Independent contractors have more tax deductions compared to employees. For a business expense to be considered as a deductible, there are three conditions under the law. First, it must be directly connected to your business or trade. Second, it must be ordinary, meaning it is accepted and customary in your business and third, it must also be necessary or helpful and appropriate but necessarily essential or indispensable. The business expense must not also be extravagant or lavish.
Aside from these three basic rules, there are also related tax deduction limits to business-related home office, meals and entertainment, business gifts and automobile expenses.
For the home office expenses, these are actually liberalized only in 1999. Until now, these expenses are just deductible to the extent of the net income. It is just for the part of the home which is exclusively used on the basis as the principal place of your business and a place used for meeting customers or clients.
When entertainment expenses are concerned and these include business meals, tax will be deducted if they are directly related to the active conduct of business for this is the prime purpose of this entertainment. Also, they must be associated to the business. This means that this entertainment follows or directly precedes the business discussion.
There are no allowed deductions for entertainment facilities such as hunting lodges, yachts, tennis courts, swimming pools or bowling alleys. If you are an independent contractor who were able to meet all these tests, only 50% is deductible of the business entertainment.
For the business gifts, gifts which are up to $25 annually per recipient are the ones deductible. If the gift is not over $4 with your name embossed, it cannot be considered as a gift.
Clothing, on the other hand, is not deductible, unless there is an affixed permanent logo. Automobile expenses are also deductible if they are attributed directly to the business conduct but with some exceptions. Other tax deductions include publications and dues, business property repairs and extra first year depreciation.
These tax deductions are all the responsibility of an independent contractor. However, they will be pointless if you will not keep a record of them.