own business, there are additional nuances to handling rental and real estate transactions that often require more professional help. Renting out a property inherently carries higher legal risks than being a freelance artist, for instance. Fees paid to accountants, attorneys, real estate professionals, and consultants to help you manage your real estate activity are all deductible.
The tax code can be complicated to navigate, but small owner-operated businesses generally don’t have finances as complex as mid-size and large companies. Paying your own taxes can seem daunting at first, but it gets easier to reasonably estimate how much you’ll owe every quarter by knowing which deductions you can claim. If you’d like more information about small business tax deductions, download our free guides attached to this article or at smallbusinesslearning.com!
Disclaimer: Please keep in mind that the content of this post is not intended as tax, accounting or legal advice. The information presented here is for informational and educational purposes only. Before engaging in any transaction, be sure to discuss these matters with a trained, licensed professional.