Tax season is coming, and freelancers should know about all the tax deductions they can claim to save money on their taxes.
Deductions can help reduce the taxes you owe the government, including charitable contributions, healthcare costs, capital losses, and many other expenses.
Business Travel
There are several tax deductions every freelancer should know about, including those related to business travel. The IRS says that business-related travel expenses can be deducted when the trip is ordinary (common and accepted in your industry) and necessary for your work.
You can also deduct certain transportation costs, such as airfare, car rental, taxis and shuttles, and lodging fees. You can also remove 50% of your meal costs based on the federal meals and incidental expense per diem rate.
Meals are an ordinary expense for many freelancers, and the IRS allows them to be deducted when they are reasonable in light of their circumstances. But they can be tricky, so it’s best to consult a tax professional on how to file freelance taxes before you write them off.
In addition, you can claim business-related expenses such as Wi-Fi and communication costs, as well as shipping materials and clothing. These can be a big help if you need to attend a conference or trade show. However, remember that these can only be written off if you prove you were there for business.
Advertising
Advertising your business is critical to attracting new clients and keeping existing ones happy. The good news is that the IRS allows businesses to deduct reasonable advertising expenses as ordinary and necessary.
But not all advertising is deductible. Some expenses, such as advertising to influence government legislation or donating products or services to charity, are not.
When deciding whether an expense counts as ordinary and necessary, the IRS looks at what is expected and accepted in your industry. In addition, a fee must be helpful and appropriate for your business.
Examples of reasonable advertising expenses include printing, direct mail, and radio ads. Other forms of marketing include sponsorship of local events, advertorials on third-party websites, and business cards.
Advertising is an essential component of any freelance business. It helps you reach potential clients and land the jobs you want. It also keeps your name in the public eye.
Business Licenses
Business licenses are required for businesses that work with the public or sell products or services to consumers. These licenses help ensure that companies comply with government regulations and do not harm the public.
Even freelancers who have a home-based business should consider obtaining a business license in their area. Many local governments offer a low-cost permit that doesn’t require inspections.
However, suppose you have a more specialized business, such as a doctor or lawyer, or one that involves the transport of nuclear waste. In that case, your business may need to be licensed by the federal government instead of your state.
If you register as a sole proprietor, partnership, or limited liability company (LLC), you must pay filing fees to the state and other regulating agencies. These fees are typically deductible as ordinary and necessary business expenses.
In addition, tax deductions are available for all fees paid to keep your business license current. These include annual fees based on your revenue or a flat fee. These can be a significant benefit for freelancers who only have a little money to spend on taxes yearly.
Meals
The IRS allows freelancers and self-employed people to write off various business expenses, including meals. But before you start writing off everything you eat, you need to understand what counts as a tax deduction and how to document your claim.
The IRS considers meals deductible if they are ordinary, necessary, and directly connected with or about your trade or business. This includes the food and beverages you buy for yourself or your employees or provide to customers, clients, or other business associates.
However, the IRS does not allow a business meal to be deductible if it is “lavish or extravagant.” This judgment call is based on the facts and circumstances of the specific meal you’re claiming.
Generally, the meal must be accompanied by a business contact (such as a customer, employee, vendor, or consultant). Then, it must be related to the active conduct of your trade or business — or your “business associate.” Whether you close the deal, get a tip, or even meet a prospective client is not a matter.
Equipment
You can deduct the cost from your taxes if your freelance business needs a computer or other specialized equipment. You can also take a deduction for the amount that your gear has depreciated over time.
The IRS defines equipment as “capital assets,” or long-term assets used to generate a profit. To take a tax deduction for your equipment, you must prove that it is used in your trade or business and must be in service during the tax year.
Many small businesses buy heavy equipment in the fall and scramble to get it “put into service” by the end of December to take advantage of Section 179. While this is an excellent way to maximize purchasing power, ensuring that the equipment you buy makes financial sense for your business before you pull the trigger is essential.
If you are in the market for new equipment for your business, consider financing it. This will give you the bonus of claiming a tax deduction for the entire purchase price in one go instead of spreading it out over several years via depreciation.