Yes, it’s almost April 15th—and that means you better get going on those taxes! Even though my books are ready to go, I’ve been spending my time reviewing my deductions until my (very busy) accountant becomes available. Since many of you are likely doing the same thing, it’s a great time to talk about deductions for small business owners, freelancers, and others who work from home.
First and foremost: don’t cheat. There are plenty of legal deductions for business owners. The trick is to keep track of everything throughout the year. Keep your receipts. Track every cent you spend on your business. Granted, if you’re on the ball, you’ve already done this by now.
Hey, might as well double-check to be absolutely certain you didn’t miss any deductions. After all, it’s your money—don’t give it away!
Home Office Space
The Gist: If you work from home, a percentage of your rent or mortgage, insurance, utilities, and more are tax deductible.
The Legwork: Calculate the square footage of your entire dwelling, and then calculate the square footage of your office area. Apply this percentage to determine how much you can deduct.
The Kicker: Whether part of a room or an entire room, your home office must be used ONLY for business. The space must follow IRS guidelines for “regular and exclusive use” and be your “principal place of business.”
More Information: The IRS on Home Office Space.
Auto Expenses
The Gist: Do you use your car to drive to meet with clients, go to conferences, and attend work-related events? You can either take the standard mileage rate deduction (55.5 cents/mile for 2012), or track your actual auto expenses. Parking and toll costs are also deductible. No car? You can also deduct bus, train, and taxi fare.
The Legwork: I find the standard deduction is a lot easier to calculate. I track my business mileage on this handy iPhone app: MileBug.
The Kicker: Trips to your office (if your main office is outside your home) don’t count. Most vehicular travel expenses are deductible, but ONLY if you’re traveling on business.
More Information: The IRS on Car Expenses.
Entertainment Expenses
The Gist: Treating your client to dinner? Heading out for drinks to discuss a new project with a business partner? Keep your receipts because you can deduct these expenses.
The Legwork: Make sure your calendar and your receipts line up. Most people keep their business receipts and jot down what the meeting was for on the top. You can also use expense trackers like the one in Freshbooks to snap a pic of your receipt and upload it right to your records. Handy!
The Kicker: For most entertainment expenses, ONLY 50% is deductible. (Bummer, I know.) So if you’re tracking those receipts, don’t forget your deductible amount is only half the total.
More Information: The IRS on Entertainment.
Business & Office Supplies
The Gist: You’re going to be amazed at just how much you can deduct, so if you spend ANY money at all on your business—track it! When I say Business & Office Supplies, I mean: audiotapes, videotapes, and book and magazine subscriptions; online computer services, like accounting software or backup services, and software; computers, desk chairs, staplers, pens, etc; postage; coffee and beverage services; and more.
The Legwork: Track your expenses. ALL of them. It’s easiest to use a separate business credit or debit card for your business expenses. Nowadays many banks allow you to track and categorize your business expenses online.
The Kicker: Don’t get too creative. Your expenses MUST be products and services used ONLY for business purposes. Find yourself role-playing a scenario in your head, in which you explain the deduction’s legitimacy to the IRS…? Not a good sign.
More Information: The IRS on Business Expenses.
Bonus Info: Check out this list of 101 Deductions for Bloggers and Freelancers from Wise Bread.
Fees & Interest
The Gist: Fees and interest are some of the most irritating parts of running a business. They’re those extra expenses you always forget about, such as: bank service charges, consultant fees, PayPal fees, credit bureau fees, business loan interest, student loan interest, and many more.
The Legwork: Again, track everything. If my advice is getting old, hire a bookkeeper to track your expenses for you. That way, by the end of the year, your bookkeeper should have everything categorized and ready to go.
The Kicker: For these deductibles, it’s best to talk to your accountant before assuming what is and isn’t deductible. There are a lot of hidden deductions that fall under a variety of categories—so speak to a tax professional before filling out your forms.
More Information: Visit the Small Business and Self-Employed Center at IRS.gov.
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Did you know there are over 17 million full-time independent workers in the U.S. today? Represent! Many solo professionals new to self-employment might be surprised just how expensive taxes can be. So you must be absolutely certain you’re getting all the legal deductions you deserve. When in doubt, hire an accountant. They’ll save you time, money, and that looming tax season headache.