6 Ways to Maximize Tax Deductions for Entrepreneurs and Solopreneurs

With higher-than-normal inflation still eating into household budgets, an increasing number of Americans are trying to supplement their primary income. As per a MarketWatch study,  in the past 12 months, over half of working Americans picked up a side hustle with Gen Z workers leading the charge.  While making more money means paying more taxes, entrepreneurs/solopreneurs can keep more money for themselves if they know how to maximize their tax deductions.

1. Home Office Deduction

The cost of any workspace used regularly and exclusively for a business can be deducted as a home office expense for people running a side gig. The expenses include the business percentage of rent, deductible mortgage interest, utilities, homeowners insurance, and repairs made during the tax year. Furthermore, 15% of the annual electricity bill can also become tax deductible if the home office occupies 15% of the home, as per Investopedia. 

2. Car Use and Mileage

While, most entrepreneurs know that they can write off mileage for business-related they don’t always know that driving to the post office, and even a gas station can count as business miles. As per the GoBankingRates report, mileage is reimbursed at 67 cents per mile. However, if business owners have over 50% use of their car for the business, they can claim depreciation, loan interests, maintenance costs, and more as their business costs. 

3. Professional Licenses and Fees

Those whose side gigs require a professional license or registration can write off the cost of setup and renewal fees for these.  In some cases, business owners may also be able to write off credit card interest, and legal and accounting fees. It is always better to check with a tax professional to seek out all such deductions.

4. Health Insurance Costs

Health insurance is another deduction that business owners can take. Those who don’t get health insurance from their employer can buy it through their side gig, and under Section 199A, qualified business income (QBI), they can claim a deduction of 20% on their taxable income. However, the taxable income must be under $191,950 and $383,900 for single and married individuals, before complicated rules apply.

5. Retirement Plans

Contributing to a retirement plan is one of the best ways to lower taxable income for business owners, without reducing their actual money. The one-participant 401(k) plan allows business owners to defer as much as $66,000 (for 2023) if they are under 50. 

Other plans such as the Simplified Employee Pension plan (SEP) can help defer up to 25% of the net earnings or $66,000. The Savings Incentive Match Plan for Employees (SIMPLE) IRA plan is also a great option for small business owners with 100 or fewer employees, as per Investopedia. 

The SIMPLE IRAs can be funded by both employer and employee, helping them to reduce their taxable income.

6. Use the Promotional Deduction

A promotional deduction is an unusual deduction, Hughes mentioned in the GoBankingRates report.

This deduction is a special tax concession given for the advertising or marketing dollars spent on a charity that has promoted the business or side gig.