Commonly Overlooked Self-Employed Tax Deductions
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Being self-employed is not at all easy. It takes a lot of courage, self-motivation, creativity and tenacity to run a thriving business or to be a successful freelancer. I know how tough it is; I am one of you. In this cut-throat economy, we all struggle with our arms reaching out to a variety of resources and our heads calculating all kinds of possibilities. Despite all that effort, sometimes luck still might not be on our side. And then there's the IRS, the Gorgon of the tax world that constantly scrutinizes us with its numerous snaky eyes. Many people usually turn quite depressed during tax filing time, fearing the tax Gorgon and its merciless rules. Guess what? It doesn't have to be that way. Below is a list and detailed discussion of self-employed tax deductions that many taxpayers might overlook. This is NOT to encourage you to make up phony business expenses and cheat the system, but rather, to help you acquire all of your legitimate tax deductions, and be able to look at the tax Gorgon in the eye and say "Ha! You can't audit me!"
Determining Your Self-Employed Status
These are some important guidelines that the IRS uses to determine whether someone is a self-employed individual or an employee:
Sets their own work schedule
Told when and where to work
Purchases and uses their own supplies
Given or told to purchase supplies
Advertises their business
Does not advertise the business
Receives no worker benefits
Worker benefits are usually provided
Paid by a flat fee (no taxes are withheld)
Earns a regular wage and certain taxes (medicare, social security and income taxes) are usually withheld
Pays for all business expenses (meals, mileage, work space, etc)
Does not pay for business expenses or usually gets reimbursed for business expenses
Hired for a certain contract or project
Available to their relevant market
Works for only one employer
Self-Employed Tax Tips - Deductible Advertising Expenses
Most people are aware of the deductible expenses on the obvious advertising media, such as newspaper ads, brochures, business cards, flyers, posters, website hosting, etc. However, there are other forms of marketing and promotion that might be indirect but can legitimately qualify as business advertising as well.
Commonly overlooked tax deductions: holiday cards, school sponsorship, workshops, seminars
Holiday cards you send to your clients are a good example of indirect advertising. Although the cards don't read “My yoga studio is the best in Sacramento” or “Please continue to come to my spa,” they do create a positive image for your business as well as foster a better relationship between you and the clients in the long run.
Sponsoring your child’s sport team or school rally is another valid advertising expense, especially if your company’s name or logo is printed on the uniforms or other products they use. As long as you can prove a clear connection between your business and your sponsorship, the IRS will see it as a deductible business expense.
Last but not least, holding a workshop or seminar is another clever and legitimate way to promote your business, and therefore the expenses in these activities are tax deductible.
Scenario 1: Ms. Pumpkin Pie owns a baking supply store. One day she decides to give a special workshop on wedding cake decoration, using the products from her store. This will grant exposure to her business and possibly lead to an increase in sales, thus she can deduct the costs of this workshop as advertising expenses.
Big Exception: When you offer your service for free in order to promote your business, you cannot deduct the value of your time as an advertising expense.
Scenario 2: Mr. Casper Whisperer, a fortune teller, has just opened a new psychic store. In order to attract potential customers and spread the word about his clairvoyant ability, he offers free palm-reading service every Saturday. Even if Mr. Whisperer usually charges $100 per hour for this type of service, he won't be able to take $100 as a tax deduction. Advertising with time and sweat is not deductible.
Self-Employed Tax Tips - Deductible Business Gifts
Whenever you give a present to your customers, potential clients, employees or business associates, that is a business gift and a valid business deduction. The bad news is it doesn't matter how expensive the gift costs or how many fruit baskets you send to the same client. According to IRS, here's the rule:
Business gifts are deductible up to a maximum of $25 per person per year.
You may buy a two-hundred-dollar bottle of wine for your beloved secretary, but $25 is all the deduction you will get from this business gift. You can give your client three presents for Valentine's day, Christmas and his birthday, but still the maximum deduction for what you have spent on this special client is $25.
Commonly missed tax deductions: 1.) Business gifts given to people who also have a personal relationship with you 2.) Related incidental costs
Scenario 1: Mr. Harry Toothfairy's sister is a florist. Every week, she arranges an exquisite vase of roses for him, to place in the waiting room of his dental office. At the end of the year, he buys her a ticket to Justin Bieber's concert just to thank her for being so sweet. True, she is his sister; she is neither his client nor employee; and she is not in a business related to dentistry. Nonetheless, her flowers have made his dental clinic appear much more pleasant, and therefore she has helped nurture his business in a way. That's why the Justin Bieber's ticket is a business gift, and Mr. Toothfairy is entitled to a $25 tax deduction.
Scenario 2: Ms. Simone Smith sends a Hubpages coffee mug to Ms. Om Paramapoonya simply because she has always been such an awesome hubber. The mug is wrapped up beautifully and mailed from San Francisco to Sacramento. In this case, Hubpages can deduct the gift-wrapping and mailing as incidental costs beyond the $25 limit.
Gifts that Don't Count
- If you give away free samples of your products to prospective customers, you may deduct the costs as supplies or inventory, not as business gifts.
- If you give presents to both your client and his wife, you cannot count them as two business gifts. The IRS will consider husband and wife as one person.
- A gift or donation to a charity does not qualify as a business gift.
Keeping Track of Your Business Gifts
Sometimes when you fail to provide records for certain business expenses, the IRS might allow you to estimate the amount of them. These expenses usually include business equipment, supplies or any necessary costs that sound reasonable to have actually incurred. However, the tax Gorgon is usually not lenient about business gifts. Unless you have records to prove, the IRS would likely assume the costs are invented, and you would receive zero deduction.
So make sure you keep the receipts of all the business gifts you have bought and also write the following information on the back of each receipt: date it is given, description of the gift, name of the recipient, business relation between you and the recipient, and business reasons for the gift.
For example, Mr. Harry Toothfairy would write on the receipt of the Justin Bieber's ticket:
12/18/2010 - Ticket to Justin Bieber's concert for Stephanie Toothfairy, office-flower provider. Thanks
Self-Employed Tax Tips - Deductible Business Travel Expenses
What defines business travel?
Whenever you need to be away from your regular office and stay at a distant location longer than one day for a business purpose, that is business travel according to the "IRS dictionary." It is NOT the distance that defines it but the length of time you have to stay away from your regular place of business. If you fly from San Francisco to L.A. at 6 a.m. to negotiate a business contract, and fly back at 1 p.m. the same day, you cannot deduct your airfare as a business-travel cost but have to categorize it as "business transportation." Simply stated, business travel includes at least one overnight rest.
Typical business travel expenses: airfare, auto rentals, taxi fare, bus/subway fees, lodging fees, meals
Commonly overlooked tax deductions: incidental expenses that are necessary in your business travel, such as passport fees, laundry, concierge tips, fees for communication services (phone, fax, etc), and costs for separately mailing the products or samples you cannot bring with you on the plane.
What travel expenses are nondeductible?
Any expenses that are totally unnecessary and unrelated to your business.
Scenario 1: While having his paintings exhibited in a famous gallery in Italy, Mr. Vincent Earless decides to visit a nearby opera theatre and purchase a pair of Versace boots for his wife. His trip to Italy might be a real business trip, but these are personal expenses and thus nondeductible.
Scenario 2: Mrs. Lovie Dovie is going to attend a three-day business conference in Japan. She asks her husband to go on this trip with her because she desperately needs an emotional support. Mrs. Dovie won't be able to deduct her husband's airfare or any of his expenses in Japan, because he is not her employee or professional advisor. Although the emotional support from him might enable her to handle the conference more confidently, his presence there does not directly constitute a business purpose.
Self-Employed Tax Tips - Deductible Business Education Expenses
It doesn't matter whether what you learn is required by legal regulations or not; if it is necessary or useful in your trade, then the costs of your education are tax deductible. Business education expenses usually include tuition fees and books. But guess what? Education does not always have to take place in a typical classroom.
Commonly missed tax deductions: workshops or seminars, gallery or museum admission fees, research, library fees, document gathering, CDs, DVDs and travel expenses related to your business education
Scenario 1: Ms. Loveleen Netgeek, an online store owner, has to drive all the way from Reno to San Francisco to attend a seminar on Internet marketing trends. Due to the late schedule of the seminar, she also has to stay in a hotel overnight. Any costs of attending this seminar (admission fee, books, DVDs, etc) are deductible business-education expenses. Also, she can deduct all the costs of lodging, gas mileage and meals on this trip as business travel expenses.
Scenario 2: Mr. Romeo Montague, a drama historian and author, is writing a book titled "Shakespearean Plays in the Modern Theatre." It is impossible for Mr. Montague to finish this book by just sitting on his couch and allowing Shakespeare's ghost to inspire him. Since thorough research is much needed, he spends a fortune on collections of DVDs, theatre tickets, museum admission fees and many other educational documents. Luckily, he won't have to go broke because of that; these research expenses are tax deductible.
What education expenses are nondeductible?
You cannot deduct the costs of your education if you need such education to meet the minimum requirements of a business or to qualify for a new career. In other words, your learning can qualify as "business education" only when you are already in that field of business.
Moreover, sometimes you may feel that certain education really has a positive impact on your business and should be tax deductible, but the IRS might not think so. It all comes down to this question: is such course or educational material fundamentally related to your business? Think about it and give yourself an honest answer before trying to convince the IRS to grant you a tax deduction.
Scenario 3: Mr. Big Wig, a hairstylist, has no one to take care of his new dog while he is at work. It means he has to bring Rosemary, his beloved Chihuahua puppy, to his hair salon. Unfortunately, Rosemary turns out to be the little devil incarnate. She messes with his equipment and does her bathroom business wherever she wishes. When he decides to keep her in a cage, he has to listen to her screechy yelp all day long. The tiny dog drives both him and his customers crazy, so Mr. Wig decides to take a dog training course, hoping he will be able to deal with his Chihuahua more effectively. It is a great course, all right. He can finally order Rosemary to quit yelping and chewing up his hair dryers. As a result, he can run his business much more smoothly. Can he deduct the dog training course as a business education expense? Sadly, no. The course has absolutely nothing to do with hairstyling techniques, customer service skills or salon management.