Freelancers: Tax Deductions You Might Be Missing

Published: Dec 11, 2016
Under: Business

If you’re a 1099 worker or small business owner, you must either have a firm grasp of the tax code or the assistance of a qualified accountant to not only stay in compliance with IRS rules, but to retain as much of your earnings as possible. Knowing about all the available credits and deductions is the most important aspect of maximizing your income. Many freelancers know all about the most common deductions:  office expenses, business travel, meals and entertainment. But there are more tax deductions you might be missing out on.

Take a look at some of these commonly overlooked deductions to see if you can further lighten your tax burden:

Startup Costs:

This first one is a big one. Costs incurred by a new business before opening are traditionally deducted over 180 months according to an amortization schedule, with one big exception: the IRS allows you to accelerate deduction of up to $5,000 in startup costs in the business’s first year of operation. Startup costs include things like advertisements for the opening of the business and travel costs to secure customers. Startup costs exceeding $5,000 should be deducted in equal portions over the next 15 years.

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There is a similar but separate $5,000 acceleration available for organizational costs, which include things like legal, filing and accounting fees for setting up a business entity. Together, these two allowances create the opportunity to save $10,000 in taxes in the first year of business. There are, of course, qualifications, limitations and further considerations for each of these. Learn more at IRS.gov.

Interest Payments:

If you’ve used a personal loan or credit cards for business purchases, then any interest you’ve paid is tax deductible. You will need to keep careful records to document that the money was spent on actual business costs, but this can help you offset the cost of using personal funds to keep your business, well… in business!

Self-Employed Health Insurance Premiums:

The Affordable Care Act requires independent contractors to have health coverage and not doing this can result in stiff tax penalties. The upside to this requirement is that the premiums are deductible. In order to claim this deduction, you must be showing a net profit and you cannot be eligible for another insurance plan (like a spouse’s employer-provided coverage).

You might also want to read: Getting to know the Affordable Care Act for Designers.

Maintenance and Repairs:

If you have had to have some part of a home office (space or equipment) repaired you can deduct the expense.  A few things to keep in mind, however, are that if you did the work yourself you can only deduct the cost of materials (not labor), and if the repairs were on a part of your home or a piece of equipment that is not directly related to the office space but does impact the business, it can only be partially deducted.

Business Organization Memberships & Publication Subscriptions:

Staying current in your chosen field is vital for all working people, and especially for independent contractors. Any professional organization membership dues and/or fees, as well as any professional publication subscriptions, are deductible expenses.

Also take a look at Why you should be a Google Trusted Store.

Professional Services:

Professional services like accounting and legal fees are all tax deductible. Just make sure that if any of these expenses are also attributable to personal services (like having the same person prepare both your business and personal taxes) that you receive an itemized bill.

Uncollectable Receivables:

If you are using the accrual method of accounting (i.e. reporting revenue as earned, not as paid) you can deduct any bad business debts or uncollectable receivables. Note that most small businesses and independent contractors use the cash method of accounting and therefore cannot claim this type of deduction.

Keeping track…

Knowing all of the possible deductions an independent contractor can claim, as well as when and how to claim them is an important part of being a responsible and successful entrepreneur. Keeping careful records of every expense can help reduce the amount of money you owe the government and increase your earnings.

However, even with a solid layperson’s understanding of the many tax deductions available, it is still possible to overpay or run afoul of the IRS thanks to the complexity of our tax code. To ensure avoidance of either of these outcomes, consult a tax professional.

Author Bio:  Jacob Dayan is partner and co-founder of Community Tax, a national provider of tax resolution, tax preparation, bookkeeping and accounting services. Before starting Community Tax, he specialized in financial modeling and the securitization of mortgage- and asset-backed securities. Jacob graduated from the University of Michigan’s Ross School of Business.

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