Tax deductions for Self-Employed and Freelancers

IRS Schedules C and E 2014

From River Journal Online — Ron Friedman provides general guidance for the tax deductions for freelancers and self-employed workers.  Taxpayers who file a schedule C  (Profit or Loss from Business) or Schedule E  (Supplemental Income) are more than 3 times as likely to be audited as other taxpayers.  Maintaining appropriate records, keeping receipts and completing tax forms accurately are especially important for freelancers and self-employed individuals.  Ron provides great general guidance for tax deductions.  He writes:

Every profession and industry may have its own unique characteristics; here’s a general list of what is available to most:

Home Office: In order to qualify for the home office deduction, you must have a dedicated space devoted to your business and absolutely nothing else. Deducting the den in your house that contains the family computer and serves as a guest bedroom is an invitation for trouble. The deduction is calculated by the amount of square footage devoted to your office divided by the total square footage of your home. That fraction is applied to the costs of running your home will be the basis for your home office deduction.

Automobile: The deduction for use of your automobile is the greater of the actual costs of owning and maintaining it compared to the standard mileage rate the Internal Revenue Service publishes every year — 56 cents per mile for 2014. Actual expenses may include lease or loan payments, registration fees, insurance, gas, maintenance, repairs, garage fees and depreciation. The caveat here is that the only deductible portion of the costs are those associated with the business use of the automobile. It is advisable to maintain a car log or diary, to distinguish business miles from personal miles.

Meals and Entertainment: The rules regarding meals and entertainment can get fairly complicated, however, here are some guidelines to determine if the expense qualifies:

1)    The expenses has to be an ordinary and necessary expense that is common in your industry/profession and is helpful and appropriate to your business.

2)    The expense has to be directly related to your business, meaning it occurred in a business setting, or the primary goal was to do business or for a particular business outcome. It does NOT have to result in business transacted.

Equipment: Normally business equipment (phone systems, computers, furniture, copiers, scanners, etc.) is tax deductible (depreciable) over the useful life of the equipment. The IRS publishes tables covering all kinds of equipment and their related tax lives. However, one of the nuances in the tax code allows for 100% depreciation in the year of acquisition.

Retirement Contributions: While not directly a cost of business, the tax code allows those self-employed and freelance workers the ability to lower their tax bill by contributing to a retirement account. Whether one utilizes an IRA, SEP or KEOGH plan, those contributions can lower your overall tax bill…”

Health insurance: Premiums paid for health insurance by freelancers are deductible. In fact, for those who are collecting Social Security while freelancing, your premiums paid for Medicare coverage are also deductible.

For information about additional deductions, read the full story at Tax deductions for Self-Employed and Freelancers

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