Almost everything a self-employed salesperson buys for his or her business is tax deductible as long as it is ordinary and necessary and the cost is reasonable. These deductions can really add up. For example, if you buy a $2,000 computer and use it for your sales business, you could deduct the full cost from your taxes. If you were in the 28% federal income tax bracket, this would save you $560 in income tax. In effect, you'd be getting a 28% discount on the computer. The catch is you must use the computer or other item you buy for the business. You can't deduct personal expenses.
Common tax deductions taken by salespeople include the following.
Car Deductions: The single most claimed tax deductions for all small businesses are car and truck expenses. The cost of all driving you do for your sales business, with the important exception of commuting to and from your home to work, is tax deductible. If you like recordkeeping, you can keep track of all your car expenses to figure your annual deduction. But, if you'd rather not keep track of how much you spend for gas, oil, repairs, car washes, and so forth, you can use the standard mileage rate. When you use the standard rate, you only need to keep track of how many miles you drive for business, not how much you spend on your car. To learn more, see Nolo's article on Using the Standard Mileage Rate to Deduct Business Driving Expenses.
Office Expenses: The amounts you spend on your business office are deductible business expenses. For example, you may deduct the rent and utilities you spend on an office. But, if you work at home, you may be able to deduct the cost of your home office. This deduction is particularly valuable if you are a renter because it enables you to deduct a portion of your monthly rent, a sizable expense that is ordinarily not deductible. To learn more, see Nolo's article on The Home Office Tax Deduction.
Business Travel: You may also deduct your expenses when you go out of town for your sales business. These include airfare or other transportation costs and hotel or other lodging expenses. But, you may only deduct 50% of the cost of meals when you travel on business. If you plan things right, you can even mix pleasure and business and still get a deduction. To learn more, see Nolo's Travel Deductions area.
Long-Term Property: Salespeople often purchase tangible personal property that lasts for more than one year—for example: computers and office furniture. The full cost of such property can usually be deducted in a single year using 100% bonus depreciation (in effect through 2022), Section 179 expensing, or the de minimis safe harbor (applicable to property that costs $2,500 or less). This enables you to get a big deduction in a single year rather than spreading it out over several years through annual depreciation deductions. For more information, see Section 179 Tax Deduction Limits and First-Year Bonus Depreciation.
Supplies: Supplies are business items that you use up in less than one year. They include everything from paperclips to postage stamps.
Legal and Professional Services: You can deduct fees that you pay to attorneys, accountants, consultants, and other professionals if the fees are paid for work related to your business.
Insurance: Insurance you buy just for your business is deductible—for example, business liability insurance or insurance for business property. If you have a home office, you may deduct a portion of your homeowners insurance. Self-employed people are also allowed to deduct 100% of their health insurance premiums from their income taxes.
Business clothing with logos: You can only deduct clothing you buy for business use if it can't be used for ordinary street wear. This means you can't deduct a regular business suit. However, you may deduct the cost of a sport jacket, coat, or other clothing item with a company logo on it.
Websites: You can deduct the cost of designing and maintaining a website you use for business. You can also deduct your Internet hosting fees and the cost of obtaining a domain name for your business.
Business gifts: Gifts you purchase for clients are deductible as a business expense--but the deduction is limited to $25 per person per year. However, the $25 limit applies only to gifts to individuals. It doesn't apply if you give a gift to an entire company, unless the gift was intended for a particular person or group of people within the company. These company-wide gifts are deductible in any amount, as long as the amount is reasonable. To learn more, see Nolo's article on Business Gifts Tax Deduction.
Telephone expenses: You get no deduction for the monthly charges for a single phone in your home, whether a land line or cell phone; but you may deduct extra costs for long distance phone calls and special phone services you use for your sales business such as call waiting or message center. You may deduct the full cost of a second phone you use for business, including a cell phone. If you use a second phone both for personal and business calls, you're required to document your business use.
Pass-Through Deduction: The vast majority of self-employed salespeople operate as pass-through businesses. A pass-through is any business in which the profits are taxed on the owner's individual tax return at his or her individual tax rates. Most salespeople are sole proprietors (a one-owner business in which the owner personally owns all the business assets); some have formed limited liability companies, S corporations, or are members of partnerships. The Tax Cuts and Jobs Act established a brand new deduction that allows owners of such pass-through businesses, including salespeople, to deduct an amount equal to up to 20% of their net income from the business. For example, if you earn $100,000 in profit from your sales business, and qualify for the pass-through deduction, you may deduct $20,000.
However, if total taxable income exceeds $315,000 for marrieds filing jointly, or $157,500 for singles, the deduction is wholly or partly limited to the greater of:
In addition, if working as a salesperson is viewed as a personal service business by the IRS (something that has yet to be determined), the deduction is gradually phased out for salespeople whose taxable income exceeds the $315,000/$157,500 thresholds. If sales is determined to be a personal service business, the deduction may not be taken at all by married filing jointly salespeople whose taxable income exceeds $415,000, or by singles with taxable income over $207,500.
This is a personal deduction salespeople can take on their returns whether or not they itemize. This deduction began on January 1, 2018 and is scheduled to last through December 31, 2025.
To learn more about making the most of your tax deductions, see Nolo's book Deduct It! by Stephen Fishman, J.D.