Some people brush their teeth after each meal, floss every day, and never miss a dentist appointment. These are the kinds of freelancers and work-from-homers who don’t need advice on tax write-offs a few weeks before it’s time to file, because they’ve likely already paid their taxes. (Damn them!) But for the rest of us, it's a time of reckoning with what we’ve spent, and what can be gotten back.
If you work from home, work for clients on the side of your main paycheck job, or run your own small business or freelance consultancy, here are a few clarifications and considerations you should make when tallying up your receipts from last year. Go ahead—save this post for reading later, then pull it up with one week to go. All right, two days to go. One day? Starting right after lunch...
The seemingly hard-to-figure home office
If you use a section of your house or apartment for business, and only for business, then it’s the easiest tax math that exists. Figure out the square footage of the entire apartment or house, figure out the percentage that work space takes up, then use that to determine how much of your electricity, heat, water, and other household bills can be deducted. But that’s just one method for the math, and not the only way.
"You don’t have to use square footage," wrote Jacoba Urist, a tax lawyer, family finance expert, and frequent blogger, in an email exchange. "If you’ve turned your garage into a home office and have a separate heating unit or meter, you can use the entire separate bill." Any way, that’s a "more practical, reasonable way to figure out your utility costs" can work, within reason, Urist writes. Don’t round numbers or do the math on a napkin—you want exact percentages of specific expenses, because a lazy home office deduction can be an audit-triggering flag.
Gifts, favors, and karma in cash form
The rule about "business gifts" is simple: $25, per person, per year. When it’s a coffee mug for a new client, that’s simple. If it’s an entertainment-based trip with a client, that’s a 50% write-off, so a bit more complicated. But the really tricky part is capturing all the little favors and gifts that you almost never think of as expenses.
You can write off a dinner out with your significant other if that person is hearing out your business plan or a new campaign strategy, especially if there’s no way you could have shared that dinner moment at home, with the kids doing their kid thing. If somebody covers for you while you run out to make an important phone call, the funky pen or gift card you buy them as a thank-you is a write-off, assuming you mark the receipt properly. June Walker, tax advisor to the self-employed, covered more on the personal/business gift conundrum in an extended Bloomberg Businessweek interview.
Dressing for the (freelance) job you want
You’re in sales, but you really want to develop your coding skills. Sorry to say, the tax tide is against you, because to deduct job-search-related costs, you must be looking for work in the same field you work in, or just previously worked in, Urist writes. And those deductions aren’t even allowed after "a substantial break" from your last gig. And since you have no field of work coming out of college, that’s even less permissible.
The upside? Since you’re working for yourself, it’s up to you to determine what you need to keep up to date on your field and the people in it. If magazines (print or digital access), books, job-search sites, discussion forums, or other tools help you connect and get the job done, those are deductible, too. All the stuff you use to get a job these days—take a good look and save your receipts.
The little things worth counting
- Merchant fees for transaction processing, such as freelance payments taken through PayPal.
- Union, trade organization, and other membership dues.
- 100% of the health insurance you buy for yourself and your family (as of 2010)
- Consultations with lawyers, accountants, and other professionals related to your freelance work.
- Cellphones are tricky, because you probably mix personal and business. But Skype and other VoIP/networking costs? Those are much easier.
[Image: Flickr user Tanel Teemusk]