Key Takeaways
- If you use a portion of your home regularly and exclusively for your business, you may be able to claim the home office deduction. The deduction can be based on the square footage of your office.
- Self-employed people can deduct the costs associated with their business use of a personal vehicle. This can be done through the standard mileage rate method or by tracking actual expenses related to business usage.
- Contributions to a SEP IRA, SIMPLE IRA, or other retirement plan designed for small business owners are generally deductible up to the annual contribution limit for that type of plan. So, making contributions to these plans can not only help you save for retirement but also reduce your current taxable income.
- Self-employed people can generally deduct 100% of the health insurance premiums they pay for themselves, their spouses, and dependents, as long as they’re not eligible for coverage through an employer-sponsored health plan.
Your business and deductions
There’s something special about being your own boss. You're more motivated. You have greater control over your career. There’s more flexibility. All these factors and more can make self-employment extremely rewarding.
But being self-employed isn’t all roses and sunshine. You’re going to run up against plenty of things you’re probably not familiar with – such as business taxes.
As with other business expenses, taxes are going to eat into your profits. So, you have to proactively manage your business’s tax liability to make sure it’s as low as possible.
Fortunately, if you’re self-employed and operating a sole proprietorship, there are several tax deductions that can cut your business tax bill and protect your bottom line. You’ll want to become familiar with these write-offs as you build your business. If you qualify, they can save you a lot of money.
To get you started, here’s a rundown of 20 common tax deductions available to self-employed sole proprietors (plus a list of some other deductible expenses you might have).
1. Start-up costs deduction
Many self-employed people spend money to get their business going before they even start operating their business. For example, you might pay for market research, training new employees, travel, consulting fees, advertising, registration fees, and the like before you open for business.
These business start-up costs are deductible for the tax year you start operations – to a point. If you’re operating your business as a sole proprietor, you can only deduct up to $5,000 of business start-up costs. However, the $5,000 cap is reduced on a dollar-for-dollar basis if your total start-up costs exceed $50,000. So, for example, if you have $53,000 in start-up expenses, you can only deduct $2,000 of those expenses ($5,000 - ($53,000 - $50,000) = $2,000).
This deduction is claimed as an “other expense” on Schedule C of your Form 1040.
Any start-up costs that aren’t deductible in the year you start your business can be gradually written off over a 15-year period.
[Note: If you form a corporation, you can also deduct up to $5,000 of “organizational costs” to set up the corporation as a legal entity such as amounts paid for temporary directors, organizational meetings, state incorporation fees, and legal services. The $5,000 limit is phased-out in the same manner as the limit for start-up costs.]
2. Home office deduction
Many self-employed people work out of their home. Perhaps you have a den or extra bedroom that you converted into an office. If that’s the case, you might be able to claim the home office deduction on Schedule C.
This deduction covers expenses related to any part of your home used "regularly and exclusively" as your principal place of business. If you qualify, you can deduct the cost of insurance, utilities, rent, mortgage interest, property taxes, repairs, maintenance, and other expenses related to the business use of your home.
There are two ways to calculate the home office deduction. You pick which one works best for you.
The first method is to deduct the actual expenses related to your home office. Basically, this is your total home expenses multiplied by a percentage representing the portion of your home used for business. For example, if your home office takes up 10% of your house, then you can deduct 10% of your total home expenses. Use Form 8829 to calculate your deduction if you use this method.
If you don’t want to keep track of all your home expenses, you can go with the “simplified method” of calculating the home office deduction. In that case, you simply multiply the square footage of your home used for business (up to 300 sq. ft.) by $5. So, if your home office is 100 square feet, then you can deduct $500 (100 x $5 = $500).
3. Rent expense deduction
If you don’t have space in your home for an office, or you just want to keep your home and work spaces separate, you can generally deduct the cost of renting office space. But there are a couple of conditions and restrictions.
First, you can’t deduct rent if you have (or will have) an ownership interest in the rented property such as having an equity interest or title to the property. So, for example, you can’t deduct payments made under a conditional sales contract as a rent expense.
You also can’t deduct “unreasonable” rent. Rent is generally unreasonable if it’s higher than market value or a professional appraisal. This sometimes becomes an issue if you get a sweetheart deal on property leased by a relative. But even in that situation, rent is still considered to be reasonable if you’re paying the same amount that a stranger would pay to rent the property.
If you pay rent in advance, you can only deduct the amount that applies to rent for the tax year. You’ll have to wait to deduct advance payments until the tax year for which the rent applies.
Sole proprietors claim the deduction for rent on Schedule C.
4. Health insurance deduction
A self-employed person can generally deduct premiums paid for health insurance for his or her family. The self-employed health insurance deduction is claimed on Schedule 1 of Form 1040, not Schedule C.
The insurance must be established for your business. But if you’re filing Schedule C, the policy can be in either your name or the business’s name.
You can’t claim the deduction for health insurance premiums paid for any month that you were eligible for health insurance through your or a family member's employer.
The deduction also can be taken for the cost of long-term care insurance. However, the deduction is capped at an amount that’s based on your age at the end of the tax year. For the 2024 tax year, the deduction for long-term care insurance is limited as follows (based on your age on December 31, 2024):
- $470 if you’re 40 or younger ($480 for 2023)
- $880 if you’re 41 to 50 ($890 for 2023)
- $1,760 if you’re 51 to 60 ($1,790 for 2023)
- $4,710 if you’re 61 to 70 ($4,770 for 2023)
- $5,880 if you’re 71 or older ($5,960 for 2023)
You must file Form 7206 if you’re using amounts paid for long-term care insurance to calculate the deduction.
5. Retirement plan contributions deduction
There’s another Schedule 1 tax deduction designed specifically for self-employed people – it’s for contributions to certain types of retirement plans.
The deduction applies to funds that sole proprietors and other self-employed people put in the following retirement accounts for themselves:
- Simplified Employee Pension (SEP) IRAs
- Savings Incentive Match Plan for Employees (SIMPLE) IRAs
- Solo 401(k) plans
Money contributed to these plans for an employee can be deducted as a business expense on Schedule C.
However, whether you’re deducting retirement plan contributions for yourself or your employees, the deduction is capped by the annual contribution limit for the particular type of plan.
6. Car expense deduction
The costs associated with driving your personal car, truck, or van for local business use can be deductible on Schedule C. This includes things like driving your own car to a client's office for a meeting or to a store to pick up supplies.
You can use either the standard mileage rate or your actual expenses to calculate the deduction. The standard mileage rate is 67¢ per mile driven for business for the 2024 tax year (up from 65.5¢ per mile for 2023). You can add any parking fees or tolls to that amount. However, you can’t use the standard mileage rate if you use five or more vehicles in your business (such as having a fleet of vehicles).
With the actual expense method, you deduct the actual amount paid for gas, oil, tires, insurance, repairs, lease payments, parking, tolls, garage rental, and other expenses for operating your car. If you use your car, truck, or van for both business and personal driving, you have to divide your expenses between business and personal use based on miles driven for each purpose. You can then deduct the business expenses, but not the personal ones.
7. Business travel deduction
Self-employed people who must travel away from home for business can write off certain related expenses. However, to be deductible, travel expenses must be ordinary (common and accepted in your trade or business) and necessary (helpful and appropriate for your business).
Common deductible travel expenses include:
- airfare, bus, train, or car expenses (if you use your own car for travel, you can deduct actual expenses or use the standard mileage rate as described above)
- taxi, commuter bus, and limousine fees
- hotel or motel costs
- meals (see the next section for details)
- tips and fees for porters, baggage carriers, hotel staff, and other similar people (you can deduct $5 per day instead of your actual tips and fees if you don’t claim a deduction for meals that day)
- dry cleaning, laundry, and phone calls while away on business
If other people are traveling with you (including family members), you can’t deduct travel expenses for them unless they’re your employee.
Travel expenses are reported on Schedule C.
8. Business meals deduction
You can generally deduct 50% of the cost of meals that are directly related to your business or happen during a business trip. However, all the following must be true in order for the meal to be deductible:
- the meal expense is ordinary and necessary for your business
- the meal isn’t lavish or extravagant under the circumstances
- you or your employee are present at the meal
- the meal is provided to you or a current or potential business customer, client, consultant, or similar business contact
- the meal is purchased separately from any related entertainment, or the cost of the meal is stated separately from the cost of any entertainment on one or more bills, invoices, or receipts
If you’re traveling for business, you can deduct 50% of either your actual meal expenses or the standard meal allowance.
The standard meal allowance for travel in the continental U.S. is equal to the General Services Administration’s per diem rates, which depend on where and when you travel. Those rates can be found on the GSA’s website. The Department of Defense sets rates for Alaska, Hawaii, U.S. territories, and U.S. possessions, while the State Department sets them for foreign countries.
In addition, the 50% limit doesn’t apply in certain cases. For example, if you’re self-employed, the limit doesn’t apply if all the following requirements are satisfied:
- you have meal expenses as an independent contractor
- your customer or client reimburses you or gives you an allowance for the meal expenses in connection with services you perform
- you provide adequate records of the meal expenses to your customer or client
You also aren’t subject to the 50% limit if your meal expenses are for recreational, social, or similar activities such as a holiday party or a summer picnic. In addition, the limit is waived if you sell meals to the public or provide them as a means of advertising or promoting goodwill in the community such as distributing free food and beverages.
9. Self-employment tax deduction
If you work for someone else, your employer will withhold your share of Social Security and Medicare taxes (FICA taxes) from each paycheck and send them to the IRS on your behalf. But if you’re self-employed, you generally have to pay both the employer’s and employee’s share of those taxes yourself. This tax is known as the “self-employment tax.”
The self-employment tax rate is 15.3%. That includes 12.4% for Social Security and 2.9% for Medicare. You’ll owe an additional 0.9% Medicare tax if your total wages, compensation, and self-employment income for the year exceed $250,000 for joint filers, $125,000 for married people filing separate returns, or $200,000 for all other people.
But here’s the good news: You can deduct 50% of the self-employment tax you must pay. The deduction is first reported on Schedule SE, which is also the form used to calculate your self-employment tax. The deduction is then claimed on Schedule 1 of Form 1040.
10. Qualified business income deduction
The qualified business income (QBI) deduction generally lets qualified self-employed people write off up to 20% of the combined total of their business’s income, gains, deductions, and losses. (It’s sometimes called the Section 199A deduction, after the tax code section authorizing the tax break.)
There are important limitations, though. For example, if your business income exceeds a certain amount, the QBI deduction is reduced (possibly to $0) for certain service-oriented business owners like doctors, lawyers, and accountants. The deduction might be limited for other businesses based on the W-2 wages they pay to employees and the basis of certain property they own. These limitations can make calculating the QBI deduction a bit tricky.
You must use either Form 8995 or Form 8995-A to calculate the QBI deduction. The deduction amount is then claimed directly on Form 1040 rather than reported on Schedule C or Schedule 1.
Note, however, that the deduction is currently set to expire after the 2025 tax year.
11. Work-related education deduction
Self-employed people who want to further their education might be able to deduct the cost of tuition, books, and related expenses as a business expense on Schedule C. However, to deduct your education expenses, the courses you take must either be:
- required to keep your present salary, status, or job such as continuing education classes and serve an actual business purpose
- needed to maintain or improve skills needed in your present work
But even if your coursework meets one or both of the requirements above, the costs aren’t deductible if the classes are either needed to meet the minimum educational requirements of your present trade or business, or part of a program of study that will qualify you for a new trade or business.
If your courses meet these requirements, you can deduct:
- tuition, books, supplies, lab fees, and similar items
- certain transportation and travel costs related to your classes
- other related expenses such as costs related to research when writing a paper
Any personal expenses aren’t deductible, though. For instance, you can't deduct the dollar value of vacation time taken to attend class.
You can also deduct any ordinary and necessary costs of education and training of your employees. These are also reported on Schedule C.
TurboTax Tip:
If you’re furthering your education, you might also qualify for the American Opportunity tax credit or Lifetime Learning credit. However, you can’t “double dip.” So, any educational expenses you deduct as a business expense on Schedule C can’t be used to claim these tax credits (and vice versa).
12. Cost of goods sold deduction
The deduction for the “cost of goods sold” allows businesses to reduce their taxable income by accounting for expenses related to the production or purchase of any products they sell. The deduction is calculated and reported on Schedule C.
Basically, the deduction is computed by adding the cost of inventory at the beginning of the tax year to the cost of any inventory purchases or production costs during the year, and then subtracting the ending inventory at the close of the tax year.
In most cases, you’ll need to take an inventory at the beginning and end of your tax year in order to deduct the cost of goods you sold. However, if you’re considered a “small business taxpayer,” you don’t have to keep an inventory (although you must still use a method of accounting for inventory that clearly reflects income). For the 2024 tax year, you qualify as a small business taxpayer if your average annual gross receipts for the three prior tax years is $30 million or less ($29 million or less for 2023) and you’re not considered a tax shelter.
13. Bad debts deduction
If someone who owes you money won’t pay up, you might be able to deduct the amount owed to you as a bad debt. However, the deduction is only available if you included the amount you’re owed in your gross income for the current or a previous tax year.
The debt must also be considered a business bad debt in order to deduct it as a business expense on Schedule C. To be treated as a business bad debt, a worthless debt must be either:
- created or acquired in your business
- closely related to your business when it became partly or totally worthless
A debt is closely related to your business if your primary reason for incurring the debt was a business reason.
Business bad debts often result from credit sales to customers. Loans to suppliers, clients, employees, or distributors can also result in business bad debts.
14. Depreciation and Section 179 expense deduction
If you acquire certain business property that’s expected to last more than one year, you generally can’t deduct the entire cost as a business expense in the year you receive it. Instead, you have to deduct it little-by-little over the course of the property’s expected useful life. This method of deducting the cost of business property is called depreciation.
There are two special rules that can result in either a greater depreciation deduction or a full deduction for the cost of property acquired during the tax year. For the 2024 tax year, the first rule – dubbed “bonus depreciation” – permits 60% of the property’s cost to be deducted if it’s acquired in 2024. Standard depreciation deductions are allowed for the remaining cost basis.
Note, however, that bonus depreciation is being phased out. The percentage rate used to calculate the immediate deduction was 100% for the 2022 tax year, but it drops 20% each year until it’s 0% for the 2027 tax year.
The second special rule is called Section 179 expensing (the name comes from the tax code section establishing the rule). This rule lets you deduct part or all of the cost of certain property you buy during the tax year for use in your business. Again, any remaining costs are depreciated as usual.
For the 2024 tax year, the most you can deduct under the Section 179 expensing rule is generally $1,220,000 ($1,160,000 for 2023). However, this limit is reduced on a dollar-for-dollar basis to the extent the property’s cost exceeds $3,050,000 ($2,890,000 for 2023). In addition, the total cost you can deduct each year after you apply these dollar limits can’t be more than your business’s taxable income for the year.
You might have to use Form 4562 to calculate your deduction. In any event, sole proprietors ultimately report the deduction on Schedule C.
15. Charitable gifts deduction
As a self-employed person, you might want to make a charitable donation or volunteer your time in the name of your business. In addition to the personal rewards, it might be good for business, too.
You’ll also be happy to know that you might be able to claim a charitable deduction for your generosity. But if you’re operating your business as a sole proprietor, you must claim the deduction in the same manner as any other person. That means you must claim it as an itemized deduction on Schedule A of Form 1040 (instead of on Schedule C or Schedule 1), which also means you can’t also claim the Standard Deduction.
There are also certain income-based restrictions that can limit the amount of your charitable deduction. For example, cash contributions can’t be more than 60% of your adjusted gross income. The enhanced deduction for businesses that donate food is also limited to 15% of your business net income.
On the other hand, if you volunteer your time for a charity, any unreimbursed out-of-pocket expenses might be deductible. For example, if you bake a cake for a charity fundraiser, you can deduct the cost of the ingredients (although you can’t deduct the value of your time).
You can also deduct travel expenses if you drive your own car as a volunteer. In that case, you can deduct either of:
- your actual expenses for gas, oil, and the like
- 14¢ per mile, the standard mileage rate for charitable expenses
Tolls and parking fees are deductible, too.
16. Employee’s pay deduction
If you hire employees, you can deduct their salary and wages as a business expense on Schedule C. However, as a sole proprietor, you can’t deduct your own salary because you’re not considered an employee of the business.
To be deductible, the wages must be both reasonable and for the performance of services. The pay itself can also be in cash, property, or services.
Deductible pay can include bonuses, vacation and sick pay, commissions, education expenses, fringe benefits, reimbursements for employee business expenses, and the like.
You can’t deduct salaries and wages that are deducted elsewhere on your tax return. You also must subtract the amount of any employment-related tax credits you claim (like the work opportunity tax credit) when calculating the deduction.
17. Business insurance deduction
There are many different types of insurance you can buy to protect your business. Fortunately, the premiums you pay for most business insurance policies are deductible on Schedule C. In fact, premium payments for the following types of business-related insurance are generally deductible:
- fire, theft, flood, or similar insurance
- credit insurance covering losses from business bad debts
- group hospitalization and medical insurance for employees (including long-term care insurance)
- liability insurance
- malpractice insurance
- workers' compensation insurance
- overhead insurance covering business expenses if you're on disability
- car and other vehicle insurance covering vehicles used in your business
- life insurance covering your employees
- business interruption insurance
Plus, as noted earlier, self-employed people can deduct their health insurance premiums.
However, you can’t deduct payments for self-insurance reserve funds, policies covering lost earnings due to sickness or disability, certain life insurance and annuities, or insurance to secure a loan.
18. Supplies and materials deduction
Supplies and materials used in manufacturing are included in the calculation of your cost of goods sold (see above). However, other supplies and materials used in your business are also deductible on Schedule C as a business expense. This includes general office supplies, such as pens, paperclips, printers, envelopes, postage stamps, and the like.
You generally can only deduct the cost of supplies and materials if you use them in your business during the tax year (unless you deducted them in a prior year). However, if you have incidental materials and supplies on hand for which you don’t keep an inventory or record of their use, you can still deduct the cost of the materials and supplies you actually purchased during the tax year.
The cost of books, professional instruments, equipment, and similar items if you normally use them within a year. But if their usefulness extends well beyond a year, you generally have to take depreciation deductions for them over several years.
19. Interest expense deduction
Self-employed people generally can deduct interest paid during the tax year on debts related to their business. Interest relates to your business if the loan proceeds are used for a business expense. It doesn’t matter what type of property secures the loan.
However, you can only deduct interest as a business expense on Schedule C if all of the following are met:
- you’re legally liable for payment of the debt
- both you and the lender intend the debt to be repaid
- you and the lender have a true debtor-creditor relationship
This can include mortgage interest related to real property used in your business or credit card interest for a company card.
Interest related to a personal loan or debt isn’t deductible as a business expense, though.
20. Taxes and license fees deduction
Taxes paid by your business might be deductible. As noted earlier, you can deduct 50% of your federal self-employment tax on Schedule 1. Plus, write-offs are also available on Schedule C for self-employed sole proprietors paying:
- state taxes on gross income (as opposed to net income) directly attributable to your business
- sales taxes imposed on you as the seller of goods or services
- real estate and personal property taxes on business assets
- Social Security and Medicare taxes withheld from your employees’ wages and paid to the IRS (don’t deduct any amount claimed as a credit for Social Security and Medicare taxes paid on employee tips)
- unemployment taxes paid to the IRS or to a state unemployment insurance fund or disability benefit fund if they’re considered taxes under state law
- excise taxes that are ordinary and necessary expenses of carrying on your business
- federal highway use taxes
In addition, state and local licenses and regulatory fees paid by your business are generally deductible, too. However, some licenses (liquor licenses for example) might have to be amortized and deducted over several years.
You can’t deduct every tax payment or licensing fee as a business expense, though. For instance, you can’t deduct:
- income taxes
- estate and gift taxes
- property taxes assessed to pay for improvements such as paving and sewers
- property taxes on your home or personal property
- sales taxes on property purchased for use in your business (these taxes are part of the cost of the property)
- fuel taxes on gasoline, diesel fuel, and other motor fuels you use in your business
- sales taxes imposed on a buyer that you were required to collect and pay
- other taxes and license fees not related to your business
Other business expense deductions
The deductible business expenses listed above can all save you money. But it’s not an all-inclusive list – there are other costs a self-employed person operating a sole proprietorship can deduct.
If you’re self-employed, here are a few more common costs you might be able to write-off:
- advertising
- bank fees
- commissions and fees
- contract labor
- depletion
- employee benefit programs
- legal and professional services
- pension and profit-sharing plans
- removing barriers to individuals with disabilities and the elderly
- repairs and maintenance
- research and experimentation
- trademarks or trade names
- utilities
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