5 Tax deduction tips for your side hustle or small business
To the relief of many small business owners, the 2020 federal tax deadlines were pushed back to July 15, 2020. This comes in response to the COVID-19 pandemic negatively impacting business revenues. As a result, it was decided back in March to extend the April 15th filing and payment deadlines to July.
For those gearing up for the July 15th deadline, there are some important tax deduction tips you should know in order to save money this year. Since many small business owners are having to tighten the purse strings, these money-saving deductions could be crucial to help you retain cash this year.
Here are five deductions that can lower your taxes.
1. Dedicated home office
If you have a home office that is primarily used for your business, you can take a tax deduction on it. However, it has to be a specific room. It can’t be a situation where you work on your living room couch a few hours a day or from bed with your laptop.
If your workspace meets the right criteria, then it’s a simple matter of figuring out the square footage of your home and dividing that by the square footage of your office. That is the percentage that can be deducted for expenses such as rent, utilities, insurance, etc.
2. Vehicle expenses
There are two ways to deduct if you use your vehicle as part of your business. The first takes into account your actual expenses for business driving. The key here is keeping meticulous records, especially if you also use your car, truck, or van for personal travel. The list of deductions includes your costs for vehicle registration fees, gas, insurance, repairs, and oil.
If careful record keeping isn’t one of your strong suits, consider taking the standard mileage deduction instead for business driving. It’s easy and straightforward. Keep in mind this rate changes every year, but calculating your deduction is a simple matter of multiplying your business miles by the rate for that year.
Are you a freelance copywriter who bought new office equipment, such as a laptop or printer? Did you buy supplies for your pet grooming side hustle? The good news is that supplies you buy for your business can be deducted as long as they are only used for business purposes.
4. Professional services
As a small startup, there’s probably a good chance you don’t have a team advising you. But that doesn’t mean you didn’t reach out for some professional help during the tax year. For example, did you hire an outside expert to help you expand your flower shop’s customer base? Did you pay someone to create your website? It’s always a good idea to check with a tax professional – whose services might also be deductible – but chances are that the payments you made toward professional services are tax deductible.
5. Estimated taxes
While all those deductions can help reduce your tax burden, failing to pay your estimated taxes is a good way to get penalized by the IRS. Those payments are generally due on the 15th of April, June, September, and January.
A good rule of thumb for how much to save for your federal and state taxes is 30 to 40 percent of your weekly business income. In other words, if you make $500 in a week, you should set aside $150-$200. It’s a lot, but if you overpay, you’ll get a refund at the end of the year – and that’s always a nice surprise. But just to hedge your bet, make sure you schedule an appointment with your tax expert.
Now that you know some of the tax deductions your business could qualify for, it’s time to start managing common business risks. Small business insurance can help protect you against the financial impact of a claim or a lawsuit.
And to learn what it takes to turn a side hustle into a small business, watch these videos of our customers as they describe their journey from side gig to full-time entrepreneur: Josh Crandal, Angela Yungk, and Claire Zovko.