Tax-Deductible Expenses for Freelancers
The tax-filing season is here again. As a freelancer, you must be feeling burdened with dual tax liabilities — income tax and self-employment tax. But, did you know that you can claim tax deduction for several categories of expenses? Knowing the nature of your expenses can help you to optimize the tax outflow and maximize net income. Let’s look at the major tax-deductible expenses.
Office space costs
Many freelancers work from their home. If you have a home office with a designated work area, you can claim a portion of the proportionate rent or mortgage payment for the designated area as a business expense. Similarly, you can also deduct the proportionate cost of utilities to arrive at your taxable income. The list of utilities includes electricity, phone, gas, heat, etc. If you have a separate office, outside your home, the cost of utilities is 100% tax-deductible.
Travel and accommodation costs
If your freelancing business requires you to travel and stay at hotels, you can claim deduction for those expenses. If you are traveling to attend trade shows or visiting clients, the transportation and accommodation costs are tax-deductible. If you are taking your client for lunch, those expenses are also tax-deductible. But you need to be cautious that these expenses are incurred for the sole purpose of business development. Leisure travel and sightseeing expenses do not qualify for tax deduction.
Professional development costs
Freelancing requires you to showcase your skills and connect with professional organizations for networking. IRS allows freelancers to deduct fees paid to professional organizations or any other membership dues. If you are enrolling in any course for professional development, the cost associated with the course is also tax-deductible.
Advertising and marketing costs
As a freelancer, you need to advertise and market yourself. All these expenses are tax-deductible. Therefore, you can deduct the costs of printing business cards, flyers, print ads, etc. to arrive at your taxable income. If you have created a website to market yourself, the cost associated with the development and management of the website is also tax-deductible. Therefore, you can claim deduction for domain fees, site building costs and site maintenance costs.
If you drive regularly to meet clients or other stakeholders, you can claim deduction for mileage and gas expenses. You can select from either the actual expense option or the standard mileage option to claim vehicle-related deductions.
If your freelancing business requires you to use specialized software such as MS-Office, Adobe, etc., you can claim deduction for the purchase cost of such software.
While you work as a freelancer to earn revenues, you cannot rule out the possibility of bad debts. You may end up working for clients who default on their payments. Fortunately, IRS recognizes these losses to the business as an expense and you can claim deduction for unpaid invoices. Be sure to maintain a list of invoice numbers, so that you can take the deduction properly.
You MUST be honest when you claim deduction for expenses, else you may end up in audit. Categorize your expenses diligently, maintain proper records and maximize your after-tax income.