deducting business expenses for self employment/ SEP vs. SIMPLE IRA
I lost my job in 2023, but finally got paid severance in 2024 and former employer will issue a W2. I started a consultancy in 2024 and earned $24K from the same employer who will issue me a 1099. Can I deduct all business expenses from my consulting company? client meetings/meals, travel, education to prepare me to launch my business?
Also, I wanted to create a SEP or SIMPLE IRA since I didn't have any contributions from an employer this year. I also wanted to be able to deduct more expenses so I wouldn't have to pay so much self employment tax on my 1099 income. If I have significant expenses for setting up my business, is it possible to even out and not pay much on the 1099 income? Any help would be appreciated.
Best Answers
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You should be able to deduct many expenses of the consulting company which should offset much of the 1099 income. Our program has a section which allows you to list out the the various expenses in an an organized manner with information most lines with responses to frequently asked questions.
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I think that it would be prudent to set up SEP or SIMPLE IRA if you're anticipating the business being profitable. The main reason behind that is because of the Self-Employment Tax which is about 15.6% of income. That's a self-employed persons covering the employee and employer share of Social Security Taxes that are incurred in a traditional employment situation.
You may find the following link to the IRS page useful.
https://www.irs.gov/retirement-plans/self-employed-individuals-calculating-your-own-retirement-plan-contribution-and-deduction.
I don't know why the $20K coaching program would not be deductible.
I'm not sure what you response that you may have received as far as deducting the $150K loss but that would generally be reported in the investment section.
IRS Publication 547 covers Casualties and Thefts.
https://www.irs.gov/pub/irs-pdf/p547.pdf
It would probably be reported as a non-business bad debt or a capital loss, given that there are now restrictions on the reporting of Casualties and Thefts.
Answers
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Thankyou John. And do you have thoughts on whether I should open an SEP or SIMPLE IRA to house additional funds? I don't really have extra funds right now after falling victim to a huge cryptocurrency investment scam (i posted another question here about how to deduct that $150K+ loss). If I can deduct all of my business expenses to not pay taxes on the $24K 1099 income, then I won't bother to open another retirement account. I enrolled in an executive leadership coaching program to position better to launch my consulting business. It's a year long program that cost $20K. Will I be able to deduct that too? They tell me that I should be able to.
Thanks. And if you have thoughts on my big scammed loss and how to deduct it, I would appreciate an answer there too since you are looking at this.
Beach lover
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Hello,
Expenses that are incurred prior to launching your business are called "Startup Costs". You may deduct up to $5,000 of start-up cost as a Miscellaneous or Other Business expense. If you have more than $5,000 of start-up costs, then you must capitalize (create an intangible asset) and amortize the balance over a period of 180 months (15 years).
I recommend speaking with a retirement administrator about setting up an SEP or SIMPLE IRA. The SEP has very large limits (25% of net profits).
To deduct the maximum amount of business expense, keep track of all your costs. You can also deduct Home Office, travel, auto expense and certain utilities (cell phone).
Again, when it come to expenses used to set up your business those are startup costs and have rules. See this IRS tax tip for startup costs.
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Thank you Matthew. And if I joined the executive coaching program AFTER I started my business to become better skilled at finding clients and strengthening my network and learning tips on how to manage a consulting business, would that be a regular business expense where I could deduct the whole $20K or still only $5000 this year?
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Hi Beachlover,
Yes, that's correct. Expenses you incur after your business begins are deducted in that year as expenses. They're no longer start-up costs.
