There are a lot of perks that come with running a business. (This includes you, freelancers!) Beyond a sense of freedom, one primary perk that comes with being self- employed is the ability to boost your tax refund and lower your taxable income. But, how? It’s not magic, we promise.
Whether you’re a freelancer, consultant or small business owner, every purchase you make that doubles as an investment for your business may be tax-deductible. The Internal Revenue Code allows you to write off all “ordinary and necessary” expenses required to operate your organization. But, before we get into maximizing your tax refund, let’s examine what tax write-offs are exactly.
What are tax write-offs?
Technically, a write-off is something you write out of your taxes. But, tax write-off often refers to tax deductions or tax credits as well. The two are similar, so it’s easy to mix them up. (Both help a lot, though.)
A tax credit is a set amount that’s taken straight off your owed taxes. So, if you owe $5,000 and you have a credit for $2,000, now you only owe $3,000.
A tax deduction, on the other hand, reduces the amount you pay taxes on. So, in this case, let’s say you have a deduction worth $2,000, and you made $65,000 that tax year. The $2,000 deduction would reduce your income to $63,000 and benefit your state and federal tax. This doesn’t hold the same direct monetary value as the $2,000 credit, but it can move you into a lower tax bracket in some cases and still reduces how much federal income tax and state income tax you owe.
Now, let’s start looking at those sweet, sweet tax benefits available to you and get you the biggest tax refund possible.
12 business tax write-offs and deductions
Business tax write-offs are numerous and can apply to most types of businesses. According to the IRS, expenses that qualify as tax write-offs should be customary to your industry and necessary for performing work, gaining clients and prospects, or increasing income.
It’s worth noting that your filing status can impact a number of these. You also need to look up your state tax laws to make sure there aren’t additional tax breaks or tax limitations to be aware of in your area. Lastly, the deductions you’re eligible for can vary, depending on whether you’re itemizing your taxes.
You’re also going to want to keep extensive records of all business expenses for the sake of these deductions (and as a best practice in the first place). If you have a business credit card, you should request receipts for all transactions, print out digital receipts and go to great lengths to make sure everything is documented. Many of these deductions rely on receipts and documentation of expenses, so this is a must.
With that said, here are some of the most common tax write-offs taken by consultants, freelancers and business owners that can make your adjusted gross income lower next tax year.
1. Standard deduction
You likely know about this one already, but it’s worth mentioning anyway. The standard deduction is an annual deduction offered by the IRS, which reduces your taxable income by a set amount for each year. If you take this deduction, you can’t take your small business or self-employment deductions. So, think twice before opting for this. (And, speak with a tax professional to make sure you’re making the right choice.)
2. Earned income credit
The earned income tax credit (EIC) is available for many lower- to mid-income families, especially those with children. This credit allows you to take a set chunk off the amount of taxes you owe. This one can typically be taken in conjunction with business deductions and credits as well, making it especially great for newer businesses with less income.
3. Business operations
You can deduct business expenses, such as utilities, advertising, marketing (including event sponsorships), office supplies, rent, travel and internet charges, so long as they’re used to run your operations. Building-management costs, such as landscaping and repairs, can also be looped in under these general costs.
These include taxes, bank charges (wire transfers, overdraft fees) and business insurance premiums.
5. Health insurance
As long as your business is profitable, your health insurance is 100% deductible. Similarly, certain medical expenses may be covered as well. You can also claim deductions for a health savings account (HSA) if you use one through your own business.
This includes the purchase of office equipment, furniture and business vehicles, as well as the depreciation value of your equipment. Check with a tax advisor on what qualifies under this deduction.
7. Social security payments
You can deduct half of your payment amount if you’re self-employed.
8. Charitable contributions
The U.S. Small Business Administration (SBA) estimates that approximately 75% of small businesses donate to charities annually. Besides the opportunity to become active in your surrounding community and to share a portion of your good fortune with those less fortunate, the IRS bestows tax-deduction benefits for individual and corporate donations.
9. Home-office deduction
When you’re self-employed, you can claim a portion of your home for work use with the home-office deduction. You can use the simplified method, which gives you $5 for each square foot of your home used for business purposes, maxing out at $1,500. Or, you can use the regular method, which involves determining the percentage of your home used for business. This can include your mortgage payment, utility costs and homeowner’s insurance premiums.
10. Internet and phone used for business
Just like the home office deduction, you can claim the portion of your internet and phone that you use for business purposes. This is best when done by a tax professional, but essentially boils down to determining what percentage of your phone and internet is used for business. From there, you can claim that portion as a business expense and reduce your taxable income.
11. Travel expenses
Do you ever commute for business meetings, head to coworking spaces for planning or do any other work-related travel? That’s a deduction. Any traveling for business reasons done during the current tax season qualifies for a travel deduction. This can include car rental, airfare, hotel fees and other travel-related expenses that were incurred during a work-related venture.
12. Medicare costs
If you’re currently using any medicare plan and are self-employed, you could qualify for a deduction per new IRS rules. With this, you can deduct any medicare premiums, which can be a sizeable chunk over the course of a year.
Other deductions your business may qualify for include expenses related to business education, moving, and losses from theft and fraud.
Besides claiming too few deductions, some small business owners get overzealous and claim too many. While you should take advantage of the deductions you’re legally entitled to, lying or stretching the truth on your business returns can result in an IRS audit, heavy fines and even jail time for tax evasion.
Meet with your accountant regularly to make sure your tax write-offs don’t end up creating an even bigger tax liability. Here are some of the common tax write-off mistakes to avoid.
Mislabeling personal expenses as business expenses in deductions
You can only deduct services related to your business. For example, home-care services like gardening won’t count, even though you work from home. If you’re unsure about something, double-check with an accountant.
Claiming mixed-use personal space as a home-office deduction
Home-office deductions qualify if a portion of your house is used solely for business. You cannot use this space for other home tasks or you may run into trouble. Hire a contractor to measure the square footage of the space and have them provide you with a letter proving your claim to the IRS.
Deducting your personal cell phone or internet bill as a business expense
If you choose to do this, you’ll have to keep meticulous records and demonstrate that the majority of your calls were business-related. The same applies to home computers and other home-office electronics. As a best practice, keep your personal cell phone, laptop and other devices separate from those you use for business.
Work uniforms or costumes
An easy way to determine whether this is a write-off is to ask whether the outfit could be worn outside of work. For instance, a new business suit would not qualify as a tax write-off. However, a clown suit for your party business would likely qualify for a deduction.
Other tax write-offs that are usually flagged
If you do any of the following on your tax return, it could land you in hot water with the IRS:
- Misidentifying contractors as employees and vice versa
- Writing off personal travel or family vacations as business trips
- Taking excessive deductions on income
Making the most of tax write-offs
Nobody ever said the freedom of self-employment would come for, well, free. There’s a lot of paperwork, business expenses, small business taxes and your own personal taxes, too. But, with self-employment comes the beauty of tax write-offs. With research, documentation and some extra effort, you can use write-offs to ease some of the financial burden that comes with running a business.
Meet with your tax advisor ahead of time to gather the paperwork you need to identify and back up your deduction claims. (If your business isn’t off the ground yet, you can still ask ahead of time to prepare for your first year.) Being organized and, above all, being honest about which expenses are directly related to your business, will minimize the stress that comes with filing your business returns during tax time.