Tax Write-offs for Sole Proprietors
Business owners who run sole proprietorships pay taxes on business earnings on their personal income tax returns. A sole proprietor is considered the same entity as his business for tax purposes, so a proprietor can use personal tax write-offs like charitable contributions, real estate taxes and mortgage interest to reduce taxable income. Sole proprietors are also eligible for a variety of business-related tax deductions.
Sole proprietors are self-employed business owners, which means they aren't subject to income tax withholding from an employer. Instead, self-employed workers are responsible for sending income taxes and self-employment taxes to the Internal Revenue Service on a quarterly basis. Self-employment taxes go toward funding Social Security and Medicare; sole proprietors pay 10.4 percent for Social Security on the first $110,100 of business income and 2.9 percent for Medicare with no upper limit in 2012. One-half of self-employment taxes are tax deductible on income tax returns.
Self-employed workers can potentially open several types of retirement and other financial accounts that offer tax deductible contributions. For example, contributions made to a traditional individual retirement account are tax deductible for workers who are not covered by an employer-offered retirement plan. Contributions made to self-employment pension plans and health savings accounts are also tax deductible. A health savings account is a type of financial account that lets people with high deductible health insurance plans save money to pay for medical expenses.
The cost of operating a home office is a tax deductible business expense if the office is the primary place of business and used exclusively for business purposes. An owner that uses a room as an office some of the time, but also uses it for entertainment and recreation cannot deduct home office expenses. Deductible home office expenses include the cost of utilities, repairs, office supplies and furniture.
The cost of operating a vehicle for business purposes is tax deductible. Business purposes include driving to visit clients, driving to meetings away from a main office and driving to secondary workplaces. The cost of commuting to a primary workplace isn't tax deductible. A business owner can deduct the actual cost of operating a car for business purposes or take a deduction based on the number of miles driven for business. According to the IRS, the mileage deduction equals 55.5 cents per mile for business miles driven in 2012.
Costs related to traveling away from your home for business purposes counts as a tax write-off for business owners. Examples of deductible travel costs include hotels, airfare, local transportation, laundry services and tips. Deductions for meals while traveling for business are generally limited to 50 percent of the cost of a meal. Personal travel expenses like staying in a location longer than is necessary for a business trip and engaging sightseeing and other tourist activities are not deductible.