I have summarised the most important information about tax deductions for self employed contractors in this article today.
Why Learn About Tax Deductions For Self Employed Contractors?
Contractors are among the most heavily taxed under the Internal Revenue.
Despite that, there are many options inside the tax code that allow methods to minimize their tax as follows:
- Methods of Accounting: Contractors have more methods of accounting available to them than nearly any other taxpayer.
- A contractor can be eligible to use of the cash method, the accrual method, the modified accrual method, the completed contract method or the percentage of completion method.
- There are various regulations and rules that must be addressed relating to accounting methods, but if one qualifies for a favourable method, significant opportunities might present themselves.
Consult your tax advisor for a tax calculation to see how much money you could be saving.
Depreciation Methods since contractors are equipment intensive, use of bonus depreciation, accelerated depreciation, and treatment of idle equipment all can result in significant income tax and property tax savings.
Sales Tax a strong understanding of our states sales tax and use tax regulations can result in significant sales and use tax savings.
Tax Exemptions and Tax Credits
There are a number of sales tax exemptions available to contractors.
Consult your tax advisor as to how these exemptions or utilizing a leasing structure might save overall sales tax.
Tax Credits many contractors are eligible to state and federal tax credits.
Some common examples are:
- the research tax credit
- fuel tax credit
- and employment tax credits
As a result, understanding how tax credits work might be a major cash flow enhancement tool for you.
Contractors and Pension Plans:
The use of pension plans can lower prevailing wage costs significantly and save payroll taxes let alone income taxes.
When you contribute to a private pension plan this is tax deductible, so it’s a good idea if you don’t have an employee pension.
Exploring the use of fringe benefit plans may also accomplish comparable objectives.
Certain types of plans have higher deductions than others, but beware the requirements to fund might not be optional as is the situation with a profit sharing plan.
Home Construction and Residential:
For contractors there are exceptions incorporated in the tax code for residential contractors to escape some of the reach of the dreaded alternative minimum tax.
There are regulations that force the contractor to pay interest to the Internal revenue service on property jobs in progress which are more profitable than originally projected.
Claim Back Losses:
There are tax deductions for self employed contractors to carry back net operating losses.
During troubled times losses should be reviewed as cautiously as profits.
Under the tax code, a contractor should be eligible for carry back losses at least 2 years.
This could only be done by following the laws in the code to have a business purpose and support from a tax professional for doing this.
Personal Estate Tax:
As you grow your income and invest well you will build up an empire or fantastic estate.
It might seem far away now but it is a possibility for you and your loved ones.
When the time comes, gifting is a wonderful opportunity presented to taxpayers.
In that gifting will be far more tax effective in the future.
To explain, because of the latest recession, you might be capable to value your company at a much lower valuation than before and therefore make monetary gifts to lessen your estate taxes as well.
It gets technical so always get the calculations done for you first.
I hope that this helps you with tax deductions for self employed contractors.
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