Being your own boss has a lot of appeal. Goodbye 9-to-5 grind, incessant meetings and office politics. Hello independence and, yes, taxes.

Deductions for the self-employed There are tax advantages; some expenditures that were personal now might be allowable business deductions. And there are tax costs that, as an employee, you didn't think about.

• Equipment • Operating expenses • Home office • Health insurance • Social Security taxes • Retirement savings

If you operate as a sole proprietorship, taxes are not nearly as complicated as if the business were incorporated or set up as a partnership. Your business doesn't even have to be your primary source of income. If you decide to keep your full-time job but turn your love of photography into a side business, the tax considerations are the same. In either case, you'll be able to use your Social Security number as your business's tax identification number and the bulk of your tax filing can be done on Schedule C or C-EZ as part of your individual income taxes (either C form is an attachment to the long Form 1040).

Which form?
If your business is still quite small, Schedule C-EZ is the way to go. You may file this one if you ended the year with a profit, had no employees, don't claim home-office deductions, don't have any depreciation to report and had minimal business expenses. This brief form asks for your gross receipts, less your expenses, to arrive at your net profit. If you used your vehicle for business purposes, there's an information section the IRS requires you to complete. You then take your net profit amount and transfer it to your personal income tax Form 1040 and complete the rest of your return, and that's it.

If, however, your independent operation is more elaborate, you must use Schedule C. It, of course, asks for your gross income, but this longer form also requires more detail on your business expenses. If one of those expenses is use of a home office, you must also fill out Form 8829. Like the EZ, Schedule C has the business vehicle information section, plus a portion related to your inventory valuation method.

The key difference between the two forms is that it's possible with the Schedule C to have a loss rather than a profit. Once you get that final number, either plus or minus, then it is transferred to your 1040 and you complete your individual tax return as usual.

Taking the loss personally
If you had a great number of expenses and just couldn't turn a profit, it may hurt professionally, but it could be a tax blessing. Since your sole proprietorship income is reported on your personal Form 1040, any loss is subtracted from your total income, helping you reduce the amount of income that will be taxable. This business loss can help reduce your personal income taxes. Technically, all the IRS requires is an indication that you started your business with the intention of earning a profit. This intent is presumed by IRS if you net any income in any three out of five business years.

Since the IRS business profit motive test is subjective, you stand a better chance of surviving any tax questions if you conduct your business professionally. That's what matters, along with your training and background in the field, the amount of time you put into the venture, the operation's profit/loss history, your overall financial status and the "recreational" elements of the project. That doesn't mean you have to hate your own business, but you can't claim your hobby is your work. You may have escaped the restrictions of a traditional job and gone your own direction, but consider your audience.

Equipment costs and expenses
One of the major considerations for any business is how to pay for the equipment you need. Tax laws can ultimately make your life a bit easier when it comes to these expenses. Although you have to come up with the initial outlay to buy the computer and office furnishings, you may be able to deduct their entire cost the same year rather than depreciating the costs over several tax years. One thing to keep in mind, though: This deduction, called Section 179 expensing -- after the portion of the tax code where the law appears -- gives you an immediate benefit and greatly simplifies your bookkeeping. There is a limit to the amount of Section 179 expenses you can claim and the amount changes periodically; check IRS Publication 946 for the latest figures. Any amount you spend on business assets over the limit is depreciated normally.

Other operating costs can be deducted as part of your day-to-day expenses when you fill out Schedule C. To qualify as business deductions, your expenses must be connected with your business, necessary for its operation and paid for during the tax year.

As with other businesses, your travel (including mileage) and a percentage of meal and entertainment expenses also are deductible. The key to all these expenses is to keep the receipts and clearly note what the expenditures were for.