When you go into business for yourself as a freelancer, there’s a lot of enthusiasm and creativity involved as you build your brand, start a website, advertise through traditional and non-traditional methods, and begin doing organizational things like building your portfolio, doing customer analysis, and paying taxes.
We often are so intent on considering such activities to be good investments in our business’s future success that we overlook the fact that any purchase we make for business purposes can be written off on our federal income taxes.
It’s the federal government showing its appreciation to business owners for contributing to the US economy. And as you’ve probably found out from paying income taxes on freelancer wages in the past, every penny you can reclaim in deduction is a big deal.
Here’s a few things you routinely buy for your business that you might be missing out on as deductions.
- Vehicle expenses: Anytime you go to the store to busy something business related, those miles driven are a business expense, and deductible at the rate of $0.575 per mile. If you’re editing a book and drive 90 miles once a week to have editorial meetings with the author, those 90 miles are deductible as well. In addition to the mileage, you can use the number of miles driven for business to write off a percentage of your vehicle expenses including the cost of gas and oil, repairs, new tires, parking fees and tolls, the cost of insurance, and interest on your car loan. Here’s how it works: Divide the number of miles driven for business by the total number of miles driven in a calendar year. For example, if you drove 1,000 miles for business in 2015 of 8,000 miles total, your business percentage would be 12.5%. In addition, to the standard per mile deduction you would write off, you could deduct 12.5% of the money you spent on gas, tolls, and repairs in 2015. Obviously, you need meticulous record-keeping to make this work.
- Health Insurance Premiums: Other than taxes themselves, nothing stings a freelancer’s pocket more than having to pay big money every month for health insurance that’s usually not that good and often times you don’t need (until you do). But this colossal budget-biter turns into a sweet-smelling rose come tax time because the money you spend. Does your spouse work in the business with you? If so, you can deduct all their premiums as well.
- Cell phone bills: Can you hear me now? As long as you can prove that you’ve kept track of the minutes you spent on business calls versus everything else, you can deduct that percentage of your cell phone bills, just like you would for your vehicle expenses. So if you spent 40% of your minutes on business-related calls, and your yearly cell phone bill came out to $1,800, you could legally write off $720.
- Your retirement fund: Yet another downer about being a freelancer is your utter lack of a 401(k) or pension from the company you call home. Instead, you have to set aside little bits of income as you can afford to build your nest egg for your golden years. Like your health insurance, however, there is a silver lining: You can deduct 100% of your contributions to your own retirement fund, just keep records in case you get audited.
- Food and Drink Expenses: Meeting a potential client at Starbucks to talk about a business arrangement? Pick up the tab – not only will you impress them with your generosity, but you’ll also be able to write off 50% of that purchase when it comes time to pay your taxes. Just make sure you write on each receipt what the meeting was for and who it was with. That makes it a slam dunk success in case the IRS flags your return.
- Books and eBooks: No, the IRS won’t reimburse you for buying a first-edition Harry Potter and the Cursed Child, which by the way, is awesome; but if you’re educating yourself with books pertaining to your particular industry; or you’re buying books that will help you run your business better, you can write off the cost of them at year’s end. This can include any eBooks or other online publications you purpose to help with things like marketing, social network advertising, branding, etc. Just make sure you keep your receipts and/or proof of purchase on file to turn over to your accountant or to have on file in case of an audit.
- Mortgage/rent costs and utilities: Don’t throw yourself a party just yet; you can only write off a percentage of your home or apartment’s biggest bills, not the whole thing. Before being a freelance and running your business from home became a common thing, the IRS’s rules on qualifying part of your living space as a hoe office were tricky and narrow; they’ve since made them a good more accessible, but there’s still accountability on your end. For starters, you can only qualify a room as a home office if you spend more than 50% of your time in that room working – no fair plopping your laptop down in the living room once a month for 30 minutes and doing graphic design while watching football on Sunday just to claim the most square feet possible. Once you’ve established which room truly is your home office, get out a tape measure and record its length and width. Multiple those together and you’ve got the square footage of your home office. Now divide that number by the total number of square feet in your residence and the resulting percentage is how much you can deduct from your yearly mortgage payments, electricity costs, etc. For instance, our family’s study is my home office and measures 12 feet by 10 feet for a total of 120 square feet. If your house is 1,500 square feet, you can claim 8% deductions on your household bills. If your mortgage is $1,000 a month or $12,000 a year, you can deduct $960 of that as a business expense. Not bad!
Know any freelancer deductions we haven’t mentioned above for common purchases? Send us a tweet and let us know!