Tax Writeoffs for Freelance Business OwnersJanuary 8th, 2009 by Michael Kwan
Now that 2008 has come and gone, many business owners have started to pull their papers together in preparation of income tax season. Naturally, this is also the case for freelance writers like myself, because I still have to complete an income tax return just like anyone else. This true regardless of which freelance writing business structure that you choose to use, though the specifics of how to prepare the income tax documents will vary accordingly.
The best practice, of course, is to stay as organized as possible throughout the year. This way, all your ducks are already in a row, so to speak, and you just have to run it through the software to see how much you are getting back in an income tax refund or how much you owe to the government. In working out these computations, it is important to consider the various things that you can “write off” as a freelancer. In general, freelance writers have fairly minimal business-related expenses and some may not be as obvious as others.
Before we go any further, I should note that I am far from any kind of income tax professional. While the advice described below may be useful, you should consult with a properly licensed accountant or other income tax professional for any specific questions or concerns.
Business Use of Home Expenses
Most freelancers work from home. A few may rent some office space somewhere, but working from home is more convenient and, unless you meet with a lot of clients in person, just more cost-effective. Calculating your business use of home expenses is a lot easier (and more easily justified) if you have a distinct area in your home that operates as a home office. Do you have a room that is used solely for work? How about a specific corner in the main living room?
With this in mind, you can “write off” some of the expenses related to keeping this home office running, like a portion of your rent (or mortgage), utility bills, property taxes, and that kind of thing. You cannot write off the entirety of your rent, because your entire home is not being used for business purposes. Instead, the calculation would be based on what portion is being used for business. If your home office is 100 square feet and your entire home is 1000 square feet, then you can justifiably write off 10% of the related expenses.
Communications and Supplies
Just like the business use of home expenses described above, you can take a similar approach when computing the freelance expenses related to communications and office supplies. Unless your Internet service is used solely for business and no one else in the household uses it for any other purpose, you probably shouldn’t write off the entirety of your Internet bill. You can justifiably write off an appropriate proportion.
The same thing can be said about a landline telephone, a VoIP line, or your cell phone. If you have a dedicated business line, that’s one thing. If you use your personal phone for business purposes, that’s a different thing altogether. Chances are that if you use a fax machine, though, that it will be almost entirely for business purposes.
Reasonable Expectation of Profit
What about buying equipment and paying for all sorts of other things? Would it be appropriate for me to write off the purchase of my Xbox 360, for example, seeing how I do video game reviews from time to time? Well, it’s up to you to justify the expense to the government should you ever get audited. This may be slightly different in the United States, but in Canada, business owners must demonstrate a reasonable expectation of profit. Will the Xbox be used mostly for business? Will it generate well over its purchase price?
Another example would be where someone like John Chow can write off his fine dining exploits, seeing how he generates well over $30,000 a month from his blog. By contrast, my Dine Out adventures do not come with the same reasonable expectation of profit, so I don’t necessarily write them off. I could use them as an expense, however, if I was “entertaining a client” or in some other related “marketing” situation. At that point, I could justifiably write off 50% of the total bill.
Ringing Up the Little Things
When working out the tax writeoffs and expenses for your freelance business, don’t forget about the little things. Did you pay for postage? How about that batch of pens and that pack of copy paper? These little expenses can quickly add up and, if you manage to keep track of them over the course of the year, they can provide for some healthy income tax relief.