Top 10 Tips for Tax Credits for Sole Proprietors

December 17, 2023

As a sole proprietor, you're not only the captain of your own ship but also the one responsible for navigating the complex waters of taxes. Taxes might not be the most exciting aspect of entrepreneurship, but they are crucial to your business's financial health. 

But it’s not all doom and gloom because there are tax credits available for self-employed people like you that can help you keep more of your hard-earned money. In this blog post, we'll explore the top 10 tips for tax credits that can benefit sole proprietors like yourself. We'll guide you through the tax credit landscape and even introduce you to a powerful tool that can make the process smoother than ever. Ready? Let’s dive in!

Let’s Recap: What is a Tax Credit?

A tax credit is essentially a deal our government offers taxpayers to motivate certain actions or help out specific folks, including solo entrepreneurs.  For sole proprietors, it's like a direct discount on your tax bill, letting you keep more of your money to invest in your business or your next big adventure. 

While it might sound the same, it’s important to know that tax credits are different from tax refunds. A refund is what you get when you've overpaid your tax bill, giving the government a 0% interest loan that gets repaid when you file your taxes. 

But a tax credit? It's like a coupon for your taxes – it slashes your bill upfront, putting more dough in your pocket right from the start. So, be sure to check out available tax credits because they're your secret weapon for saving some serious cash!

Tip 1: Understand Your Business Structure

First things first, to take full advantage of tax credits, you must have a clear understanding of your business structure.

As a sole proprietor, your business income is treated as personal income, making you eligible for various credits and deductions, and different credits may apply to different types of businesses and industries. Make sure you're aware of the tax credits available to your specific business and meet the necessary criteria. So, before you delve into the specifics of tax credits, ensure you've got a solid grasp of how your company operates.

Tip 2: Keep Meticulous Records

It's crucial to keep accurate and organized records of all your business expenses, income, and receipts. This will make it easier to track your deductible expenses and determine your eligibility for tax credits. So, invest in a reliable bookkeeping system or consider using accounting software to simplify the process.

Tip 3: Understand Deductible Business Expenses

As a sole proprietor, you can deduct certain business expenses from your taxable income. These may include:

  • Office Supplies
  • Travel Expenses
  • Advertising Costs
  • Your Home Office

Make sure to consult with a tax professional or refer to the IRS guidelines to ensure you're claiming the proper deductions.

Tip 4: Look for the Self-Employment Tax Deduction

As a sole proprietor, you're responsible for both the employer and employee portions of Social Security and Medicare taxes, which typically ends up being ~35% of your yearly income. That’s the bad news.

However, you can deduct the employer portion when calculating your adjusted gross income, helping to reduce your overall tax liability. That’s the good news!

Tip 5: Consider Making Retirement Plan Contributions

One of the benefits of being a sole proprietor is the flexibility to choose your retirement plan. Contributions to a tax-advantaged retirement account like a Simplified Employee Pension (SEP) IRA or a solo 401(k) can provide tax deductions while helping you secure your financial future.  Depending on the plan you choose, you may be eligible for a deduction on your contributions.

Tip 6: Keep Track of Your Health Insurance Premiums

If you pay for your own health insurance directly or through a state marketplace, those premiums may be tax-deductible and can provide substantial relief in managing your tax liabilities. Keep records of all health insurance payments, including those for your family, because they may also be eligible for a deduction.

Tip 7: Take Advantage of Section 179

Section 179 of the IRS tax code is like a little gift for sole proprietors. It's all about helping small businesses (including the self-employed and sole proprietors) save on taxes by allowing you to deduct the cost of certain qualifying assets, such as equipment, vehicles, and office furniture, in the year you buy them rather than spreading the deduction over several years. 

Tip 8: Consider Taking the Section 199A Deduction

Section 199A of the 2017 Tax Cuts and Jobs Act is a real game-changer for sole proprietors. In a nutshell, it allows you to deduct up to 20% of your qualified business income, which means you get to keep more of your earnings and pay less in taxes.

Tip 9: Apply for the Family First Coronavirus Response Act (FFCRA) Credits

One of the most significant recent developments is the Families First Coronavirus Response Act (FFCRA), which extends benefits to self-employed individuals who were affected by COVID-19 restrictions that are usually only offered to W2 employees. Eligible applicants can get up to $32,220 back, making it one of the most valuable tax credits for solopreneurs to date!

But you’re busy running a business; we get it. That’s why we recommend using Adesso360, the first-ever platform that simplifies the filing process for sole proprietors to receive the maximum FFCRA benefits possible. It's like having a personal assistant/CPA/tax expert all rolled into one, ensuring you get the money you deserve. Click to see how much you can get with our 3-minute pre-qualification quiz. 

Tip 10:  Leverage Business Losses

In some cases, your business may experience a loss in a given year. It happens, and while it might be frustrating, the government can help ease your burden a little. 

While no one likes to take a loss, the good news is that you can use them to offset your taxable income from other sources. This is known as a “net operating loss” (NOL) and can provide significant tax savings that help you bounce back from a bad year. 

The Bottom Line

As a sole proprietor, there are so many opportunities out there to reduce your tax liability and keep more of your hard-earned money. The key to successful tax credit utilization lies in understanding your business, maintaining accurate records, and being aware of the credits and deductions available to you.

While navigating these tax credits may seem overwhelming, tools like Adesso360 can simplify the process and help you access the FFCRA credits with ease. Remember, you don't have to go it alone; resources are available to guide you through the complex world of tax credits and ensure your financial success. So, take these tips to heart, and start putting your money back where it belongs – in your business and your future.

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