Freelancers and small business owners often wonder what is “safe” to use as business deductions to write off from their taxes. There is often a lot of confusion, uncertainty and misinformation among small business owners about the topic of business deductions, with people wrongly assuming that certain items are deductible or failing to claim legitimate tax deductions.
Without good information, you run the risk of claiming too many deductions (and becoming a target for an IRS audit) or, by making the opposite mistake of not claiming certain deductions, missing out on tax savings that you rightfully deserve.
Here are a few guidelines to common business deductions that freelancers and small business owners need to know about:
Home Office Deduction: Many small business owners work from home, at least part of the time. But does that mean you can deduct your entire monthly rent payment or mortgage payment? No! The IRS has strict guidelines on which portion of your housing costs is allowed to be classified as a business expense. For example, your home office needs to meet at least one of the following three criteria:
- Your home office must serve as your principal place of business
- You use your home office to meet with clients and customers during the regular business day
- Your “home office” is a separate structure on your property but is not attached to your house or residence.
Also, your home office deduction is limited by the percentage of the total size of the residence that is taken up by your home office. For example, if your house is 2,000 square feet and your home office is 200 square feet (10 x 20 feet), that means that your home office consists of 10% of your house size and you can deduct 10% of your household’s costs — including mortgage interest, insurance, real estate taxes, electricity, repairs, etc. as valid business expenses.
Business Automobile Expenses: If you travel for business in your personal car or truck, business-related vehicle mileage is tax deductible. The IRS will let you claim a mileage deduction of 54 cents per mile (as of 2016) or 53.5 cents per mile beginning in Jan. 2017. This means that if you drove 1,000 miles for business last year, you can claim a business deduction of $540 on your tax return.
NOTE: the business mileage deduction does NOT apply to daily commutes to and from an office or regular place of business.
Business Travel, Meals and Entertainment: One of the perks of running your own business is that you often get to go on the road to entertain clients or have glamorous dinners out during business trips — right? But whether you’re dining at a 5-star restaurant or a truck stop fast food place, you need to be careful to keep records to show that the deductions were for valid business purposes. The IRS will let you deduct all of your business-related travel expenses, but only 50 percent of your expenses for “business meals and entertainment.” Deductible expenses for business travel include airfare (or bus/train tickets), car rental, taxis, hotels, and incidental expenses like dry cleaning and tips. You can also deduct the costs of conferences, seminars and trade shows — anything that is intended to help you enhance your business expertise, learn new skills or find new customers is all a legitimate business expense.
This is just a short list of some of the most frequently used business expenses, whether you’re a sole proprietor or have set up an LLC. For more details on various types of acceptable Business Expenses, refer to IRS Publication 535 (2016), Business Expenses.