Tax Deductions

Taxes are your enemy, but tax deductions are your friends! The following article discusses tax deductions of every type, so you can have a go at reducing your tax liability.

Preparing and paying taxes is a bit like going into battle. The tax code is the battlefield and tax deductions are your weapons. Maximize their use and you can minimize the amount you have to pay the government.

Independent Contractor Tax Deductions

An independent contractor, rather than work for a single employer, works for many clients. Independent contractor tax deductions are the same as a small business.

The IRD uses the words like necessary and ordinary to determine which expenses are allowable as a deduction against income on your tax return. Necessary and ordinary can mean just about any expense that is incurred in the conduct of your business and is common to it. It does not have to be essential even, but it It does not have to be essential even, but it can not be lavish.

Among the common tax deductions for independent contractors would be the cost of a home office. In order to claim a portion of your home expenses as a legitimate business deduction, your home must be your principle place of business. If you maintain an office at home, but normally conduct your business at another location, the home office is a luxury and not an essential part of doing your business. If you meet or service clients at your home it is possible to claim a portion of your home expense as a deduction. This is usually done by calculating the square footage of the space devoted entirely to your business and comparing it to the total square footage of the home.

Another deduction common to independent contractors is for meals and entertainment. Again there are certain rules that apply to this deductionand you should speak with your bookeeper or accountant for best advice. It is necessary that business be conducted at the meal or event in order for it to qualify. In other words, you have to at least talk about business during the course of it. An event where talking would be impossible or difficult such as a theater would not qualify. If your entertainment expense is acceptable, only 50% of it is actually deductible.

Vehicle expense is another common tax deduction used by independent contractors. All mileage driven for business purposes is deductible. There are two ways this can be done. The IRD provides a standard per mile allowance each year or you can keep your actual expenses. The per mile allowance certainly reduces the need to keep all those gasoline receipts, but if a credit card is used for all business related purchases the record keeping is simplified. You can not deduct all of your automobile expense if you only own one automobile and use it for personal use. Even if you drive your “company” car home, that is considered commuting which is a personal use.  

Home Office Tax Expenses

Self-employed individuals often work out of their own home. If this is the case with you, here’s a few tips that are likely to save you money on home office tax expenses you can claim on your taxes.

New Zealand is a country built on small businesses. Yes, the big companies are the darlings of the media, but the guts of our economy are the little guys pursuing the New Zealand Dream from the extra bedroom. Fortunately, the tax code contains deductions tailored to help cut your tax bill.

When claiming home office tax expenses, it is important to keep a receipt for each and every amount you are claiming. When dealing with the IRS, receipts are your ammo. Keep them at all costs.

When maintaining a home office, taxpayers often wonder how they differentiate a business expense from a simply home expense. The key is the square footage. Simply divide the square footage of your office by the total square footage of the home. This number is typically represented by a percentage such as 20 percent. Put another way, the home office represents 20 percent of the square footage of the house. Once you have the above answer, you can multiply it by the total yearly amounts paid for rent or mortgage interest, insurance, maintenance, utilities, taxes, depreciation of the home and repairs. Each of these home office tax expenses figures can then be deducted.

In addition to the above, you can also deduct expenses completely related to the business. For instance, the purchase of a desk for the office is entirely attributable to the office and can be deducted in full.

There are some limitations to home office tax expenses. If you are reimbursed by an employer for various home office expenses, you cannot also claim those expenses as a tax deduction. Sorry, no double dipping.

For some time, there has been an urban myth that the Internal Revenue Service keeps a close eye on home-based businesses. This may have been true ten years ago, but is clearly not the case today. To this end, the IRS has actually come out and issued clear statements to the contrary. Do not fail to claim home office tax expenses because of a fear of an audit. It is simply not a rational fear!

Running a small business can be both stressful and incredibly gratifying. Make sure you claim home office tax expenses to help your cash flow.