Freelancers and self-employed workers use their own equipment, find their own office space and contribute their own pension. All this takes time. And it costs money.
The good news is that if you’re an independent contractor, sole proprietor, or some other form of self-employment, many of your business expenses will be tax deductible.
Self-employed people benefit from knowing what is and isn’t tax-deductible. While you should consult a certified public accountant, attorney, or other tax professional for a complete look at qualifying expenses, consider this a starting guide, your head, along with common write-offs to keep in mind and strategies for saving them.
These deductions are deducted from your taxable income, reducing your tax bill. While the deduction doesn’t provide a dollar-for-dollar refund for an expense, it will likely reduce the amount you owe the IRS.
Personal or Business Expenses
Claiming deductions for shared personal and business use items will require careful record keeping. Collect call records, usage logs, GPS logs, and other evidence to demonstrate legitimate business use.
Be sure to avoid deducting personal, living or family expenses. A simple trick to keep track of business expenses is to set aside a credit card or bank account for business transactions. Since the line between personal and professional life can overlap for independent contractors, it is especially important to make a clear distinction between personal and professional expenses.
For expenses that you use partly for business purposes and partly for personal purposes, you can deduct the percentage of expenses you use for business purposes based on usage or time.
For example, if you use your cell phone for business 80% of the time and for personal purposes 20% of the time, 80% of the phone cost can be deductible for tax purposes.
Necessary Business Expenses
This is a topic you should always take a shot at before expecting a tax deduction: if the expenses are essential, you can usually claim a deduction. There are exceptions, such as cost of capital and cost of goods sold. If the expenses are not necessary, the expense may not be deductible.
Common expenses are common and accepted expenses in your industry. Necessary expenses are costs that are useful and appropriate for your business.
This means you shouldn’t deduct any expenses outside of your industry.
This also means that while you’re not required to choose the least expensive options possible to claim the deduction (staying in motels while traveling), you shouldn’t opt for the luxury options either ( five-star resorts).
Office Expenses
Electricity, water and internet bills are tax deductible. However, the utility costs for the home office don’t appear here: write them on the home office expense line instead.
You can deduct the full cost of office supplies such as pens, paper, stickers, and other stationery used to run your business. You can only deduct expenses for items you’ve used during the year (which means you can’t stock up on paper clips on December 31). If you use office supplies to manufacture or ship products, add those costs to the cost of goods sold instead.
Incidental repairs and maintenance of office premises and equipment that you use for your work will be tax deductible. Do not use it to claim repair and maintenance costs for your home office. Instead, report them on the home office expense line.
Mobile Phone and Internet Bills
You can deduct the portion of your phone and Internet expenses that you use for your business.
For example, you can offset the additional cost of long-distance business calls. You can also deduct the full cost of a second phone line as long as it is dedicated to your business.
The same goes for canceling internet use. While you can deduct costs associated with hosting a business website, you cannot deduct your personal Internet usage bill.
Once you’ve demarcated which part of your phone and internet bill is for your business and which is for personal use, you can deduct the entire portion up front.
Advertising Costs
You can deduct costs associated with using a public relations agency or freelance service. Political ads are not eligible. You can take advantage of a 100% tax deduction on reasonable online and offline advertising costs.
Advertising activities include running ads on Facebook or Google, selling during promotions at trade shows, or printing business cards, flyers, branded items and other promotional materials.
Travel Expenses
You can deduct travel-related expenses from your taxes if you have a specific business purpose for your trip that must be outside of the general area of your home.
This includes the costs of the flight, train or bus tickets, taxis and carpools on your trip, baggage fee (including shipping fee), check stub maker, car expenses during your trip, including car rental, tolls and parking fees. While you don’t always have to choose the cheapest travel options, you should avoid counting on lavish expenses (e.g. booking a first-class flight) for your business trip.
Equipment Depreciation
You may have purchased specific materials needed to do the job. Over time, the value of this equipment will decrease due to wear and tear.
For example, if you bought a laptop or printer two years ago, it is worth less today than it was when you bought it.
When you use the device for more than a year, you can deduct the depreciated value on your tax return. Depreciation is complicated, so don’t be afraid to ask your accountant or public accountant for help.
Car Expenses
Let’s say you buy a car or other vehicle under a trade name for business purposes. In this case, you can deduct the entire cost once without needing to amortize it over many years using the deduction method.
For personal and professional purposes, the actual spending method must be applied. You can then deduct some of your car expenses, mileage, tolls, and parking costs used for business purposes.
You must use this deduction method from the first year you use the vehicle for your business (in other words, you cannot switch from the actual cost method to the standard mileage method).
Wrapping Up
In conclusion, tax deductions for independent workers can help you save money and reduce your tax liability.
However, you need to be careful and accurate in claiming your deductions, as the IRS may audit your returns and disqualify your expenses if they are not legitimate, necessary, or reasonable.
Therefore, it is advisable to consult a tax professional before filing your taxes and keep detailed records of your business expenses throughout the year. By doing so, you can enjoy the benefits of being self-employed without worrying about the tax consequences.