Nothing is more gratifying from a work perspective than deciding to freelance. You’ve given yourself the freedom to choose who you work with and what work you do. You know what you want to do, whether writing, photography, graphic art, teaching, or consulting. That’s exciting!
Let’s talk about some of the benefits from the business side of things. You’ll likely be filing a tax return to report the income from your business, and you’ll also be claiming some significant deductions from your business. You can deduct expenses as long as they’re related to your business and are appropriate and common to your industry.
You might be surprised to find some of those deductions are right in front of you!
1. Business Use of Your Home
Many new freelancers begin their business from home because it eliminates the need for costly rent. The availability of the Internet and personal computers makes it feasible to operate from home permanently. The home office deduction is calculated using one of two methods.
- Simplified method – multiply the home office area by a predetermined amount (see Publication 587)
- Regular method – allocate the actual home expenses (utilities, insurance, repairs, etc.) based on the percentage of the area of the home used for your business
The home office business deduction can be a significant tax saver. However, it’s essential to understand the following rules for this deduction.
- You must conduct your business with the intent to make a profit
- Use a space in the home or a separate structure not attached to the house as your principal place of business
- Use the area regularly and exclusively for your business
The IRS does not explicitly define regular use. Whether that test is met will be determined based on facts and circumstances about the regularity of the use of the home office and the time and energy devoted to your business.
Exclusive use means just that. The space or room cannot be used for other activities like watching television, dining, or family recreation. The only exceptions are when the area is used to store products for resale, or it’s used for a home-based daycare.
2. Business Use of Your Car
Sometimes, as a freelancer, you might use your car for business. You may work as a courier or drive to locations from your primary workplace to meet with clients. When your car is used for business activities, you can deduct expenses associated with operating your car.
There are two methods for deducting freelancing business expenses for using your car. They both require you to keep good records of the miles you drive. Your deduction will be limited by the business miles you drive. The two methods are the standard mileage method and the actual expense method. You cannot use both methods simultaneously; you must pick one. See the Bonus Tip below for an exception.
Standard Mileage Method
The standard mileage method may be the easiest for maintaining records. You multiply the business miles driven during the year by the current tax year’s mileage rate.
For example, if you drive 150 miles for business during the year and the standard mileage rate for that year is 65.5 cents, your mileage rate deduction is $98.25.
Bonus Tip: In addition to your mileage rate deduction, there are three actual expenses that you can still take. Remember, you can only deduct the business portion of the expenses.
- Car loan interest
- Property taxes for car
- Parking fees and tolls
Actual Expense Method
The actual expense method requires you to keep records of car operating costs. Some examples of those costs are gas, oil, tolls, parking fees, insurance, registration fees, tires, and repairs.
You’ll only deduct the portion of costs related to the business miles driven if you use your car for personal and business.
For example, if you drive 5000 total and 600 business miles, your business percent of each cost would be 12% (600/5000). Your deduction for car insurance that costs $1,100 per year would be $132 ($1100 x .12).
3. Equipment or Furniture You Already Own
One of the great things about starting a freelance business is using equipment or furniture you already own. Whether you’ve decided to become a freelance photographer, writer, graphic artist, or anything else, you probably already own something you can use in your business – camera equipment, office furniture, or a computer.
Using items that you already own pays off in two ways. First, it helps you stay lean in the early days of starting your business. Those are cash expenses you don’t have to make. But did you know you might also be able to deduct those on your tax return? That’s the second payoff.
Here, we’ll look at the basics of converting personal use property into business use property without deep diving into the depreciation deduction. Depreciating property, like equipment or furniture, is how you deduct those costs. The total cost deduction is allocated over the estimated life of the item.
You may need to adjust the item’s cost when taking your freelance business’s depreciation deduction. This is required when deducting for something you already own personally but are now using in your freelance business. The IRS rule requires you to use the lesser of the following amounts.
- The fair market value you would receive if you sold it on a market platform like Facebook Marketplace or Craigslist on the date you started using it in your freelance business or
- The item’s original cost (increase that amount for any upgrades or decrease for previous tax deductions from casualty or theft losses)
When you deduct the cost of using your previously owned property in your business, you must consider whether you continue using it for personal activities. Do you still use your computer to play video games or your camera to take photos of friends and family? If so, you can only deduct the portion of your property’s cost or fair market value applicable to its business use.
For example, let’s say you’re working remotely as a freelance copywriter. You use your computer to write, but you also continue playing video games, writing personal emails, and making internet searches related to your personal interests. You have determined that you use your computer for business writing 60% of the time.
The fair market value of your computer when you started your freelancing business was $800. You can only deduct $480 ($800 x .60) for your computer by depreciation.
4. Cell Phone and Internet Services
Like the previous deduction of items you already own, you probably already have cell phone and internet services. Using those services for your freelance business will save you the extra cost of setting up a separate phone and internet.
You’ll only deduct the amount that applies to your business use, so you must determine how much you use your services for business versus personal.
Keeping records of your business usage, including time, date, and business purpose, would be helpful. That would allow you to estimate your total business and personal use to calculate a business use percentage. Your records will also support or prove the business use of those services.
Suppose you’ve determined that 30% of your internet usage is for your business. You can deduct 30% of your internet service charge.
In addition to the records you keep, your cell phone service company will be able to provide a statement with your itemized phone calls. You can probably access this by logging into your cell phone account. That will give a third-party corroboration to your records should the IRS ever ask for documents supporting this deduction.
The business expense deduction for these services will be simple if your business requires a separate internet or cell phone. Then, the entire amount of your cell phone and internet services will be deductible.
5. Travel
Does your freelancing require you to travel occasionally? Well, you can deduct expenses for business travel.
For travel expenses to be deductible, you must be away from your primary place of business for “longer than an ordinary day’s work” (IRS Publication 463). That means you’ll require sleep or rest to complete your work before returning home. It would be reasonable to argue that business travel for a distance that calls for you to be gone overnight meets that requirement.
You can deduct the following expenses for your travel:
- Transportation to your destination like airfare, bus, taxi, or car
- Transportation after you arrive at your destination to your hotel, business location, or customer’s home
- Incidentals like meals, laundry, and tips
- Lodging
- Other costs not listed here that are appropriate and common for your type of business
You should always consider how you’ll prove legitimate deductions to the IRS if needed. However, airfare, hotels, and meal deductions are the types of deductions that easily could hit the IRS radar for inquiry.
You can provide adequate proof of business expenses by keeping receipts with amounts, dates, name of restaurant or hotel, itemized receipts from the hotel to include meals, and the number of people served at the restaurant.
Any expenses not adequately described on receipts and bills can be documented in a journal or notebook. Include all of the components listed for adequate documentation. Do this promptly – either the day expenses were incurred or do all your entries weekly. You will also keep a written record of dates and days you traveled for business, destination, and the purpose of your travel.
Bonus Tip: You can only deduct 50% of the cost of your business meals. However, for any business meal expense between December 31, 2020 and January 1, 2023, purchased from a restaurant, 100% of the meal cost is deductible. You would include those deductions on your 2021 and 2022 tax returns.
Conclusion
Freelancing not only offers the exhilarating freedom to pursue your passion but also presents valuable opportunities for tax deductions that can significantly benefit your business. As a freelancer, you have various avenues to optimize your tax returns, from the convenience of deducting your home office space to the practicality of claiming expenses related to your car usage. Utilizing items you already own, such as equipment or furniture, helps you keep your business lean and opens the door to additional deductions. Remember, meticulous record-keeping is the key to maximizing these deductions for your home office, car expenses, or travel-related costs. As you embark on your freelancing journey, staying informed about these deductions and adhering to IRS guidelines will empower you to maximize your financial opportunities while doing what you love. Happy freelancing!
Resources
IRS Publication 463 Travel, Gift, and Car Expenses
