An Entrepreneur’s Definitive Guide on 1099 Write-Offs
- Understanding what these deductions are will help companies save big bucks during the tax season. With that, they can maximize their company’s earnings and reinvest the money they saved back into their business.
- Certain business expenses such as mileage, business supplies, rent, health insurance, business insurance, and more are considered deductible by the IRS.
As a sole proprietor, self-employed individual, independent contractor, or owner of an LLC, the IRS 1099 Form is one of the most important documents you must submit during the tax season. However, understanding what goes into your write-off can be confusing even with the wealth of information available on the internet.
As an entrepreneur or independent contractor, you will be responsible for filing your taxes, including itemizing your business expenses for your 1099 write-off. Your 1099 write-offs will allow you to deduct thousands of dollars in your taxable income so that you can maximize your business’ potential earnings.
But before you do that, you must understand which business expenses are considered 1099 write-off. Not only will this help you save money, but it will help you avoid audits and penalties from the IRS.
With that said, here are the top 12 common expenses eligible as 1099 write-offs:
Home Office Expenses
Home offices can be expensive, especially if you’re still at the early stages of your business. However, you’d be glad to know that you can write off your expenses for your home office on your 1099. It doesn’t have to be a separate room. An area you converted into a working space would still be eligible for deduction.
The only stipulation for this is that you should use the space solely for work. That said, kitchen tables, center tables, or desks that your children use for their homework would not qualify as a 1099 deduction, even if you spend most of your time running your business from there.
When it comes to the amount of the deduction, home offices are usually calculated by square footage, and the IRS would sometimes audit this to confirm. With that, you should always come prepared. It’s best to have a blueprint of your home office or work area – complete with the dimensions and measurements – in case the IRS asks for some documentation to confirm. If you had any work or repairs done, do take note of that as well.
Moreover, if your home office space is inside your house, you can deduct a portion of the interest you pay for your mortgage from your 1099. Other than that, the depreciation value of your home, utilities, home insurance, and other repairs and renovations may also be deductible.
When calculating your deductions, you can apply the 10% rule wherein if your home office takes up 10% of your home, you can deduct the amount equivalent to 10% of your home mortgage, utilities, and other expenses from your taxable income.
You can also use the following methods in calculating your 1099 reductions:
- Detailing and itemizing all of your expenses (for your home office) plus their corresponding amount. You can then deduct the total amount of those expenses from your taxable income.
- Estimating the square footage of your home office and express it as a percentage of your home’s overall square footage. Multiply that figure by the total cost of your rent/mortgage and utility bills. The resulting number will be the amount you can deduct from your taxes.
- A simplified method would be calculating your deduction based on the square footage of your home office, up to 300 square feet. As a rule, each square foot is equivalent to $5.
Office and Work Supplies
Bond papers, photocopy machines, computers, teas, cups, chairs, desks, staplers, and other office supplies and equipment are also tax-deductible. Even if you’re just renting some of your equipment, the costs associated with that may also be listed as a 1099 write-off.
Equipment like computers and other special machines can be reported as depreciating assets if they have been used for more than a year. With that, you can deduct the depreciation value of that asset from your 1099. To claim that deduction, you’d have to fill out a separate form called the IRS 4563 Form.
If you’re an independent contractor and you’re using office supplies for both personal and professional purposes, it’s important to keep track of how much supply you use for work. This will be the amount that’s going to be deducted from your taxable income.
Remember that you’ll constantly be using these office supplies. While these may seem like a minor expense when you’re buying them, these costs can add up to a lot come tax time. So, it’s always wise to keep a record of these expenses as documentation.
Phone and Internet Costs
If you’re using your personal phone to conduct business, you can claim a 1099 deduction on the estimated percentage of the time you use your phone for business. However, if you have a separate phone for business, you can deduct 100% of your business phone’s costs on your 1099. The same rule applies to your internet bills.
Aside from the rent, you pay for your equipment and special machines, you can also deduct the monthly rent you pay for office space outside your home from your taxable income. Moreover, if you have to breach your rental contract and have to pay the fees associated with it, those will be partially deductible from your 1099 as well.
Mileage and Other Car Expenses
Independent contractors, sole proprietors, or freelancers usually get the most deduction from their car expenses and mileage. Generally, the tax-deductible amount for car mileage and expenses is calculated in one of two ways:
- By itemizing each car expenses, including the cost for gas, maintenance, repairs, car loan repayments, depreciation, etc.; or
- Applying a standard amount for every mileage.
Many usually go for the second option. Itemizing each of your car expenses can be tedious and time-consuming. Furthermore, the second method also results in a much higher tax-deductible amount. As of 2020, the mileage rate is $0.575 per mile.
Business-Related Travel Expenses
Whether you’re attending a conference or meeting a client from another state, the IRS will consider the travel expenses as tax-deductible. Just make sure that you can prove that the travel was, indeed, business-related.
However, some travels may be mixed with personal pleasure, so make sure that you track your personal and business expenses and separate them. Remember, only business-related expenses will be eligible for deduction.
That said, to prove that your travel is, indeed, business-related, you should have a specific business purpose planned before you fly to your destination. Moreover, make sure to keep your spending at a reasonable range, as the IRS may often zero in on large, questionable expenses.
So, what counts as a travel expense? Here are some of the business-related travel expenses eligible for deduction:
- Transportation (i.e., airfare, bus fares, or Uber/Lyft)
- Hotels, or lodging, in general
Both transportation and hotel stay are 100% tax-deductible, while meals are only 50% deductible.
Medical and Dental Costs
While the standard deduction for medical and dental costs in Schedule A may only be up to 7.5% of the taxpayer’s adjusted growth income (AGI), self-employed individuals may be able to get more.
If they don’t receive any assistance for their health insurance premiums from the state or their spouse, they may be able to deduct 100% of the cost of their health insurance from their taxable income for a specific year. Health insurance costs for a spouse or children under 27 years of age may also be eligible for deduction – regardless of whether they are listed as dependents or not on your taxes.
If you took out a business loan for your company, the interest you pay for that loan within that tax year might be eligible as a tax deduction. However, if you took out a personal loan, you can only deduct the interest corresponding to the portion of the loan you used for your business.
For example, if you applied for a $10,000 personal loan and used 50% of that towards business expenses, you can only deduct 50% of the interest you paid from your 1099.
To make itemizing easier, we highly recommend separating your personal and business expenses. For instance, you can apply for a separate credit card for your business expenses.
Any insurance obtained to protect your business from liabilities can be deducted from your 1099. This includes fire, flood, malpractice, errors, general liability, workers compensation, or omissions insurance. It is worth noting that this category doesn’t include the costs of your personal insurance or any auto insurance you pay – even if you use the car for business purposes.
There’s a wide range of advertising strategies for businesses. You could run Facebook ads, Google ads, websites, billboards, television commercials, radio guesting, or pass on business brochures on the street. Any costs associated with these can be deducted from your 1099. Promotional costs such as sponsoring an industry conference or any business events may also be considered a 1099 write-off.
It can be a great morale booster to treat your team now and then to a team dinner or buy coffee for your staff to keep them awake in the morning. While it may seem costly, you’ll be glad to know that you can write these coffee and business meal expenses off your 1099 during the tax season.
Moreover, if you treated a client for a meal or drink, you can also write the expenses off your 1099, as long as the meeting was business-related.
Conferences, training, conventions, and other forms of educational resources are sometimes necessary for the company’s growth. For instance, you may need to obtain additional certifications related to your industry to manage your company better. Or, you may need to send one or two of your employees to a 3-day training in another state to learn about a new technology that might be helpful to your company. Whether the educational costs were for the business owner or employees, the costs associated with it can be written off your 1099.
When it comes to tax deductions, documentation is very important for the IRS. That said, when you’re claiming for your 1099 write-off, be sure to back your expenses up with their corresponding receipts. Otherwise, the IRS might not recognize a business expense as tax-deductible.
Maximize Your Earnings and Take Advantage of These 1099 Write Offs
There is a lot of other deductible expense you can include on your 1099. The ones mentioned above are the most common 1099 write-offs people often overlook when filing for their taxes. Now that you have an idea of what they are, you can take advantage of the savings and reinvest it in your growing company.