On the other hand, even though there is some cash activity in your business that doesn’t affect your taxable income as a sole proprietor, there is also some non-cash activity that can lower your taxable income. These activities might not show up on your profit and loss statement, though. So, when it comes to your sole proprietorship taxes, you should be aware of these unique business tax deductions, which are frequently overlooked, as they can significantly reduce your tax bill. Read more to find about proprietor income tax return.
Health insurance deduction
A lot of sole proprietors are unaware that they can deduct health insurance premiums for themselves and their families even if they do not itemize their taxes. Your health insurance premiums are eligible for an “above the line” deduction if you are a sole proprietor, which means that you can deduct them before calculating your adjusted gross income. However, keep in mind that this only applies to the monthly premium for months in which you, your spouse, or any other members of your family are not covered by a group insurance plan.
Despite the fact that sole proprietorships are not excluded from the business mileage deduction, sole proprietors frequently overlook it, believing it to be insignificant. However, at 57.5 cents per mile (in 2020), this deduction can significantly reduce your tax bill if you drive for business. You will, however, need to keep meticulous mileage records in order to qualify for this deduction. Fortunately, a number of business apps are available to assist with this process.
Home office deduction
A lot of sole proprietors are hesitant to claim the home office deduction because they have been told that it is a red flag and increases the likelihood that their return will be audited. However, you are eligible for this deduction if you operate a home-based business, and it can significantly reduce your tax bill. However, you should keep in mind that you can only deduct expenses for the portion of your home that you use for your business with this deduction. Also, your home office must only be used for business, so you can’t take this deduction if your “office” is a corner of your kitchen table.
As an employee, your employer is responsible for paying half of your social security and Medicare taxes; the other half is taken out of your pay. However, as a sole proprietor, you are liable for paying all of these taxes. The current self-employment tax rate is 15.3% of your net self-employment income, and these taxes are referred to as self-employment taxes. Having said that, you can deduct 50% of your self-employment taxes. A specific form, Schedule SE, is used to report these particular sole proprietorship taxes, which we’ll go over in greater detail below.
We recommend consulting an expert in accounting if you want to ensure that you get the most out of your sole proprietorship tax deductions. Bench’s accounting software lets users pair up with a seasoned bookkeeper who will take care of all of their tax filing needs.