Many freelancers give only a little bit of thought to tax deductions. After all, if you operate out of your home, you keep your costs low and there are few expenses to offset your taxable income.
However, there are several important, and easy-to-overlook, tax deductions that freelancers, independent contractors, and sole proprietors can maximize before the year draws to a close.
Here are eight tax deductions to be aware of—and how to take full advantage of them.
1. Home office tax deductions
It might be hard to believe, but millions of home businesses aren’t taking advantage of this important deduction. That’s crazy, since it has the potential to save you a ton of money every year you operate your business from home.
According to the SBA, 50 percent of all businesses are home-based, while 60 percent of all firms without employees (i.e. freelancers and sole proprietors) also work out of their homes. Yet, the IRS reports that small business owners often overlook this deduction.
What is the home office deduction? In simple terms, it allows you to deduct the business expenses associated with your office space, such as rent, mortgage, and utilities. There are two methods of calculating the deduction—the simplified method (introduced in 2014 to encourage more home businesses to take advantage of the deduction), and the regular method.
If you choose the simplified option, you can claim $5 per square foot of the area of your home that is used for business (up to 300 square feet). Alternatively, the regular method requires you to track your actual expenses such as utilities, mortgage, rent, any home repairs, home depreciation, etc. and then calculate your deduction based on the percentage of your home devoted to business.
In order to claim the deduction, the IRS requires you to use a certain area of your home solely for the purposes of trade or business. It’s an important distinction. For example, if you use the kitchen table as your workspace for six hours a day, then clear it away for meal times with your family, you can’t claim the deduction because you aren’t using that space “exclusively” as a home office.
If, however, you have a separate room or space in your home that is clearly defined as an office and is used solely and “regularly” for business purposes, then go ahead, make that claim!
The IRS has more information about the home office tax deduction and how to choose the right option for your business.
Ah, the joys of working from home!
2. Business supplies and tech expenses
Any business, including freelancers and sole proprietors, can write off the cost of purchasing business supplies and technology if they are used exclusively for a business purpose. This includes furniture like your desk, chair, computer, printer, as well as software licenses.
You can also deduct the cost of printer paper, your notebooks, and so on. Plus, if you drive to the store to make those purchases exclusively, you can deduct the mileage incurred.
If you need any office equipment or furnishings, you might want to purchase those before the end of 2018 as you may be able to use these purchases as a tax deduction this year.
It’s a good idea to do an audit now of all your purchases in 2018 so that you have the information you need before you complete IRS Form 4562 and attach it to your 1040 tax return.
3. Legal and other professional services
If you used the services of a third-party to help you with legal matters such as incorporation, bookkeeping, or accounting, you can usually deduct these costs—if they qualify as “ordinary and necessary” expenses (meaning they are common and appropriate).
However, there are exceptions. For example, some of the fees paid to professionals are not deductible. This may include fees paid to professionals who also provide you with personal tax advice.
Similarly, if you use the same tax preparer or bookkeeper to manage your business and personal finances, then these costs may overlap and are hard to account for come tax season. This is one of the reasons why it’s important for freelancers and sole proprietors to separate their personal and business finances.
4. Mileage and vehicle expenses
Do you use your car to visit clients, meet prospective customers, or attend business-related events?
If so, you can claim the mileage tax deduction for miles driven during 2018 in your business or personal vehicle.
If you use your vehicle exclusively for business, you may also be able to deduct its entire cost of operations, including oil changes, gas expenses, tires, insurance, registration fees, and more.
Use this time to make sure you’ve kept stringent records of your vehicle use for business purposes. The IRS requires that businesses maintain a log of the miles traveled, date of the trip, start and end location, business purpose, and so on. Keep a notebook or spreadsheet, or even better, use a mobile app to automatically track and log your mileage as you go. QuickBooks Self-Employed, Hurdlr, Stride Tax, and MileIQ are a few options out there that make this easier to do.
5. Advertising and marketing costs
Did you do any marketing for your business this year or make marketing-related purchases such as social media monitoring tools or email marketing software? Even if it only made a small dent in your budget, the costs add up, but they are deductible.
Other deductions you may be able to take include monthly website fees, PPC advertising such as Google AdWords, printing costs for your business cards, marketing automation software, as well as traditional print marketing.
Organize those costs now and record them on your Schedule C during tax time.
6. Insurance (including healthcare premiums)
Many clients require that freelancers purchase general liability or professional liability insurance (aka malpractice or errors and omissions insurance) to protect their interests. This can be a significant cost, in the region of $400-$1,000 depending on the coverage you decide on. But you can deduct the premiums you incurred this year so don’t overlook this important deduction.
Another important deduction for self-employed freelancers and sole proprietors in this category is your healthcare insurance premium. If you pay for healthcare insurance entirely out of your own pocket using after-tax dollars (no government subsidies or employer share) you may be able to write-off your costs.
7. Cost of materials
If your business revolves around producing goods, for example, jewelry, arts and crafts, and clothing, you may deduct the cost of materials under the cost of goods sold (COGS) category. This covers expenses such as the cost of raw materials and storage.
COGS is a required part of your business tax return and can reduce your taxable income. Knowing your COGS can also help you determine how to price your products profitably and help you ensure you’re maintaining sustainable margins. It will also help you identify which product lines may be killing your profitability.
Don’t forget that client entertainment and meals with a business purpose may be deductible, saving you money at tax time.
8. Client entertainment and gifts
If you can prove that a meal or coffee with a client has a business purpose, you can deduct 50 percent of the cost. For example, the occasion must involve active discussion about business, such as plans for next year, new product releases, etc. Don’t forget you can also deduct the cost of mileage to and from the restaurant!
This year did see the rolling back of a popular deduction in this category. If you’ve claimed client entertainment, such as a trip to the ball game in past tax years, the new Tax and Jobs Act of 2017 eliminated the deduction for client entertainment, amusement, or recreational activities such as sporting events.
Finally, if you purchased gifts for clients during the holidays, you can deduct up to $25 per person, per year. If you’re looking to maximize your tax deductions, it pays not to spend more than this amount on each person.
Before you claim
The new tax law has brought sweeping changes and many businesses remain confused as to what it means to them. In addition to ensuring you have all your deductible ducks in a row, now is also a good time to make an appointment with a tax attorney or CPA (also tax deductible) so you can better understand the implications of the new tax law on your deductions and filing.
Disclaimer: Fundbox and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction. Please refer to the IRS guide to Deducting Business Expenses or consult a tax professional for information about tax laws and how they apply to your business.