Freelance tax deductions can be a confusing topic as there is a lot of misinformation out there about what you can actually deduct and how those deductions work.
Here are three things you need to know about freelance deductions.
1. Deductions reduce your taxable income.
You make money; You are spending money. So life is. Uncle Sam wants some of the money you make, but he also wants you to invest in your business.
To give you a break from these business expenses, Uncle Sam does not tax all of the money you make from your business (i.e., revenue). You can deduct most of the business expenses from your income, and in most cases, business losses can reduce your total adjusted gross income (AGI).
Fewer taxes, right? That’s a pretty cute deal, which means you have to meet some qualifications.
2. The expenses must be normal, necessary, and related to your business.
What does it all mean? Let’s look at two examples.
Suppose you are a photographer. You spent $ 30 on social media ads last month.
- That $ 30 cost is not uncommon for photographers.
- This is necessary as marketing is part of running the show.
- The ads all pointed directly to your company. So it’s obviously a related issue.
Congratulation! You can deduct $ 30 from your taxable income.
Now suppose you are spending $ 1,500 on a gold-encrusted hamburger. You know for the experience. Let’s see how that holds up in the ordinary, necessary, and regular argument:
- A gold burger is no ordinary photo expense (surprise).
- You don’t need a gold burger to become a photographer. Or anything, but I digress.
- Unless your entire business revolves around snapping pictures of ridiculous luxury foods, you definitely aren’t going to drop that much money on sandwiches on a regular basis.
Unfortunately, not all issues are black and white when it comes to whether you can get them off. Some expenses are split between personal and business use, e.g. B. Your fuel consumption. In these cases, you can only deduct the amount that you used only for business purposes.
3. Keep all records of business expenses just in case.
Whether you are absolutely certain that an expense is deductible or a little blurry in the details, you need to have records to prove the expense and its relationship to your work.
If you are claiming deductions on your tax return, the IRS and your state tax agency will look for red flags and suspicious patterns. Appendix C, which you use to report business income, is one of the most researched points because of its abuse over the years. If something you say is wrong, you will hear from the higher ones.
It’s no fun to be interviewed by the IRS. However, if you can provide record keeping showing your deductions that your expenses were normal, necessary, and related to your business, you are home free.
When it comes to filing an expense for a business deduction, a good rule of thumb is, “If it’s gray, stay away.”
Would you like to get a better idea of what expenses you can deduct? Check out our infographic for a list of business deductible expenses and some expenses that are not being cut.