When you operate your business as a sole proprietorship, you don't create a separate legal entity like you would if you set up a partnership or corporation. It's just you, running your own business, being personally responsible for its success or failure as well as its debts and taxes. When you operate as a sole proprietor you have access to some tax deductions that you wouldn't otherwise get to take.
Maintaining an office in your home for your sole proprietorship lets you deduct expenses that are typically not deductible for individual taxpayers. For example, you can deduct a share of your utility bills, homeowner's or renter's insurance and maintenance costs proportional to the amount of space in your home dedicated to your office. You can take the home office deduction whether your rent or own your home. If you own your home you can also take depreciation on a portion of your home as a capital asset.
Self-Employed Health Insurance
If you don't have access to another subsidized health insurance plan, such as your spouse's health insurance plan from her job, you can write off the health insurance premiums you pay for yourself, your spouse, your dependents and your children who are under age 27, even if they are not your dependents. Unlike other self-employed business expenses, which are reported on Schedule C, you report your self-employed health insurance deduction as an adjustment to income on Line 29 of Form 1040.
Vehicles and Mileage
If you use your vehicle for business purposes, you can't afford to not take a tax deduction for business use of your car. The IRS lets you choose between claiming either actual expenses or the standard mileage rate, which was 55.5 cents per mile as of January 1, 2012. If you use your vehicle 100 percent for business, you can write off 100 percent of your expenses. If you use your car for both business and personal purposes, you can still deduct that portion that you used for business.
Fees and Interest
Bank account fees and charges are not typically deductible for your personal account, but you can deduct bank charges and fees on accounts you used to operate your business. You can deduct fees the bank charges for accepting and processing credit cards. While only mortgage interest is deductible for individual taxpayers, you can deduct the interest on your business credit cards and other business-related loans.
- Bank of America: Commonly Missed Deductions
- IRS: Form 1040
- Washington Post: Tax Time: Small Business Tax Advice
- IRS: Like Share Print IRS Announces 2012 Standard Mileage Rates, Most Rates Are the Same as in July
- IRS: Publication 334, Tax Guide for Small Business
- IRS: Work From Home? Consider the Home Office Deduction
Mike Parker is a full-time writer, publisher and independent businessman. His background includes a career as an investments broker with such NYSE member firms as Edward Jones & Company, AG Edwards & Sons and Dean Witter. He helped launch DiscoverCard as one of the company's first merchant sales reps.