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4 Tax Deductions for Self-Employed Freelancers and Small Business Owners

By Kira Botkin

cash calculators deductionsWhen you start your own business, it can seem like there’s always something else to spend money on to keep things running smoothly. Fortunately, most 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

1. Advertising
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 2013, you can deduct 56.5 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 runs less than $50 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.

Final Word

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?

Kira Botkin
Kira is a longtime blogger and serial entrepreneur who enjoys gardening, garage sales, and finding stray animals. She lives in Columbus, Ohio, where football is a distinct season, and by day runs a research study for people with multiple sclerosis. She hopes that the MoneyCrashers team can help you achieve your goals and live a great life.

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  • http://www.carcheckup.com/businessmileage Travis

    For 2011 the standard mileage rate is .51 per mile for business miles traveled.

    • Kira Botkin

      Thanks, we’ll keep it in mind for next year!

  • Ken

    I was unemployed last year and used 1 bedroom exclusively to search for work and practice my computer skills, networking, building, and disassembling to stay sharp for a job I found in November. Can I deduct the room from my rent?

  • Kira Botkin

    Nope, sorry – in order to deduct a home office, you need to turn a profit in a business you ran out of that room. So if you picked up any freelance jobs while you were unemployed, you might be able to take the home office deduction. But just using it for work-related activities isn’t enough.

  • Timothy

    Kira,
    I live abroad and qualify for the foreign-earned income exemption. Is additional freelance money that I earn during the year included in that exemption (the net total of my foreign-earned salary plus freelance earnings is much less than $90K. Much less.) or are the freelance earnings taxable? And if the foreign-earned freelance is taxable, what is the percentage I owe on the freelance total?

    Hypothetically, let’s say I owe $2,000 in taxes on freelance earned abroad. My deductable expenses last year are more than that, so I shouldn’t owe anything, right?
    Thanks!

  • Kira Botkin

    Hi Timothy, according to this article – http://www.irs.gov/businesses/article/0,,id=182017,00.html – you won’t have to pay regular income tax on your freelance income, as long as you’re still under the limit, but you will still need to pay the 15.4% self-employment tax on it.

    “Self-employment income: A qualifying individual may claim the foreign earned income exclusion on foreign earned self-employment income. The excluded amount will reduce the individual’s regular income tax, but will not reduce the individual’s self-employment tax. ”

    So as far as I can tell, you would take your total freelance income, subtract your expenses, and that would give you your taxable freelance income. You would then owe 15.4% of that

    However your hypothetical situation is missing a step. You will still owe taxes unless you have a LOT more expenses than tax owed! Keep in mind that deductions reduce your taxable income, which does reduce your tax liability, but not dollar for dollar. In this case, every dollar of expenses (anything that can be claimed on a Schedule C) would reduce your tax liability by 15.4 cents.

  • Timothy

    Ok, thanks. So the self-employment tax applies even if I don’t own a small business?

  • Kira Botkin

    Yes, we will have an article up on this topic in coming weeks, but under American tax law earning money for yourself basically means you have a business. You don’t have to get a license or apply anywhere to start a sole proprietor unincorporated business – all you have to do is intend to use your skills to earn some money.

  • Jmcclennon

    When u file schedule c .. of small business Ger return

  • SIE

    Our business is in Texas we service the engines for the oil rigs. usually we only bill for labor and mileage since the customer provides their own parts. However sometimes we have to supply parts and charge sales tax for the parts only. Is this right? Or are we supposed to tax the entire subtotal for parts and labor.

    • Kira Botkin

      In most places you do not charge sales tax on labor, but I have no idea what your local regulations might be. I would call your local chamber of commerce and see if you can find a local accountant who can tell you.

  • SLH

    Hi – My husband’s small business (an LLC) failed 2 years ago, after never showing a profit. We’re still paying off a business line of credit loan to the tune of $10k a year. Any way to deduct that expense? Thanks!

    • Kira Botkin

      I would check with an accountant, but my understanding is that if it was incurred for business purposes, you should continue to file the schedule C and report the interest as an expense even if the business is no longer running. However, there may be some statute of limitations on how long you can do that. Keep good records in case the IRS has questions (often years after you file.)

  • Willsolve

    I’m starting a Home Based business with Legal Shield, and I’ve been told I can deduct all the costs of my membership, the business supplies, travel, and three months of prior expenses as “exploratory business expenses” do you agree with this. If I keep careful records can I deduct this against my taxes and get a big refund?

    • Kira Botkin

      1. This looks like a scam and I would advise you to invest your money elsewhere.

      2. You can only deduct expenses that are directly related to the business. I don’t know why they would tell you that you can deduct expenses that you incurred before you started the business. What the heck kind of expenses do you think you could legitimately rack up while researching a business opportunity that has information all over the internet? Scamming you is legal, but scamming the government isn’t.

      • Boncher

        Not a scam. Endorsed by US Chamber of Commerce President Tom Donahue, four former American Bar Association Presidents. Listed as one of the top 200 small businesses in America for 9 years in a row by Forbes Magazine. Not sure abut the exploratory expenses but the others are legit.

  • BC

    what if my employer went into receivership in August and I worked ( self employed acting sales mgr ) to June with expenses…… I did not receive any compensation at all in 2012 from that employer. ( only Soc Security ). Can I still use Schedule C and deduct my expenses.

    • Kira Botkin

      Yes, but I’d still file something with your state’s labor board to try to get paid.

  • Osha

    Kira, you seem to be extremely knowledgeable on this, so maybe you can help my confusion: I started a dba to make a film in 2011. People donated to the film account. From that I used monies for travel, accommodation, equipment etc etc,; we shot some of the film, no one was paid including myself (as agreed). In 2012 I got us fiscally sponsored and more people donated through a social media site. But not much (under $5000).
    In 2012 my accountant told me that I couldn’t deduct my film dba expenses from 2011 as the film was not finished and had not earned an income.
    However, in 2012, now fiscally sponsored I received an ‘earnings’ slip from the fiscal sponsor at the beginning of 2013.
    My understanding is I need to file a schedule C with all the film business deductions; however as the film is still in the works and still incomplete, the business at this point is running at a loss.
    Should I wait until the film is complete and file as a complete entity over the 3 years it will have taken to make it? Or should count the fiscal sponsor money as ‘income’ for the business and still deduct all film expenses……..?????
    Any ideas on this would be very helpful. Thanks Kira.

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