As the sole proprietor, you’re basically in charge of your business. While considering the tax code, you as well as your own business are just one single entity. And, it entails the specific freedoms.
This is also helpful in creating the additional responsibilities. You would typically face the more taxes as well as the reporting requirements. Though, you might also be capable of the specific business-related tax deductions.
The Health Insurance Deduction
There are so many tax advantages. One of the major tax benefits of operating the sole proprietorship is that you could deduct a cost of your health insurance for just yourself, the spouse and the dependents. Hence, you could take the deduction even in case you do not itemize the deductions on the tax return.
A health insurance deduction is "above-the-line" deduction typically. It means that this is taken off the gross income before you actually reach the adjusted gross income. There are many other deductions as well. Other deductions that include the itemized deductions are basically "below-the-line" deductions.
The deduction is just limited by an amount of the taxable income. Hence in case you take the loss on the business. You could not just take a health insurance deduction. And, you also could not take the deduction for those months which you and your spouse are capable for the group health insurance with your employer.
The Business Expenses
Each and every business has some operating expenditures and the sole proprietorship is not different at all. As long as the expenditures are "ordinary as well as necessary," in the parlance of Internal Revenue Service. Then you might claim these on the tax returns. In addition to the health insurance, typical deductions include the equipment, meals, charitable contributions, capital assets, entertainment, and travel.
In case you are running the business out of the home then you might make a claim for your home office deductions. Certain daily routine expenditures, just like the rent as well as the utilities, could be deductible. But, you should use this portion of the home exclusively for the business.
The Self-Employment Tax
In case you are running your own business then you are actually responsible for the self-employment taxes along with the regular income tax. The self-employment taxes are typically equal to Social Security and Medicare taxes which all of the employers as well as the workers need to pay in any case.
While you are working for some employer then you just pay for the portion of taxes for your employee. And thus your employer actually pays for the other part. Just like the sole proprietor, you are actually required to give both the portion of the employer and the portion of the employee. You are generally permitted in order to take the tax deductions for half of the self-employment taxes too.
The Records and Audits
There is the IRS. It basically tends to take a quite close look at the tax returns. These tax returns are filed through the sole proprietors as this might be quite easy for blurring a line between the business as well as the personal expenditures. Even though, the business and the personal tax returns are typically combined together. Hence the IRS is very much good for the accuracy.
So, The IRS still expects you for keeping the accurate as well as the distinct business records. In case you are going to deduct the complete price of the computer, for instance, the IRS might want to see the records in order to prove that a computer is actually used for just different business purposes. And this computer is not used for any type of other purposes that are irrelevant to the particular business purposes.
In case your expenditures are more than your income then you might expect the additional IRS scrutiny, especially in case you have not turned the profit in at least 3 of the most current 5 years. You must not be afraid in order to take the deduction that you are in general legitimately entitled to, but it is necessary that you need to be sure in keeping the detailed records to assist the claims, especially your home office deduction.
