Figuring out deductions

Why am I talking about taxes in the middle of August? We’ve got something like 8 months before we need to think about prepping our taxes, right?

Well, a little work along the way will make it easier to prepare your taxes come April. Personally, I like the idea of just getting the damn things done and over with, as soon as possible. Getting an extension just means I have to worry about it even longer.

One way to simplify things is to keep track of your business expenses now. If you’re using some kind of money management software, great! — your computer may do all the work. If you’re using paper and pencil, you still need to be tracking which of your expenses are deductible.

According to the IRS, “Business expenses are the cost of carrying on a trade or business. These expenses are usually deductible if the business is operated to make a profit.”  I don’t know about you, but I’m planning on making a profit here, if it kills me.

So, let’s take a look at exactly what we can write off.

  • Do you work from home? Well, as long as you own your house, you can write off a certain amount of expenses. Take a look at the IRS’ Publication 587 to determine just how much.
  • If you work from an office you rent, that expense is deductible.
  • Do you use your personal car to make business trips, even down to the post office? You can deduct set amounts depending on mileage. More information is available at the IRS’ Publication 463.
  • You can deduct travel expenses for conventions, and often other expenses as well, although if you take your family along, their expenses are not deductible.
  • You can deduct business assets — such as if you buy a new computer to work on.
  • You can also deduct insurance and retirement expenses — the government pays you to protect yourself!

Basically, all of these deductions boil down to the fact that you can deduct any normal cost of doing business. And you should! The typical freelancer treats her business as a sole proprietorship — the simplest business form there is — and simply files her business income as part of her personal tax return. This means choosing between a standardized deduction of $5,150 (this differs if you’re filing with your spouse or have dependents), or itemizing deductions. It’s good financial sense to take the largest deduction you legitimately can. Otherwise, you’re just giving extra money to the government.