As the old adage goes, “Work smarter, not harder”.
Before increasing your workload, make sure you’ve maximized your income by keeping track of your deductible expenses – to lower your taxes.
Many freelancers like you know about common tax deductions like business travel and meals, but there are many other deductions,often overlooked, that can save you $100’s this tax season..
Our friends at Hurdlr put together a list of 17 tax deductions for freelancers that you can potentially use. Check them out below! For a more extensive list of freelancer deductions and to learn more about your finances, visit 99deductions.com
Education and Training
If you take classes or training courses to further your professional education, you may be eligible to deduct your tuition, related course materials, and certain travel costs. There are a number of requirements you must meet to be able to deduct your education expenses (see our diagram). However, the most important points for sole proprietors to take note of are that your training and education cannot qualify you for a different trade or business; they cannot be for the purpose of meeting minimum educational requirements; and they must maintain or improve the skills required in your field. Sole proprietors can deduct qualifying education expenses on their Schedule C or E. Employees may be eligible to deduct unreimbursed training and education expenses on their Schedule A, subject to the 2% limit.
Sarah Gomez has a masters in English and has been a freelance writer for the past 6 years. Her articles and books are targeted towards a younger demographic, so she regularly participates in training courses to stay current on how to communicate with young readers. She spends approximately $1,900 every year on these courses, all of which would be deductible on her Schedule C, since these courses improve the skills required in her business.
Software and Online Service Subscription
Many entrepreneurs subscribe to online services or purchase software to support project management, accounting, and marketing activities, to name a few. Microsoft Office, Hurdlr, Podio, ZenDesk, Contactually, and Adobe CS all could be considered software or online service subscriptions. Since these platforms are often critical to operations, they are generally fully deductible.
Mrs. Oyster is a speaker and author who writes and talks about politics and the economy. She recently purchased a computer that came with Microsoft Office already installed. Rather than deduct the cost of Microsoft Office, Mrs. Oyster would include it as part of her basis in the computer and depreciate the software cost along with the computer. If Mrs. Oyster had instead purchased her Microsoft Office package as an add on, she would depreciate the software over 36 months, since the software has a useful life of more than one year.
Conventions, Seminars, and Trade Shows
Many entrepreneurs regularly attend industry trade shows, conferences and seminars both near and far to support their businesses. These events allow business owners an opportunity to network with other entrepreneurs, vendors, and industry leaders, not to mention stay on top of the latest technology and innovation in their respective fields. Often times these events have a high price tag, but it is important to remember that if the event you attend serves a legitimate purpose, its cost may be deductible come tax time.
Jolly is a professional speaker and an author who writes books for parents on child care. Jolly makes sure to attend at least two different seminars each year to promote her books and stay on top of the the most current parenting strategies. Last year, she spent a total of $1,750 on conference registration fees, all of which will be deductible on line 27a of her Schedule C when she prepares her taxes.
Commissions paid by your business to employees, real estate agents, and contractors, to name a few, are generally fully deductible business expenses that no entrepreneur should overlook. Depending on your business, commissions can quickly add up and end up being one of your largest deductions.
Donovan is an author who just finished writing a science fiction book on UFOs. He has contracted with an agent who will help him supply his books to a chain of bookstores nationwide. As per Donovan’s agreement with his agent, he will pay her a fixed fee of $15,000. When Donovan files his taxes at the end of the year, the fixed fee will be deductible as a contractor expense on line 11 of his Schedule C. Donovan would only consider this fee or a portion of this fee a commission if it were variable based on the number of books his agent sells.
Being a successful entrepreneur often times requires that you participate in some extracurricular activities to help further your business goals. If you are a sole proprietor or business owner, professional or otherwise, and you incur costs throughout the year to be part of a trade group, professional organization, business league, public service organization, board, etc., these could all be considered deductible business expenses.
Ross Rubin is an English teacher who moonlights as a freelance writer on nights and weekends. For the past five years since starting his business, Ross has deducted his annual $70 dues for his Association of Writers and Writing Programs (AWP) membership. Since this organization provides him access to guides, community events, and ideas, it is a key component of his business operations and is fully deductible.
You may be eligible to deduct the portion of your home expenses related to your business through the home office deduction. However, there are a few things you need to know: Your home office needs to be used exclusively for business. This means your couch, exercise room, and kitchen table don’t count. Your home office needs to be a fully dedicated work space. Further, it needs to be used regularly for management and administrative functions. Use our diagram to help you determine if you would qualify for this deduction. If you are allowed to take the home office deduction, you can take it in two ways: simplified and regular (see below for details).
Penn is a freelance journalist who writes for a number of reputable publications. Penn has an office available to him at the headquarters of one of the publications he works for. He also works from home and from the coffee shop around the corner. Generally, as long as Penn considers the area he works from in his home as his principal place of business, uses it regularly and exclusively for journalism activities, and conducts mainly non-management and non-administrative functions at the other places he works, he could be eligible to take the home office deduction.
Across all industries, website costs to acquire, design, maintain, and market your site are common business expenses. Web costs are broad and can include but are not limited to development, programming, domain fees, hosting, and analytics. While many of these costs are deductible, the IRS treats certain website expenses differently. Generally, the money you spend on development may need to be capitalized and deducted over many years, while the money you spend on operating and maintenance can be deducted in the year incurred.
Ali is a well respected expert on behavioral psychology who makes a living giving presentations at universities and conferences across the country. In 2014, Ali paid a developer $2,500 to develop a new website and mobile app for his business from standard templates. He had no other capital expenditures during the year. At the end of the year, Ali was advised by his tax preparer that the $2,500 he spent on website development qualified for the 179 deduction (off-the-shelf computer software), so he would be able to deduct the full development cost on his 2014 tax return.
Cost of Goods Sold
If you are an entrepreneur who manufactures or purchases inventory for resale, the costs you incurred during the year to produce and/or acquire your sold inventory would be deductible as a cost of goods sold. Costs of goods sold can include but are not limited to materials, labor, and overhead. For an expense to be considered a cost of goods sold, you must have sold the product (costs associated with unsold products should be classified as inventory). Entrepreneurs who operate personal service businesses (lawyer, accountant, uber driver, etc.) and do not sell merchandise would not have any costs of goods sold for federal income tax purposes. Calculating cost of goods sold can be an involved or a simple process depending on your type of business, the size of your business, and the quality of your records.
Ed is an author who just finished writing his third novel. He pays shipping to have his books delivered from a printer in Indonesia. The money Ed spends to have his books printed and shipped to him from Indonesia should be included as part of the value of his inventory and deducted as part of cost of goods sold when he sends sold books out to his customers.
State Sales Tax
Did you know you can deduct most of the state sales taxes you pay on your everyday transactions? State sales tax is a common deduction that many taxpayers easily miss. Sales taxes you incur operating your business are deductible on your Schedule C, while sales taxes you personally incur may be deductible on Schedule A, if you itemize your deductions and choose not to deduct state income taxes paid.
Tori writes children’s books that she sells wholesale to bookstores across the country. Generally, Tori does not have to collect or pay sales taxes on her wholesale book sales. When she prepares her Schedule C, she would not deduct any sales tax expenses (sales taxes paid on business property should be included as part of the properties cost).
Entrepreneurs often need to travel away from home to meet with clients, negotiate with vendors, pitch to investors, attend trade shows, and conduct business developement. If you travel for business purposes, whether it be to a neighboring city, a different state, or even outside of the country, as long as the primary purpose of your trip was for business, your travel expenses will generally be deductible.
Kimberly is a speaker who recently took a business trip to Portland, Oregon. Since her husband had never visited the northwest, he decided to tag along. In addition to sightseeing, he also attended the event she spoke at. Despite her husband’s best efforts to support his wife in her business endeavors, since his visit was not for a bona fide business purpose, Kimberly would not be able to deduct any of his travel expenses (flight, hotel costs in excess of a single room, his meals and entertainment, etc.) on her Schedule C. However, she can deduct all of her related business travel costs, subject to IRS limits.
As a business owner, if you entertain your customers, clients, or employees, the cost of your meals may be deductible as a business expense, so long as the meal was directly related to or associated with your business. Generally, the deduction for business meals is limited to the 50%, however, there are certain circumstances where your meals could be 100% deductible.
Ellen is an author who is about to finish writing her 6th novel, which she wants to ensure is placed in all major bookstores across the country. She arranged a meeting with her publisher at a steakhouse to discuss how they can best bring her new novel to market. During this meeting, Ellen spent $280 on food and drinks. When Ellen prepares her Schedule C, she could deduct $140 (50% of the $280) for this business meal.
If you own your business vehicle, you can deduct the cost/value of your car over a 5 year period through depreciation. There are a few different ways you can depreciate your vehicle. The main difference is in how you spread the depreciation expense out over a five year period.
Here are your options:
If you are traveling for business, did you know that instead of deducting your actual meal expenses you can deduct meal and incidental expenses using a Per Diem rate? Many entrepreneurs choose to use the Per Diem rate to deduct meal and incidental expenses because the recordkeeping requirements are less stringent than the actual method. Before deducting your meal and incidental expenses, you can calculate your deduction both ways to see if using the actual method or one of the Per Diem methods will be more favorable.
Jane writes children’s books and frequently travels to book fairs around the country to promote her books. In March 2015, Jane traveled to Tucson, Arizona for five days (two travel days, three full days) to attend a book festival. While traveling, she spent $200 on meals, $100 ($200 X 50%) of which would be deductible using the actual method. Using the Per Diem rate for Tucson, Jane could deduct $126 (($56 X 3 full days X 50% limit) + ($56 X 75% travel limit X 2 travel days X 50% limit)). Since the Per Diem rate for her trip would result in a higher deduction, Jane could deduct the Per Diem rate instead of the 50% of her actual meal costs.
Freight and Shipping Costs
Regardless of what type of business you operate, the freight, shipping, and postage costs you incur to receive supplies and send products to customers will likely be deductible. Overall, the treatment of these costs is straightforward, but there are a few things you should keep in mind when it comes to freight and shipping costs: whether shipping costs should be deducted immediately or added to the basis of the asset you purchased, if your shipping costs should be considered cost of goods sold, and if you are responsible for paying sales tax on shipping and freight.
Ed is an author who just finished writing his third book. He pays shipping to have his books delivered from a printer in Indonesia. He then sells his books to bookstores across the country and through his website. The money Ed spends to have his books shipped to him from Indonesia and the costs he incurs to send his books to retailers and his online customers are deductible as part of Cost of Goods Sold on line 39 of his Schedule C (since these costs are directly related to the production and sale of his books). Depending on what state Ed lives in and where he is sending his books, he may also need to collect sales tax on shipping and handling for his online orders (wholesale orders generally are not assessed sales tax).
Many entrepreneurs give gifts to their customers, clients, suppliers, or other business associates to show their appreciation. Giving gifts is an ordinary and necessary part of doing business, and the IRS recognizes this. Accordingly, you are allowed to deduct certain business gift costs, subject to limitations. The business gift deduction could be claimed on your Schedule C or your Schedule E, while gifts made to charitable organizations could be deducted on your Schedule A if you itemize your deductions.
Dorothy is a freelance writer who creates content for a blog and two major online magazines. To thank her clients for the steady stream of work they provide, on separate occasions she chose to take each of her editors to a basketball game, tickets which cost $60 each (face value). She also purchased each editor a $23 holiday gift bag. When Dorothy prepares her taxes, she should deduct $180 ($60 x 6 tickets x 50% limit) as an entertainment expense (since she attended the basketball games) on line 24b of her Schedule C, and $69 ($23 x 3) as a gift expense on line 27a of her Schedule C. Note that since her gift bags were less than $25, her deduction is not limited.
If you are ready to hire an employee or contractor, you may want to consider including various fringe benefits as part of their compensation package. Fringe benefits are non-cash compensation for services. Fringe benefits may be taxable or non-taxable, so it is important you understand the proper treatment for various types of benefits to ensure you are in compliance with IRS regulations. Regardless of the tax status, fringe benefits offered for legitimate business purposes will generally be deductible on your Schedule C.
Phil owns a small editorial business and employs a full time administrative assistant. In addition to paying his assistant a base salary, each year he sends him on an expenses paid trip to Mexico as a token of his appreciation for his assistant’s hard work. Using the General Valuation Rule, the trip has a fair market value of $2,500. Since this annual vacation serves no business purpose and is in exchange for services provided throughout the year, it would be considered a taxable fringe benefit. Accordingly, Phil would need to withhold income tax and payroll taxes from his employee’s paycheck based on the fair market value of the trip.
Office space can be one of the most expensive costs an entrepreneur incurs. Whether you have an office in a commercial building, work from home, an incubator, or a coworking space, the costs you incur to house your business operations may be deductible, and they can quickly add up.
Tim is a professional speaker who rents a small office in WeWork that he uses to draft presentations prior to his speaking engagements. When Tim moved in, he paid an $850 security deposit. When Tim prepares his Schedule C at the end of the year, the security deposit should not be included as a rent payment, since he is expecting to receive it back. Rather, it should be included as an asset on his balance sheet. The only circumstance in which a security deposit should be deducted as an expense is if it is clear that it will not be refunded.
Hobby Vs. Business Expenses
It is important to determine whether your activity is a hobby or a business.This can be a complicated matter, as often sole proprietors slowly build their businesses over an extended period of time or pursue a longstanding passion that has brought in some money. The distinction between business and hobby is generally made based on how much profit your activity generates and is important to consider because business expenses are generally fully deductible, while deductions for hobby expenses will usually be limited.
Paul is a full time college student studying information technology at the University of Wisconsin. To gain experience and set himself up for when he graduates, he spends approximately 20 hours per week making websites for local Madison businesses. Paul makes money on the projects he charges for, however, he also does many projects for free and overall he has not yet turned a profit. Even though Paul’s activity is not yet profitable, since he has the skills to make a successful web design business, conducts his activity in a professional manner, puts a significant amount of time into his activity (considering he is a student) and intends to pursue this full time when he graduates, he could likely consider his activity a business and report all of his revenues and expenses on his Schedule C.
This post was originally published on the Hurdlr blog
Disclaimer: The information contained in this document is provided for informational purposes only and should not be construed as financial or tax advice. It is not intended to be a substitute for obtaining accounting or other financial advice from an appropriate financial advisor or for the purpose of avoiding U.S. Federal, state or local tax payments and penalties.