Deductions for Independent Contractors, Freelancers and Self-Employed Part 1

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model-tWorking as an Independent contractor, you know saving money is paramount and while being frugal is always smart, sometimes you have to spend money to make money. By properly deducting the expenses that are necessary to keep your business running, you will minimize your tax bill, and maximize the money in your bank account.

Since this is such a big topic, we’re going to break this blog post into several pieces to make it more digestible. It isn’t possible to produce a comprehensive list of EVERYTHING that can be deducted, because it depends on your personal facts and circumstances. Instead, we will focus on defining what makes something tax deductible, and then go over a few of the more common deductions that clients ask about.

When determining whether an expense is tax deductible, it’s important to remember that everything is evaluated based on your facts and circumstances. All deductible expenses must be for your business. For example, if you develop video games for a living, you can legitimately deduct the purchase of video games if you’re doing it for market research or training. If you’re a banking consultant, you’re going to have a really hard time justifying the deduction of video games to an IRS auditor.

If something is used both for business and your personal life, you have to deduct the percentage of what was used for business purposes, and your records should reflect those deductions. Also, you have to ask yourself if it follows the guidelines set out by the IRS, whether an expense is “ordinary and necessary.” An ordinary expense is common and accepted as normal in your field or business. A necessary expense is one that’s considered both helpful and appropriate for your field or business, also, an expense does not have to be vital to be viewed as necessary by the IRS.

Now that we have defined what you have to consider when determining what can be deducted, we can go over a number of common deductions clients ask about every day.

 

Startup Costs

The expenses associated with starting your business are called startup costs, of which you can deduct $5,000 in the first year you are doing business. Any remainder of those expenses must be deducted in equal parts over the course of 15 years. Once your business is up and running, expenses on things like advertising, office supplies, and repairs can be deducted.

 

Travel

If you travel for your business, which many independent contractors do, there are several deductions you can take advantage of. Things like air fare, the costs of operating your car, rental cars, taxi fare, food, and lodging are deductible as long as the purpose of the trip is business, and the costs of your trips are reasonable. Now, if you take your family along for a trip, over 50% of the time spent on the trip must be devoted to business, and you may only deduct costs associated with your business.

For a more detailed description on how to properly utilize your vehicle deduction, check out the FAQ on our blog: Deducting Your Vehicle.

 

Home Office

If you work from home, the home office is an important deduction that can save you a lot of money. There is a common misconception that it’s a red flag to the IRS, but it’s not, as long as the space is devoted solely to your business and you follow the rules. With that said, the best way to utilize the home office deduction is to measure the total square feet of the space used for your office, and divide that by the square footage of your home. This is the percentage of your home related business expenses that you are able to claim (e.g., rent, mortgage interest, homeowners insurance, utilities, HOA fees, etc.)

 

Interest

When using credit to finance business purchases, any interest charges are completely tax deductible. The same is true for a personal loan if the proceeds are used for your business. It should be noted that you need to keep good records displaying that the money was used for your business.

 

Cellphone

In the past, the IRS has been very stringent about the way a cellphones could be deducted, requiring you to track the minutes used for business purposes, but in 2011 they relaxed the rules. If you use your cellphone primarily for business purposes, you can deduct the cost of your cellphone.

TO BE CONTINUED HERE

 

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