Hey guys.
Today I'm going to talk about the top five deductions that you will receive
as a business owner that you can't receive as an employee.
The first one I'm going to talk about is what's called the qualified business
income deduction.
And this was new starting in 2018.
and essentially what this is, is it's
a free 20% deduction right off the top for qualifying income.
And qualifying income generally includes income
that you'll earn through an LLC and as a corporation
or the sole proprietor filed on your individual income taxes.
Now, there are limitations and there is certain income
and types of businesses that don't qualify for this.
for the most part, most businesses qualify,
including most rental real estate.
only real rental real estate that doesn't typically
qualify is like triple net leases.
Those won't qualify, but as long as you're managing a property
or you're paying someone to manage a property and the landlord
has obligations, it's not just the tenant that's taking
care of everything for you and you're just sitting back and collecting a check.
Then it probably qualifies for this deduction.
So that can be make a pretty big difference.
And I can go into more detail
in another video to talk about some of the limitations
and how to take advantage of and maximize this deduction.
the second deduction that you can get as a business owner but
not as an employee is auto expenses.
So as an employee, when you commute from your home
to the office, you don't get any deduction for that.
You also don't get any deductions.
If you go and visit a client or something, you have to rely on being reimbursed
from your employer if you want to make up that cost
because employee expenses are no longer allowed.
Ever since the 2018 Tax Cuts and Jobs Act.
So you don't get that as an employee, but as a business owner,
you actually have a couple options when it comes to auto expenses.
First, you can either take the standard mileage rate,
which is 65 and a half cents a mile for 2023.
Now, keep in mind, this does not include commuting
from your home to your main place of business,
but it would include visiting clients or doing other things.
When you go from your office, some offsite location and back to your office
or doing longer travel for business, you could take auto deductions for that.
So that can make a pretty big difference and help subsidize the cost
of your vehicle.
alternatively, a lot of times actual expenses,
which is the second method for auto expenses, may end up higher.
And this is where you actually calculate depreciation on the vehicle.
So you take the cost and you can depreciate it.
And most vehicles these days will also qualify
for what's called bonus depreciation, which means you may be able to write off
a significant part
of the vehicle or all of it, depending on the year and circumstances.
So not only do you get depreciation for it, though,
you can include all of your other expenses.
So if you pay if you have a loan on it and you have interest expense,
you can take that your gas,
your insurance, your registration costs, any maintenance that you're paying.
You add all of that up at the end of the year
and then you figure out your business use percentage.
Your business use percentage is the total amount of business miles
you drove for the year divided by your total miles overall,
including commuting and personal miles, as well as business miles.
figure out that percentage.
So, for example, if you drove
5000 business miles and your total miles on the vehicle
for the year was 10,000, then that would be a 50% business use.
And let's just say that your auto expenses were 4000 for the year
while you would take 4000 times 50%, which was your business use,
and you'd take a deduction of $2,000 for the cost of your vehicle
during the year so that you only receive if you are a business owner,
you're not going to get that as an employee. third deduction
that you receive as a business owner is the Home Office deduction.
And this is when you have a dedicated space in your home
that you use only for business.
And there's two methods that you can use for this.
Also kind of similar to auto expenses.
you can ever do the simplified method, which is where you figure out
the square footage of your dedicated space.
Or if you use a separate room, you figure out the square footage
and you take a $5 deduction per square
foot up to 300 square feet.
So this maxes out at 1500 dollars.
And you take that as a deduction for the for your home office.
And this is meant to include essentially the cost of maintaining that space,
whether it's the mortgage
you're having to pay, the rent, your having to pay utilities
and things like that that are applicable to that business use portion.
Alternatively, you can use the regular method
and the regular method a lot of times might actually give you
a bigger deduction, but it requires you to keep more documentation
and do a little bit more math.
So if with the regular method similar to auto expenses,
you would figure out all your costs associated with the home.
So you would calculate depreciation on the house
and just take the square footage for the office that you're using.
So if you say I had a 300 square foot office
and you had a 3000 square foot home,
basically 10% of the depreciation
on the home, you'd be able to actually deduct for your home office.
And then you'll figure out all your utilities, your Internet,
any maintenance costs that apply to the entire home.
Like if you had to do some roof work that incorporated
the entire square footage, then you take your portion of that.
So you figure all your expenses
and you multiply it by the percentage of space in the home
that is used for an office compared to your total square footage.
there's a lot more that is required of you, but oftentimes that's
going to result in a bigger deduction than the simplified method.
The fourth deduction that you receive as a self-employed
person is health insurance deductions.
So typically, as an employee, if you have medical expenses,
whether that's health insurance or maybe it's doctor's visits, things
like that, you have to take those deductions,
what we call below the line, which means it's an itemized deductions.
And what that means is essentially that it's subject to a lot of limitations,
which I won't get into specifically, but most of the time
they end up getting disallowed unless you have incredibly high medical expenses.
Most of the time
you're not receiving any benefits from those expenses as an employee.
However, as a self-employed individual, you get to consider
your health insurance essentially as a business expense.
So you get now a above the line deduction.
You get a specific deduction
that's allowed for self-employed individuals for your health insurance.
And the last item that you receive as a deduction, as a self-employed person
that you don't as an employee is any type of supplies or equipment
that maybe your employer wouldn't reimburse you for, the exception
being for teachers, they do get a small amount
that they can write off, but not not enough to really make a difference.
But as a self-employed individual, let's say
you needed a electronic notepad
or or iPad or something like that
to take notes or maybe to do email on.
But your employer wanted
reimbursed it to you
because they've already given you a computer or something else.
Well, if you're self-employed, you can buy that iPad,
and if it's used for business, then you can take a deduction for it.
So as you can see from these five deductions, the IRS
definitely favors self-employed, over
employed individuals and incentivizes people to start businesses.
you're thinking about starting a business, talk with your CPA
and figure out if any of these deductions or any others apply to you.
the other strategy that can become important here is it
is possible to be employed and also start a side hustle or another business.
And as long as you truly have an intent for generating income
and you treat it like a business, then you could actually
take some of those deductions and still use them
even though you're employed because it's a separate business.
Now, there are other considerations, so you'll definitely want to look out
for other potential pitfalls like job loss rules
or other potential increases for audit rates.
And you'll want to make sure that you have great records.
point is that there are a lot of benefits for self-employed
that you're not going to get as a employee.
So I hope you found that useful.
And I'll see you guys in the next video.