Don’t forget these deductibles on your next income tax return.
After doing a private poll of freelancers and contractors, we were surprised to find out that a lot of sole proprietors were unaware that you had to pay your IRS dues quarterly – among several other things. Even more surprising was how many didn’t know which purchases they could actually could count as deductibles against their estimated quarterly taxes.
A fundamental problem is that if you don’t claim enough deductions, it might simply not be worth the trouble. While it might seem silly to keep tabs on every little deductible expense, it really can all add up.
The key is to have a good recording system set up. While you can go with any system you’d like, they should always indicate the purpose of the purchase as well as who you paid for it.
The IRS has 5 categories for deductibles:
- Gear and Equipment
- Research and Education
- Meals and Entertainment
- Necessary and Ordinary Business Expenses
“Ordinary and Necessary…”
…is the general rule with which the IRS judges a purchase not clearly in any of the other categories to be deductible or not. And it’s where you get to be a little more creative.
What’s “ordinary and necessary” will naturally differ depending on your industry. An entertainer for example, will be able to claim deductions for things a security contractor can’t- and vice-versa.
As you’d expect, there are plenty of exceptions and it would be impractical to nail them all down in one blog post.
Here we’ve tried to list down as many items the IRS allows freelancers to list as tax deductions — in even more categories. While that may seem to be needlessly complicated, we feel that these are key areas freelancers often forget to look at when listing deductions.
There will be plenty of overlaps, in the name of presenting all this in an easy-to-understand piece.
Capital Expense Deductions
- Essential equipment
- Real property
- Amortization costs
- Depreciation costs
Note: Capital expenses are expenditures for fixed assets – items with a usable life extending beyond the taxable year.
Business Incorporation Costs
- annual state fees
- legal fees
- any reasonable costs associated with starting a business
- Self-employment Tax — You can deduct up to 50% of the self-employment tax.
Home Office Expenses/Improvements
- Furniture and fixtures
- Professional fees
Note: Just make sure it’s directly connected to work. It’ll be more reasonable to an auditor if you bought the items after starting/incorporating your business.
- EVERY. SINGLE. TOOL. Whether it’s a spatula or a thumb tack, if it was bought for business use, deduct it.
- Office furniture
- Cameras. Need a camera to take pictures for your website or food truck menu? Deduct it.
- Hard disks and flash drives
- Cleaning accessories
- All devices intended for business use
- Technical support service fees for all of these
- Professional fees
- Prepaid phone credits
- Sundry office supplies— anything that gets expended over time
- Fuel. You can only deduct mileage for travel out of your local area . The distance given is nominally 50 miles, though there may be exceptions. You can either calculate based on mileage driven or gas station receipts.
- Plane tickets
- Cab fare
- Hotel accommodations
Note: Make sure these things are all directly related to your business. Commuting within 50 miles of where you live is NOT deductible.
- Business cards
- Online ads
- TV and Radio advertisements
- Website hosting
- Website domain
- Promotions Development Expenses
Education & Research
- Education and higher-learning expenses
- Industry-related magazines and other periodicals.
- A business-related internet connection
- Paid Internet subscriptions to relevant sites
- Hulu, Netflix, etc. if it’s necessary for your line of work. Artists and designers for instance, can claim subscriptions to these as necessary.
Meals, Drinks, and Entertainment.
- If you throw a party, or buy movie or theater tickets to entertain clients expenses are deductible up to 50%. You could also claim the same 50% for activities leading up to a meet with a client. If you find yourself working in coffee shops a lot, this might be pretty important.
- Parties with colleagues after wrapping up projects can be deducted completely, especially if they are expected in your industry.
Note: These expenses have to be “reasonable”, which is a fairly subjective term.
Losses Due To:
- Uncollectible accounts
- Natural disasters
- Safety clothing
- Performance-related attire (something you would wear onstage, but not normally on the street)
- Tailoring and maintenance costs
Note: Some items that do not qualify: dress shirts, bibs, overalls — even if required onsite. If it’s something that you could be expected to wear for personal reasons, chances are you can’t claim a deduction for it.
Trade Convention Fees
- Registration expenses
- Submission costs (if applicable)
- Refer to the part on Travel
Health Insurance Costs
Only applies if you pay for it yourself and if the costs are higher than 7.5% of your adjusted gross income.
Note: Not applicable for insurance through a union membership
- Credit cards (for business expenses, of course)
- Business loans
- Legal fees
- Contractor’s fees
- Tax preparation.
Note: If you’re working from a home office, only a portion of these expenses can be deducted, within reason. You also cannot deduct expenses for phone lines that already existed in your home before you set up your home office. However, you can completely deduct expenses from subsequent lines.
- Paid web services (such as job search and staffing sites)
- Purchase of software related to your industry
Payments to Non-profits
- Costs to attend networking events held by a non-profits (i.e. a church, The Red Cross, etc.)
- Using services given by a non-profit (i.e. buying ad space etc)
- Boards of trade
- Business leagues
- Chambers of commerce
- Civic or public service organizations
- Professional organizations such as bar associations and medical associations
- Real estate boards
- Trade associations
What You May Not Deduct
- hobby clubs or groups,
- country clubs
- social groups
Subcontractors and other Freelancers
Note: Be sure to follow state and Federal tax laws on their compensation.
A Word of Warning!
Not all these options will be available to all freelancers. There’s a reason why there are lawyers and accountants who specialize in this sort of thing – it’s impossible to give everyone the same tax advice.
Check out the IRS’s sole proprietorship forms page to figure out what you’ll need to fill out. Next, talk with a qualified professional before deciding on what your business’s tax strategy should be.
Don’t forget to ask for a receipt.
Sources and Additional Reading
business.tutsplus.com – 10 Deductions- Freelancers Can Grab
mashable.com – self-employed-tax-deductions
nolo.com legal-encyclopedia – How Sole Proprietors Are Taxed
sba.gov – Business Structure and Tax Implications
smallbusiness.chron.com – Deductible Expenses Sole Proprietorship