When you start your own business, it can seem like there’s always something else to spend money on to keep things running smoothly. Fortunately, many of these expenses are tax-deductible. The IRS defines a deductible expense as something that is ordinary and necessary – in other words, it must be something you need to run your business, and that is commonly used by others in your line of work. For example, a mobile dog groomer could reasonably write off a new washtub. However, it might raise some eyebrows if a graphic designer put a bathtub on the company credit card.
Expenses common to most businesses include office supplies, paper, mailing expenses, advertising, and mileage. And while it may seem cumbersome to log every single expense, every little bit adds up and can save you big bucks come tax time.
Here are several deductions that commonly benefit those who own small businesses or are self-employed.
Tax Deductions for Freelancers and Business Owners
Almost all forms of advertising are deductible, such as flyers, web banners, and print ads. Furthermore, table fees or other small business expenses incurred when promoting your business at trade shows can be deducted as advertising expenses as well.
2. Website Expenses
If you have a business website, all costs associated with that site are deductible. This includes hosting or domain name fees, software, web designer commissions, and licensing fees for images to use on your site. As long as these are for the exclusive benefit of the business, they’re fully deductible.
3. Home Office Expenses
If you have a dedicated home office or use some other part of your property for business purposes (such as storage), you may be able to take the home office deduction. The home office deduction allows you to deduct a portion of your rent or mortgage payments, utilities, home improvements, and repairs to your home. Your deduction is calculated by determining what percentage of your home the office comprises, and then multiplying that by the home’s expenses for the year. It’s a great tax break if you do freelance work for side income or work exclusively from home.
It can be a bit confusing to determine what portion of expenses, such as Internet or phone, can be deducted. If your bill is combined with other things, such as cable TV, that aren’t used for work, you can only deduct the portion of the bill for services relevant to your business. It’s a good idea to have a completely separate plan for your business phone to ensure you aren’t accidentally deducting personal expenses.
Starting in 2013, the IRS has provided an optional, simplified method for determining the tax deduction for business use of your home. If you meet the requirements for a qualified home office (an area that is exclusive for your business, is used regularly for business purposes, and is either your principle place of business, where you meet clients or patients, or is a separate structure), then the simplified formula for a home business deduction is $5 multiplied by the number of square feet that your home office occupies. The area is limited to 300 square feet.
4. Business Travel
The cost of any travel undertaken solely to get new accounts, provide service to customers, meet with existing clients, or to perform any other task for the purpose of your business is deductible. Taxi fares, baggage charges, toll fees, parking costs, and other travel-associated expenses are also deductible. Special rules apply for meals on the road, as well as entertainment expenses (for clients, not for yourself), as you can only deduct 50% of those costs. Presumably, you and your clients would otherwise be eating anyway, so you can’t deduct the full amount.
If you’re driving your own car for work purposes, you can deduct the costs of gas, oil, maintenance, and repairs as they relate to your work, or you can simply track your mileage and use a rate set by the IRS annually to determine your deduction. This is by far the most simple and more popular option. For 2015, you can deduct 57.5 cents per mile driven for business purposes. However, miles driven from your home to an outside office should not be included in the calculation. For example, if you drive 5 miles to the office and then drive 6 miles from the office to a client, 6 miles back to the office, and 5 miles home, you can deduct 12 miles for the day. Maintaining a mileage log is an easy way to keep your personal and business driving separate. Plus, it provides a solid paper trail should you be audited. In addition to recording your mileage, record the date of travel, as well as the purpose.
Even if you don’t drive a lot for your business, you can still claim mileage for trips to the post office or office supply store. A few miles here and there can really add up by the end of the year.
Tax Tips for the Self-Employed
1. Keep All Your Records
If you set off one of the IRS tax audit red flags and are audited, you’ll need to show where you were, what you bought, and why. Years after the fact, it will be difficult to remember in detail, so saving receipts and keeping records is essential. If you’re bad with receipts, a service such as Shoeboxed can help greatly. I use Quickbooks, and input payments as soon as I spend the money. Keep emails related to things you’ve purchased online and any packing slips for items you order.
2. Set Up Separate Accounts for Business and Personal Use
You should – at minimum – have a separate bank account, a separate credit card, and, if you do any business on the Internet, a business Paypal account. The IRS takes a dim view of commingling assets, since it becomes difficult to tell what belongs to you and what belongs to your business. If you’ve made a profit, write yourself a check – don’t just take money from the petty cash.
3. Get a Post Office Box for Business Use
A post office box can help you separate your business and personal mail. A small box usually costs approximately $50 to $60 every six months.
4. Don’t Go Overboard With Deductions
In most cases, if you claim a business loss in more than two out of the past five years, the IRS will consider your business a hobby – and hobbies can’t take deductions. Though claiming a (legitimate) business loss can be an excellent way to offset your overall tax burden, you want to be careful about doing it too often. Contact a CPA for more information should you face this issue.
There’s no sense in paying more tax than you need to, so be sure to deduct all of your eligible business expenses. But also be sure to keep immaculate records of those expenses. The last thing you want is to come up short in an audit and owe the IRS tax and penalties for taking otherwise legitimate expenses that you simply couldn’t support.
What other tax deductions for small business or freelancers can you suggest taking?