Deducting Expenses When You're Self-Employed

The #1 key to being able to deduct any expense - business or otherwise - is documenting it. In the daily course of my business it is shocking how many business owners, even the smart ones, skip over this critical step.

Self-employed individuals typically can deduct any ordinary, necessary, and substantiated expense that is directly related to the conduct of their business. The only exceptions are items that the IRS prohibits, such as haircuts, personal clothing, and wristwatches.

Jeff Reeves over at USA Today had a good article over the weekend on items that are commonly deductible for self-employed individuals. Here's a few:

- Travel expenses. Business travel is pretty expensive and it adds up. In addition to the IRS standard mileage rate for use of your personal vehicle for business purposes (at 57.5 cents per mile for 2015, a really favorable rate considering what's happened to gas and oil prices recently), you can also deduct any airfare, lodging, and meals and entertainment so long as you're at least a night's stay away from your primary residence. The trick is that you need to be travelling primarily for business purposes - I often have to disappoint the hopeful business owner that travel to Orlando with the family isn't deductible just because he used the business credit card.

- Education & professional dues. Expenses need to be related to your primary field of work, but absolutely any classes, books, periodicals, or conferences (again including travel expenses) can and are commonly deductible.

- Home office. Need to be careful with this one, as the real trick is finding and IRS-approved way to separate your personal space from your business space. The method I usually use is to take the total square footage of a client's home, use that in the denominator against the square footage of the office space, and then add up all of the expenses related to the upkeep of the residence. There is a special form (8879) for this, and a new safe-harbor method of calculating the deduction that went into effect last year.

- My fees. I prepare a lot of tax returns for clients - that is certainly a business expense. We usually need to separate a portion of the fee for business & then tax work, but for anyone filing Form 1065 or 1120 & 1120-S, most professional fees - including mine - are deductible as a business expense.

More from Jeff here:

Don't overlook these 7 top tax breaks for the self-employed