If you’re a freelancer or small business owner, and you’re only using the 1040 form to do your taxes, you’re doing it all wrong.
You’re missing out on some very valuable deductions and expenses you could take, and if you’re not using a professional, you’re leaving money on the table. If you find you owe taxes each year, you’re definitely not doing it right.
My advice: find a tax professional you can trust and talk to them about using a Schedule C with your 1040.
The general rule of thumb is, if an activity costs you money to do the thing you make money at, you can deduct it. For example, I make a few bucks as a travel writer for the state of Indiana. This means I can deduct any expenses related to my travel-writing trips, such as mileage and hotels. A writer friend makes money from, and is taxed for, his book sales. This means he can take deductions for any readings and book signings he drives to, especially if they’re overnighters.
You’re going to be taxed on your income already, so you might as well reduce the amount the government takes by declaring each and every expense related to it.
Here are four important deductions you may be missing as a freelancer, independent professional, entrepreneur, or small business owner.
1. Mileage Related to Work
If you drive to client meetings, conferences, or other work-related events, you can deduct the mileage. However, this doesn’t include mileage driving to and from your regular work; you can only count special trips. Keep track of all your meetings in a calendar, and then list all the meetings and mileage in a spreadsheet. Turn all that in to your accountant and they can take care of the rest.
Erik, how exactly do you think I do this? —Cary, your accountant
Cary, I don’t know. Voodoo or physics or something? I’m a writer, I don’t pay attention to this stuff. This is why I depend on you. —Erik
I use Google Calendar and Google Drive, and I use Zapier to export all my appointments to a Google Drive spreadsheet. From there, I can clean it up, delete all personal/non-paying appointments, and then pop in the mileage for each appointment. This saves me roughly three hours from trying to do it all by hand.
Note: You can also take the mileage out of the company as non-taxable expenses. But once you do that, you can’t take it as a deduction on your personal return because it will be deducted on the business return. If you drive 400 miles to and from a conference, that’s roughly $200 in expenses. You can take the $200 in cash, or you can deduct it on your taxes. Ask your accountant which would work better in your favor. And if you pay for your gas with the company card, you can’t deduct your mileage either.
2. Cable and Mobile Phone
If you work from home, and you rely on the Internet to do your work (and who doesn’t?), you can deduct your cable/Internet costs. The same is true for your mobile phone. If you have a mobile number for clients to call, that’s another business-related expense, which means you can declare it. And if you keep a work-only landline, that’s also tax deductible.
(However, you can also keep your phone costs down if you use Skype as your primary means of communication. This also lets you keep a personal-only phone, and not have to worry about that second phone, or trying to total up the number of work minutes versus personal minutes.)
Remember, you’re not allowed to deduct costs if you’re reimbursed for them in any way. For example, if you work as a remote employee, and your employer pays your cable bill, you can’t turn around and declare it yourself.
3. Office Space
I found a low-cost office to rent, and it’s something I recommend, if it’s available where you live. In Indianapolis, we also have the Speakeasy, which is a shared co-working space. Other cities like Fort Wayne and Evansville also have co-working spaces. If you pay a membership fee or rent to be able to use that facility, that’s considered a deductible business expense. (Working every day from a coffee shop is not considered a business expense, however.)
If you work from home, it is possible to declare your home workspace on your taxes, but it can be rather tricky. There are formulas, and if you use part of a room to work, you need to measure the workspace, and there’s a formula to apply and more of that voodoo physics stuff Cary knows about.
It’s a bit easier if you dedicate one room, like a basement office, to your workspace. But if it’s the desk in a corner of the family room, that’s a bit more problematic. Talk to your accountant, but be prepared to justify it to the IRS, because this often raises flags with them.
4. Food and Entertainment
This is a tricky one. It’s not like the old days when you worked for a company, and you could expense big fancy meals with important clients. Deducting food costs on your taxes can be a problem if you’re not careful.
For one thing, says Cary, you shouldn’t buy food for “working lunches” on the company account. (My wife says the same thing, so this may not be a tax rule so much as a Toni-and-Cary-are-conspiring-against-me ploy.)
One reason is that you can’t deduct the whole meal, only your half. You can’t just take people out to lunch and deduct the entire meal on your taxes. It can also raise red flags at the IRS if they see a lot of entertainment expense deductions on your taxes. So keep this kind of spending to a minimum, lest you feel the cold, probing fingers of an audit.
The problem with doing your taxes yourself is that you may not know the latest rules about deductions and expenses. Basically, if you find that you owe money when you file your taxes, you need to speak with a professional. While you’ll have to pay the accountant, if you’re making a full-time living as a freelancer or entrepreneur, you could find your tax return is much bigger than what you could get doing it on your own.
Special thanks to my own accountant, Cary Hudson of Ashworth Accounting Services for helping with this blog post (and my business!). Cary is a CPA who lives and works in Carmel, IN. He specializes in working with small businesses for their tax and bookkeeping needs, and he’s saved me from hours of headaches for the last six years.
Photo credit: Alan Cleaver (Flickr, Creative Commons)