If you're a freelancer or are self-employed, deducting your business expenses from your taxable income can help you save money.
When you're preparing your tax return, you'll track those business expenses along with your income using what's commonly known as a Schedule C, part of the Form 1040. You'll use this form to claim deductions for many of the expenses you've incurred throughout the year. These may include everything from buying a stapler for your office to paying for advertising costs, and most will be clear cut.
But some of the expenses you're entitled to deduct aren't straightforward. That's why it's important to take your time filling out your Schedule C and calculating your deductions, says Matt Rosenberg, a certified public accountant and a member of the American Institute of CPAs' Financial Literacy Commission.
Not only is it one area the IRS tends to scrutinize but being precise about your deductions can significantly lower your overall taxable income. "Making sure you have the right number is really the goal," says Rosenberg.
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Here are three deductions you'll want to calculate carefully:
If a portion of your home is dedicated to an office or a home-based business, you may qualify to claim a home office deduction. This break is available to both homeowners and renters. Be careful, though, since this is one tax break that can heighten your audit risk.
The IRS has very specific guidelines for what can be counted as a home office. "The section of your home that you're declaring for business must be exclusively used for business, and I think the IRS is very serious about that this year," says Rosenberg.
In other words, "you can't work from your dining room table and call it a home office," adds Robin Berger, a certified public accountant at R. Berger & Company in New Canaan, Connecticut.
You can calculate the home office deduction two ways:
- Simplified option: The square footage of your office determines the value of the break for you. It uses a formula of $5 per square foot for up to 300 square feet, meaning the deduction is capped at a $1,500. This method can save you some hassle and doesn't require record keeping throughout the year.
- Actual expenses method: The most precise way to calculate your home office deduction, this allows you to deduct a percentage of your total rent based on the size of your home office or business. Using this method, you can also deduct a percentage of indirect expenses, including your mortgage interest, insurance, and repairs. This method requires diligent record keeping and careful calculations.
"For most taxpayers, the simplified method is preferable because it's easier and not as likely to be scrutinized by the IRS," says Rosenberg. But if your actual home office expenses would result in a larger deduction, and you've kept good records of expenses, use that more precise calculation, he says.
If you use your car for business purposes, you may be eligible to claim deductions related to miles driven and other operating expenses. The extent of the deductions will depend on whether the car is solely for business, or both business and personal use.
You can calculate the value of your deductible car expenses using one of two methods:
- Standard mileage: This deduction works similarly to the simplified home office calculation, although there's no cap. The IRS offers 58 cents per mile driven. If you drive 5,000 business miles in a year, that's a $2,900 deduction. While this will simplify the process, you can't write off repairs or the cost of gas as additional expenses.
- Actual expenses: This method requires that you add up the actual money spent on your vehicle, including gas, oil changes, repairs, and insurance. Then you multiply this figure by the percentage of the vehicle's use for business. But as with the actual expenses home office deduction, you'll need to keep detailed records.
Which method works for you depends on how much you drive and what kind of shape your vehicle is in. With either, it's smart to keep a log of miles and other expenses with a tracking app like TripLog or MileIQ. "You have to keep mileage logs of every single place that you went for business," says Berger.
The most important thing is "just to make sure I'm in compliance with the standards," says Berger.
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Expenses like cellphone and internet service may be deductible as part of your business expenses. You'll need to figure out the percentage of phone usage for business purposes on a month-by-month basis. Keep in mind, though, that your "primary residential phone" doesn't qualify for a break, even if that's your cell.
Cellphone and internet usage can also require some effort to calculate, since you may use the same line for both personal and professional phone calls, or be doing work online while also having browser tabs open for personal items you want to purchase later in the day. "You want to show some concession for personal use," explains Baker.
Although figuring out the precise percentage of business versus personal usage is tricky, the IRS is likely to view the deduction you claim as legitimate "as long as you're showing some reasonable due diligence," says Berger.
Review your call log through your cellphone service provider and highlight personal and business calls in different colors, to help give you a sense of the usage breakdown. You'll also want to note the business purpose of each call. This can help you figure out what percentage of your total bill to claim.
Ideally, keep tabs on these tricky deductions throughout the year instead of waiting until tax time to pull together totals.
"If you have a good process for saving your statements, uploading receipts, and putting those in an organized fashion, if you do that throughout the year, it can make filing your Schedule C and your tax return pretty painless," says Rosenberg.
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