IRS Tax Treatment

• Under IRS tax codes, self-employed individuals are considered sole proprietors whether or not they conduct business under an established business name or simply file business taxes using Schedule C of Form 1040 under a personal Social Security number. In addition, an unincorporated business with one owner meets the IRS's definition of sole proprietorship. Sole proprietorships, regardless of the line of business, generally require supplies and equipment to operate. For example, a plumber may need special tools for the trade, a telephone for customer contact, an office area to maintain records, and a mode of transportation to get to and from jobs. Under IRS regulations, all or parts of these necessities are tax deductible.
  
  

Transportation Costs

• Sole proprietors who use a motor vehicle in operating their businesses can deduct transportation expenses. Either the standard federal mileage rate or the actual costs of operating the vehicle can be deducted. If actual costs are calculated to determine the deduction, receipts for gasoline, oil, maintenance, tolls and other operating expenses may be included.
  
  

Business Use of the Home

• A self-employed American taxpayer with no separate established place of business may be able to deduct home-office expenses. If the taxpayer's residence qualifies as the business's principal location, deductions may include a portion of utility bills, mortgage interest and maintenance costs. In addition, if a section of the home stores necessary supplies or products used exclusively in the business, this aspect of the business may be tax deductible, too.
  
  

Supplies, Equipment and Services

• Contract labor costs are tax-deductible for a sole proprietorship, specifically charges for hiring someone to perform services the business requires. Normal expenses, such as accountant or attorney fees, may also be claimed as tax deductions. Supplies and equipment for the normal day-to-day operation of a business are tax deductible, as are tools of the trade.
  
  

Employee Benefits

• A self-employed individual, classified as a sole proprietor under the IRS tax code, may be able to deduct the cost of health insurance premiums he pays for himself, a spouse and dependents. In addition, the IRS recognizes retirement plans for sole proprietors. According to the IRS, "a sole proprietor is treated as both employer and an employee." Therefore, the agency permits sole proprietors to claim a deduction for contributions to personal retirement plans, such as a Simplified Employee Pension (SEP).