Self-employed workers get breaks that border on lavish. For 2003 they can deduct all of their health-insurance premiums and as much as $100,000 in new equipment, including that new SUV they think they need to make deliveries and visit suppliers. They can set up their own 401(k) accounts, feed them with tax-deductible contributions as high as $40,000 a year and then borrow back their own money. They can hire their kid to help, shifting income to Junior’s lower tax bracket and offering him some benefits. They can deduct a portion of their heating bills, home-mortgage payments and Internet hookup for their home offices. Then there’s the tools of the trade. If you paint pictures for profit, you can deduct your oils, brushes, studio space and a spring trip to that art show in Paris you’ve been dying to see.
Of course there’s a rub. You’ll have to pay double the Social Security and Medicare taxes you would pay as an employee. And you have to act like a business and try to get profitable, says Martin Nissenbaum of Ernst & Young. If you never make any money, the IRS may disallow your business and all those deductions. In recent years the U.S. Tax Court has been pretty lenient in allowing write-offs for businesses that attempt to be profitable, even if they don’t always succeed. To prove that you’re legit, act it. Keep separate business accounts and clean books, work diligently and market aggressively. Who knows? It might just take off. And there are worse things in the world than paying taxes on income you made having fun.
