Tax Tips For Future Thinking Freelancers: Collect Deductions Now For a Painless April 2009

We’ve all been there.  You know you spent hundreds on office supplies, but how much?  It’s so much easier to create a simple system for tracking expenses than to scramble for receipts, or worse yet – guess, come tax time.  Review these tips, then get yourself a label maker and some manila folders.  Do it now and thank me next spring!

What’s Deductible?
If you’re in business and you incur and expense in the course of conducting that business, it’s probably deductible. There are different opinions among tax professionals about many deductions. Some CPAs are conservative, others very aggressive. It’s a subjective system. If you have a good argument for something being a deduction within the parameters of the rules, then go for it. Use your common sense, and again, consult a professional. And keep track of everything, regardless of when in the year you embark on your freelance activities.

Bad Debts – Deadbeat clients stink. Even worse is the fact that as a service provider, you can’t write off the value of your time. If someone doesn’t pay, you don’t include anything in income, but you can’t include an expense for this either. Apparently the IRS doesn’t think your time is worth anything.  In money terms, there’s nothing to write off.

Outsourcing – If you pay people to help you in the course of your business, they are self-employed and thus responsible for reporting their own income. Therefore, these payments are an expense for you. You aren’t required to report the details every little thing to the IRS, but if you pay the same person on a regular basis, you want to consult with a CPA or a good bookkeeper to find out if you need to file a Form 1099 to report the payments.
Home Office – I’m pretty conservative on this one.  I say don’t bother.  This deduction is a mess at best.  In order to take any deduction for your home office you need to meet specific tests. First, the office must be exclusively and regularly used for business. Most of us fail this test, but if you never pay bills, help kids with homework, or read your horoscope in your office you just may qualify. In addition, your office must be the main place you work, the place you meet clients, or a separate structure. If you decide to take this deduction, make sure to keep copies of all your utility and insurance bills.  And please, please, please run it by a professional. 

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Computers – Computers are not expenses. Sorry, but it’s true.  Computers, and other equipment, like printers and faxes, are considered assets, which are expensed over time.  It’s call depreciation.  The good news is that there are some wonderful rules in place that let us accelerate that depreciation so that most of us are perfectly within our rights to write off an entire computer in one tax year. But a new laptop the next year is asking for trouble. 

For more, check out this old post on Deb Ng’s Freelance Writing Jobs blog.  I also like June Walker’s  great indie tax advice.

FYI – as a former CPA, who has let my license lapse, the laws of my state prohibit me from preparing tax returns or from offering specific tax advice. Keep in mind this information is intended for educational purposes only.  Consult a qualified tax professional to discuss your particular situation.