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Special Tax Deductions for Sole Proprietorships


November 5, 2021

Businesses that are owned by a single individual are known as sole proprietorships. If you are the only business owner of your business, you are a sole proprietor. This simplicity translates over to tax planning and preparation. Sole proprietorship taxes are typically less complicated than other forms of business entities, such as C-corporations, S-corporations, and limited liability companies (LLC’s). But as straight up as small business sole proprietor taxes may appear, there are some special tax deductions that are commonly overlooked. Such deductions can greatly reduce small business tax liability.

Continue reading to learn the top special tax deductions for sole proprietorships, including where to begin your sole proprietor tax returns in Indiana.

Sole Proprietor Cash Activity and Taxable Income

It is safe to say that the majority of the cash activity happening within your business will be deemed taxable by the IRS. However, there are some types of cash activity that can positively impact your small business taxes. We are talking about specialized tax deductions for sole proprietorships. The most common include tax deductions for self-employment tax, gas mileage, health insurance, and home offices.

Self-Employment Tax

In a traditional employee-employer relationship, the employer is responsible for paying half of the employee’s Social Security and Medicare taxes, while the remainder is withheld from the employee’s paycheck. But as a sole proprietor, you are the business’s only employee, which means you are responsible for 100% of these taxes. Such taxes are known as self-employment taxes. The good news is, 50% of self-employment taxes are deductible. Currently, self-employment tax rates are set at 15.3% of your net self-employment income. You would report these taxes on a special form known as a Schedule SE.

Business Gas Mileage

There is a specialized sole proprietorship tax deduction known as a business mileage deduction. In order to qualify for this deduction, you must use your vehicle for business purposes, plus be able to provide proof of commercial use of your vehicle in the case that you are ever audited by the IRS. There are plenty of business apps that can record your mileage accurately. You don’t even have to be an actual sole proprietor to qualify for a business mileage tax deduction. Talk to your trusted business CPA in Indiana to learn the scope of your small business tax deduction eligibility. As of 2020, the business mileage deduction rate is set at 57.5 cents per mile. This could change at any time.

Health Insurance

Health insurance premiums are a commonly overlooked specialized sole proprietorship tax deduction. In order to qualify for the health insurance premium tax deduction, you simply must have active and good-standing health insurance coverage for yourself. Such tax deductions are known as “above the line” deductions” because they can be deducted before computing your adjusted gross income.

Home Offices

A home office tax deduction is arguably one of the most overlooked or passed up specialized tax deduction for sole proprietors, mostly due to an inaccurate industry stigma. Many business owners wrongly assume that claiming a home office tax deduction will be viewed by the IRS as a red flag, thus subjecting them to potential tax return audit. But the chances of this happening are very rare.

If you run your business out of your home, the home office tax deduction can significantly reduce your tax liability as a sole proprietor, so it should always be taken advantage of when possible. Keep in mind that you can only claim the percentage of square footage used for business purposes within your home as a home office tax induction.

Are you looking for trusted and reliable business tax planning preparation services near you? Contact Aspire CPA at (317) 469-4500, or email our office at acct@aspirecpas.com, and speak with a licensed Certified Public Accountant to learn how our business accounting and tax services in Indianapolis, Indiana can help you take your success to the next level.

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