When you’re self-employed, the line between personal and business can get a little blurry. Sometimes, even with your separate business and personal finances, you find there are some personal tax deductions with business implications. Additionally, there might be times when you spend your own money on business-related items, even if you work for someone else.
We’re here to help clarify some of those types of expenses that are personal, but have some relevance to the health of your business. Some of the deductions you can’t claim on Schedule C may be claimable as personal deductions on Schedule A. There are some important facts and situations to keep in mind, however, which we’ll discuss later.
First, let’s start with “above-the-line” deductions, which you can make from the get-go on IRS Form 1040.
“Above-the-Line” Business Deductions
Before you itemize, check to see if some of your expenses are eligible for an “above-the-line” deduction. These are deductions reported in the “Adjusted Gross Income” (AGI) section on the first page of Form 1040. Some may require an additional form. Nonetheless, they include:
- Out-of-pocket educator expenses
- Business expenses if you are a performing artist, fee-basis government official or reservist (Form 2106)
- Self-employment tax (Schedule SE)
- Contributions made to a self-employed SEP, SIMPLE or other qualified plans
- Amount you pay for health insurance when self-employed
Because these are personal expenses you might encounter in your area of work, you don’t need to itemize these deductions to claim them. They reduce your AGI, so you pay a lower tax. Once you’ve figured out your AGI, it’s time to reduce it further through deductions.
Standard Deduction vs. Itemizing With Schedule A
After you figure out your adjusted gross income, Line 40 offers you two choices to lower it through deductions. You can either claim individual personal deductions—what’s known as “itemizing”—on Schedule A, or you can claim the standard deduction for your filing status. Since you can’t claim both, it’s up to you to determine which one gives you the greatest deduction amount.
This is where it’s critically important to see which one works best for you. For example, let’s say you’re single, and you have expenses that include a home mortgage interest deduction of $2,000, allowable medical expense deductions of $700 and unreimbursed meal expenses of $650. That’s an itemized deduction total of $3,350. That sounds like a nice deduction amount, but it’s lower than the standard deduction of $6,300.
For quick reference, here are the standard deduction rates for 2015:
- Single or Married Filing Separately: $6,300
- Married Filing Jointly or Qualified Widower: $12,600
- Head of Household: $9,250
In that example, it makes more sense to stick with the standard deduction. But if your expenses total more than your allowed standard deduction, then itemizing can be worth your time. With that in mind, let’s check out some common business-related personal deductions.
Schedule A Personal Deductions Related to Business
The first steps are keeping good records, maintaining separation between business and personal transactions, and defending claims for tax deductions if the IRS requests documentation of expenses. Next, see if any of the following apply to you.
Medical and Dental Expenses
If you are self-employed, or if your employer doesn’t provide a healthcare plan, you might pay out of pocket for some of your medical and dental expenses. You can deduct the portion of your costs that exceeds 10% of your AGI. For example, if your AGI is $45,000, you will use $4,500 to establish the base. Any amount beyond that base is tax-deductible. Sticking with that example, if you spent $5,700 on unreimbursed, out-of-pocket medical and dental costs, your deduction amount is $1,200.
Using Your Home as a Rental Property
If you rent out a portion of your owner-occupied home for less than 15 days a year, you can still use Schedule A to deduct your mortgage interest (Lines 10 and 11), property taxes (Line 6), and casualty and theft losses (Line 20, with Form 4684) related to it. If you occasionally rent out your home, or a portion of your home, to receive extra income, you’re still eligible for a deduction on Schedule A, as long as you don’t rent for more than 14 days.
If you do rent out a portion of your home for more than 14 days, however, things become less simple, and require additional schedules.
Employee-Related Job Expenses and Miscellaneous Deductions
This one is for those that work a W-2-earning job alongside their regular self-employed work. If you use your own money for business purposes and aren’t reimbursed by your employer, there are some items you can claim on Schedule A. These include job education, union dues, travel and other expenses that aren’t reimbursed by your company. Other expenses you can report include:
- Parking fees and tolls
- Train and bus fares
- A portion of meals and entertainment for business purposes
- Vehicle expenses
If you have someone prepare your taxes, you can also deduct that on Schedule A as a business owner.
This section also includes expenses like the cost of a safe deposit box and investments. If you pursue these deductions, remember that you can only claim a deduction for the amount above 2% of your AGI. For example, if your AGI is $45,000, you can only claim the amount in excess of $900. Based on that example, if you spent $1,500 on these items, you can deduct $600.
Remember: Keep Separate Records
Even though this seems a mix of personal and business, there’s a difference between the deductions you take from your self-employed income and those you take as a normal taxpayer. Because of this, it’s critically important to keep separate records. The methods by which you earn extra income or participate in your business can result in an audit if you don’t pay attention.
Whether it’s a personal or business expense, it pays to keep track of your records. Just remember to put them in their respective places when tax time rolls around.
Want more self-employed deduction information? We’re just getting started. Check out our list of common deductions for ridesharers, consultants, general contractors and cleaning professionals. You can also learn more about the home office deduction, as well as find answers to the most commonly asked self-employed tax questions.