If you’re like Rick, working a W-2 job with a salary of $45,000 while also running a small business, you might wonder how to save on taxes. Luckily, Sm, Rick’s tax expert friend, has shared some helpful tips for maximizing deductions and increasing his refund. Let’s look at the strategies Sm suggests to Rick.
1. Deducting Business Expenses
As a small business owner, Rick can deduct many business expenses. Sm reminds him to focus on “ordinary and necessary” expenses as defined by the IRS.
– Supplies and Equipment: Rick can deduct costs for ingredients, office supplies, and kitchen equipment. Larger items, like an oven with a useful life over a year, might need to be depreciated, but using Section 179 allows him to deduct the full cost in the first year if he chooses.
– Advertising and Marketing: Rick’s expenses for online ads, menu printing, and website hosting are all deductible.
– Professional Fees: If Rick hires an accountant or lawyer for his business, these fees are deductible too.
– Rent or Lease Payments: Since Rick rents his kitchen space, he can deduct his monthly rent as a business expense.
Example: Rick spent $2,500 on rent, $1,200 on advertising, and $3,000 on kitchen supplies last year. By deducting these costs, he lowers the income that he’s taxed on, saving money overall.
2. Home Office Deduction
Rick sometimes works from home for tasks like menu planning. Sm explains that Rick can take a home office deduction if part of his home is used exclusively and regularly for business purposes.
– Simplified Method: $5 per square foot of home office space, up to 300 square feet, for a maximum deduction of $1,500.
– Regular Method: Rick can also choose to calculate a percentage of home expenses, like rent, mortgage interest, and utilities, based on the size of his office space.
Example: Rick’s home office is 100 square feet. With the simplified method, he can deduct $500 for the year (100 sq ft x $5).
3. Vehicle Expenses
Rick uses his car to pick up supplies and make deliveries. Sm tells him he can deduct his car expenses either by using the standard mileage rate or by calculating actual expenses for business use.
– Standard Mileage Rate: In 2023, it’s 65.5 cents per mile for business purposes, so Rick should track his miles to maximize this deduction.
– Actual Expenses: If Rick prefers, he can track his actual expenses for gas, maintenance, insurance, and depreciation, deducting the percentage that relates to business use.
Example: Rick drove 1,000 miles for business. By using the standard mileage rate, he can deduct $655 for his business driving.
4. Self-Employed Health Insurance Deduction
Since Rick is self-employed and pays for his own health insurance, Sm reminds him that he may be able to deduct premiums for himself, his spouse, and his dependents. This deduction is available if Rick isn’t eligible for health coverage through his W-2 employer.
To discover more about taxes, read Understanding Tax Credits for Single Mothers: A Comprehensive Guide
5. Retirement Contributions
Sm suggests that Rick look into retirement plans for self-employed individuals, like a SEP IRA or Solo 401(k). These accounts let Rick save for retirement while lowering his taxable income.
– SEP IRA: Rick can contribute up to 25% of his business income, with a maximum of $66,000 for 2023.
– Solo 401(k): Since Rick has no employees, he can contribute both as an “employee” and “employer,” which allows him to save more than with a traditional IRA.
6. Qualified Business Income (QBI) Deduction
Since Rick’s restaurant is a pass-through business, Sm tells him he may qualify for the QBI deduction, which lets eligible business owners deduct up to 20% of their business income. For single filers, the deduction starts to phase out if taxable income exceeds $182,100 in 2023.
7. Self-Employment Tax Deduction
Because Rick is self-employed, he pays a 15.3% self-employment tax (covering Social Security and Medicare). Unlike his W-2 job where the employer pays half of these taxes, Rick pays the entire amount. However, Sm reminds him that he can deduct half of this tax from his income, lowering his tax burden.
Example: If Rick’s self-employment tax comes out to $3,000, he can deduct $1,500.
To discover more about taxes, read Top 5 Tax Filing Software Options: Which One is Right for You?
8. Education and Training
Rick often takes cooking classes to improve his skills. Sm explains that if these courses relate directly to his restaurant business, he may be able to deduct the cost, as the IRS allows deductions for business-related education expenses.
9. Maximizing Itemized Deductions on the Personal Side
Rick’s itemized deductions need to exceed the standard deduction ($13,850 for single filers in 2023) for it to be worth it. Sm suggests considering:
– Charitable Contributions: Donations to qualified charities, either in cash or non-cash, may be deductible.
– Mortgage Interest: If Rick owns a home, he can deduct mortgage interest paid, up to IRS limits.
– State and Local Taxes (SALT): Rick can deduct up to $10,000 for combined state income and property taxes.
To discover more about taxes, read The Pros and Cons of Using Tax Filing Software vs. Hiring a Professional