5. Take Advantage of Educational Tax Credits

These credits can be useful for enhancing your hard skills and growing your business while lowering the amount of taxes you owe.

Have you been looking into growing your skill set as a means to enhance your business? Would taking a relevant class or earning a degree help further your business interests?

You might consider these options because doing so could earn you some valuable education tax credits.

The American Opportunity Credit can save you up to $2,500 in taxes for the education expenses paid toward a degree to improve your competencies. To qualify, the student must pursue a degree at a school which is eligible to participate in the federal student aid program.This credit is only available to students in their first four years of attendance and they must be enrolled at least half time for one academic period during the tax year. This restriction makes it a less-likely candidate for a self-employed individual to use.

can save you up to $2,500 in taxes for the education expenses paid toward a degree to improve your competencies. To qualify, the student must pursue a degree at a school which is eligible to participate in the federal student aid program.This credit is only available to students in their first four years of attendance and they must be enrolled at least half time for one academic period during the tax year. This restriction makes it a less-likely candidate for a self-employed individual to use. The Lifetime Learning Credit is available to all taxpayers who attend at least one course during the year at an institution eligible to participate in the federal student aid program.This tax credit likely appeals to more self-employed individuals because they do not need to be enrolled in a degree or certification program in order to qualify. In fact, the student only needs to attend one course during the tax year.The credit covers the cost of tuition and fees plus any books and supplies required for the coursework when purchased directly from the school. The maximum benefit of the credit is $2,000 and is not refundable if it exceeds your tax bill for the year.

Also, you can look into whether you qualify for the earned income tax credit, which is a refundable credit for low- to moderate income workers. The credit has higher income thresholds and payouts if married and have children. One other credit to consider, which is non-refundable, is the solar energy investment tax credit if you purchased and installed any solar equipment on your property.

6. Home Office Tax Deduction

While the most complicated self-employment tax deduction on this list, this can be a major tax deduction to consider each year.

Tax reform in 2018 changed the treatment of home office expenses for W-2 employees (but not 1099 contractors) by removing their ability to deduct expenses against their taxable income. However, self-employed individuals retained this benefit and may still deduct qualified home office expenses from their taxable income.

Any expense a self-employed person pays related to a home office used regularly and exclusively for their business, regardless of whether the space is rented or owned, can count as a tax write off.

However, this is an area where you will need to be careful because it is at your discretion how you allocate these expenses if they are toward a space used for both personal and professional use.

In this situation, you operate under the honor system and as a result, you may need to be conservative with your claims. Anything egregious could draw the attention of the IRS.

As a tip when calculating the allocation of these expenses toward your home office expense, you can prepare a diagram which shows the work space relative to the size of the home. Be sure to use accurate measurements because the IRS will demand specifics if they push back on your claims.

Drawing this diagram will allow you to deduct the percentage this home office space represents of your home. Further, you will need to report the square feet to substantiate your home office tax deduction.

As an example, if your home is 3,000 square feet and your home office is 300 square feet, you may include 300/3,000 (10%) of the expenses as tax deductions.

The expenses you may deduct for your home office are:

any expenses necessary to sustain your home office including the business percentage of deductible mortgage interest

applicable home depreciation (check MACRS depreciation table )

) homeowner’s insurance

home maintenance

property taxes

utilities

Beginning in 2013, and continued under tax reform in 2018, there are two methods for calculating your home office deduction: the standard method and the simplified method. Unlike other elections in the tax code, you do not need to use the same method each year.

The standard method requires you to calculate your total home office expenses each year and use this amount as your tax deduction.

The simplified method allows you to multiply $5 per square foot of home used for your business with a maximum allowed amount of 300 square feet. This method might also be the better choice if you don’t have time to accumulate all of your qualified home office expenses.

However, these rates can vary by year depending on the IRS’s wishes and might not be as rewarding as the standard method. The decision is yours about whether you prefer one method to the other.

To know if you’re getting the biggest deduction, you will need to calculate your deductions using both methods.

Of note, the simplified option does not change the criteria for who may claim a home office tax deduction. Rather, it merely simplifies the calculation and record keeping requirements of the allowable deduction.

7. Utility Expenses Eligible for Self-Employment Tax Deductions

Utility expenses needed to sustain your business can be deducted from your taxable income.

Self-employment tax deductions also include expenses related to services needed to sustain your business. These expenses must be ordinary and necessary in order to qualify as self-employment tax deductions.

Items such as phone plans, utility bills (e.g., trash, water, electric and gas), and internet subscriptions all can be deducted for the portion used to run the business.

However, if these utility bills also serve your personal use, much like the home office tax deduction, you will need to use your best judgment on how much of each can be allocated to your business.

Some instances will be clear cut such as if you have a second cell phone plan solely dedicated to your business. In this case, you will be able to deduct 100% of that expense from your taxable income.

On the other hand, if you have a cell phone which is used for both business and personal use, you will need to identify the split between your use in each area.

8. Interest Paid on Business Loans

Interest expense paid on a loan taken out to fund your business qualifies as a self-employment tax deduction.

If you took out a business loan to fund operations, add capital to your business, or buy another business and filed Form 8594, you can deduct the associated interest expense from your taxable income. Sometimes the only way to grow a business is by financing the necessary investment with debt.

The interest expense associated with many types of debt can qualify for this tax deduction. While ill-advised if you can find other cheaper forms of funding, you may use a credit card to finance your business.

The interest expense incurred for use of this form of debt may be deducted against your taxable income.

On the other end of the spectrum, you might find yourself taking on or offering a “below-market” loan. For lenders who provide funds at interest rates below-market, they may face imputed interest challenges.

For background, the federal government expects loans offered to charge at least a minimum level of interest. Otherwise these favorable terms could be seen as a way to dodge taxes on additional compensation, large gifts, dividends, or other taxable payments.

These minimums are set by the government and are called the Applicable Federal Rate, or AFR. Each month, the IRS publishes a list of current Applicable Federal Rates which reflect the current market interest rate environment.

If, for example, the current AFR is 2% on a 5-year loan and a lender extends a 5-year loan at no interest, or something below 2%, the lender will deal with imputed interest on the below-market loan.

The IRS assumes you collect interest at least at a rate commensurate with the AFR. If not, the IRS requires you to impute the costs in line with the AFR.

Imagine a scenario with an applicable 2% AFR and where your business loans $10,000 at 0.25% interest for 5-years to a friend or other business. Under your loan terms, the borrower would only pay you $25 per year in interest.

Under the AFR, you were expected to receive interest of $200 ($10,000 * 2%). The imputed interest you would need to pay tax on is $175 ($200 – $25). A rate below inflation isn’t likely to be offered in the market.

Be aware of this as you deal with lending or borrowing money and the implications you could face regarding market interest rates.

9. Self-Employment Health Insurance Deduction

If you meet certain criteria, you may deduct personal health insurance premiums as a self-employed person.

Healthcare is a cost of life in America. Fortunately, if you meet the criteria listed below, you may deduct the costs of your personal health insurance premiums.

Your business claims a profit. If your business claims a loss on your tax return, you are ineligible for this deduction.

If you are self-employed but are also an employee of another company with health insurance benefits, you cannot take a self-employment health insurance deduction. In order to deduct personal health insurance expenses, neither you nor your spouse may have insurance offered to you through another job.

If you qualified to enroll in an employer’s plan only during part of the year, you can claim a tax deduction for premiums paid in the months you were ineligible for your employer’s health plan.

As a further note with respect to insurance, life insurance premiums generally cannot be deducted against your taxable income, even as a self-employed person or small business owner.

In some instances, you may have the ability to deduct life insurance premiums if you pay them as part of an employee benefit.