What Deductions Can I Claim as a Sole Proprietor? Do Sole Proprietors Pay More Taxes?
Health Savings Accounts (HSAs)
HSAs allow tax-favored contributions to accounts used to pay or reimburse qualified medical expenses of individuals covered only by a high deductible health plan (HDHP). Contributions are tax-deductible if made directly by the taxpayer, or excluded from income if paid by an employer.
Earnings in HSAs are not taxable, and distributions used to pay qualified medical expenses are not included in income. Amounts in an HSA carry over from year to year. Distributions not used to pay qualified medical expenses are subject to income tax and a 20% penalty tax. Exception: The penalty tax does not apply to distributions after the account beneficiary reaches age 65, becomes disabled or dies.
Note: When an individual enrolls in Medicare, contributions may not be made to an HSA.
Employing Family Members
Payroll taxes can significantly reduce business profitability. Paying wages to a family member can be an effective payroll tax reduction strategy for a taxpayer who owns a business.
Family Employees—Employment Tax Treatment
Meals, Entertainment and Travel
Providing entertainment to a client, customer or employee can qualify for a tax deduction. Entertainment activities can include the cost of meals (food, beverage, tax, tip). Expenses for transportation, meals and lodging may be deductible for business travel away from the taxpayer’s tax home. The following checklist summarizes the deduction rules.
Meals, Entertainment and Travel Expenses Deductibility Checklist
Hobby Losses
Losses sustained in an activity classified as a hobby are not deductible. To preserve for-profit status, a proprietor should conduct the activity in a businesslike manner. The following suggestions can help keep losses tax deductible.
- Keep thorough and businesslike books.
- Use a separate business checking account and debit and credit cards.
- Record business and personal use of assets in a log book.
- Research market/technology trends of similar businesses. • Consult with reputable advisors in the field.
- Obtain the insurance, registration, certification, proper license, etc., customarily needed for the type of business.
- Maintain a separate telephone listing.
- Make periodic operations changes to improve the profit-making ability of the business.