The bad news about being a solopreneur is you don’t have an accounting or bookkeeping department to track your expenses, income, and other financial details. You have to do it all yourself, even if you hire an accountant to do your tax prep at the end of the year.
The good news is solopreneurship puts you in a position to write off many of your day-to-day expenses. Missing out on them is money left on the table, so get familiar with our six favorites and come out further in the black this coming year.
Tax Deductions Solopreneurs Must Know About
1. Cell Phone
Unless you have a cell phone for personal use and one for business use, you can’t write off your entire cell phone bill as a business expense. But that doesn’t mean you shouldn’t write off some of it. Think of all the things you do with your cell phone daily or weekly that serve your business:
- Post social media promotions
- Make and receive business calls
- Make and receive business texts
- Check and send business emails
- Use business-related productivity apps
- Buy supplies
- Participate in classes
- Listen to educational podcasts
The list goes on and on. The trick is coming up with a justifiable percentage of the bill to write off as business-related. We recommend tracking your phone use for a week – some apps do this for you, like Kidgy or mSpy – and then assigning each action to a “personal” or “business” column. Work out the percentage and apply it to the rest of the year.
Everything you learn, read, see, or hear that makes you better at what you do counts as an education expense. Your online and in-person courses and certification count. So does the Patreon you’re backing for the best podcast about your industry. So do audiobooks, trade journals, news subscriptions, and probably 80% to 90% of the books you buy.
Be honest about how much this education is related to your solopreneur business. If you make tea cozies for an Etsy shop, a class and a book about sewing counts. A weekend knitting workshop would probably count – if you offered knitted cozies or could document that you planned to in the future. That painting class you took with your spouse? Not so much.
No, you can’t write off holiday gifts to your family or that jewelry you got your spouse for Valentine’s Day. But you do get to deduct gifts you get for people related to your business. Some examples include:
- Thank-you notes to colleagues, clients, and friends who refer new customers to you
- Welcome gifts and packages for new clients (like a copy of an appropriate book)
- Special-occasion gifts (including holiday gifts) to business associates, clients, colleagues, and employees
- “Good job” gifts for subcontractors or other helpers (like a subscription to a for-pay podcast)
Keep in mind you can only deduct $25 per person per year in gifts. That doesn’t mean you can’t give a $50 gift, just that if you do, you can only deduct the first $25 of its value.
4. Home Office
This is one of the most complex and valuable deductibles available to solopreneurs, but it comes with some pretty hefty qualifiers. The IRS defines a home office as a place you use “exclusive and regularly as your principal place of business.” Let’s look at each of these terms in turn.
“Exclusive” means you use the space for business and only for business. If you convert your garage into a counseling studio or set aside a bedroom for your home office, it counts. Using the family computer in the living room after the kids go to bed does not make your living room a home office.
“Regular” means you use it for business on an ongoing basis. If you use your oldest kid’s room as a home office while she’s away for college, but it’s hers during breaks, that’s not regular enough. But a garden shed that stores all of your inventory throughout the year qualifies.
If your home office space qualifies, you get to write off a whole list of expenses. First, you get to write off 100% of the decor, equipment, furniture, repairs, and supplies for that space. It’s exclusively for your business, so it all counts.
Second, you get to write off a portion of your mortgage or rent, homeowners or renters insurance, and utility costs. That portion is proportional to the size of the space. Here’s how to calculate it:
- Find out the square footage of your home. You can usually look this up on your latest property tax statement.
- Measure the square footage of your home office space (add together multiple spaces that aren’t contiguous).
- Divide the office square footage by the home square footage to find the percentage of your home dedicated to business use.
That percentage is the percentage of your home costs you can apply to your home office. It’s best to get an accountant to check your work here. This is a tricky deduction, and it’s easy to make expensive mistakes with it.
Market research can be costly, but it’s important and deductible. Anything you buy to get a better sense of what’s going on in your industry, you can write off. That includes:
- Market reports
- Subscriptions for specialty magazines and websites
- Competitor’s products
- Books and courses about your industry
These are similar to education, and some of your purchases might apply to both categories. The main difference is education is about knowing your industry, while research is about understanding the competition or the market for creating new products.
Either way, deduct away.
As a solopreneur, you are responsible for your own retirement plans. It can be complicated, but some plans, like a SEP IRA or SIMPLE IRA, set enormous maximums on what you can save out of pre-tax earnings.
Having a plan in place can significantly reduce your tax burden each quarter. But this is another area where you should seek the advice of an accountant or financial planner to set up your plan.
If you have a cash surplus at the end of the fiscal year, you’re also allowed to make lump-sum contributions to your retirement accounts. It’s an excellent way to reduce your taxable income, which can be especially helpful if an unexpectedly good season skews your predicted revenues.
It’s also smart to install an expense-tracking app on your phone. BizXpenseTracker, Expensify, and Smart Receipts are three of the most widely recommended. These let you do basic expense management by merely taking a photo of receipts, then processing them quickly every few weeks. They will make every single one of the above deductions easier to calculate and prove.
This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. 1-800Accountant assumes no liability for actions taken in reliance upon the information contained herein.