In recent posts, I’ve discussed some of the ways that the American Recovery and Reinvestment Act (ARRA) will impact the American Taxpayer this year. In this post, I will focus specifically on the impact to the Self-Employed. I single out this group of Taxpayers because tax time can be especially stressful for the newly Self-Employed. There are many questions around allowable deductions, recordkeeping and self-employment tax. In this struggling economy, small businesses are looking for every extra penny. Now is the time to take advantage of these new provisions and deductions!
To begin, the ARRA provided that all businesses with average gross receipts of less than $15 million could elect to carry back net operation losses (NOL) for 2008 for 3, 4 or 5 years instead of the normal 2 years. The new act extends that option for taxpayers for an NOL incurred in 2009, but placed a 50% of taxable income limit on the NOL offsets in the fifth carry back year. For businesses that have seen better times, this may be a great way to help you weather the storm.
The mileage deduction is another huge opportunity for tax savings. Most taxpayers do a horrible job of logging their mileage for business purposes. A vehicle mileage record kept in your glove compartment could help save you thousands at tax time! For 2009, the standard mileage rate is 55 cents a mile. This number will drop to 50 cents per mile in 2010. Start keeping track of your daily mileage now!
Two other common deductions are for the home office and the adjustment for health care coverage. If you use an area of your home “regularly and exclusively for business”, a deduction may be allowable. To take the home office deduction, you will simply calculate the square footage of your office space and divide it by the total square footage of your home. You will use this percentage to calculate the allowable portion of your utilities, rent, mortgage interest, property tax, etc… Other expenses related directly to your home office will be fully deductible. This could include painting, repairs or any required build-out expenses. Additionally, small business owners who establish health insurance coverage under their business can take an adjustment to their income equal to 100% of the costs associated with the coverage for themselves and any family members.
Last but not least we need to discuss self-employment tax. The self-employment tax rate on your net earnings will be 15.3%. Because the self-employed do not pay into Social Security and Medicare through withholdings, the self employment tax is imposed to cover these taxes. Social Security makes up 12.4% of the total and Medicare accounts for the remaining 2.9%. If a small business expects to owe $1000 or more in self-employment taxes, quarterly estimated payments are required. Your Tax Preparer can help you estimate your tax liability and arrange for quarterly payments which are due April 15th, June 15th, September 15th and January 15th.
Most small business owners operate as Sole Proprietors and will complete the business portion of their tax return on Schedule C which will accompany their form 1040. Detailed instructions can be found on the IRS website.
Every effort has been taken to provide the most accurate and honest analysis of the tax information provided in this blog. Please use your discretion before making any decisions based on the information provided. This blog is not intended to be a substitute for seeking professional tax advice on your individual needs.