Like many freelancers, you may be waiting with bated breath for this year’s tax refund, with visions of what you’ll buy or do with the “found” money. After all, you deserve to splurge—don’t you?
Why yes, of course you do—you work hard, so why not live a little? There’s nothing wrong with taking some of your refund and using it as mad money, but plan to use the bulk of it to financially bolster you and your business. Here’s how:
1. Take care of back taxes
If you owe tax from prior years (and the IRS didn’t garnish this year’s refund to offset it) take care of this obligation while you have the cash from your refund. You’ll get that good feeling from eliminating debt and you’ll save money in the long run by reducing interest and penalty payments.
2. Give your business a boost
A tax refund (depending on the amount) gives you the opportunity to make an investment in your business. Use your refund to purchase new equipment or upgrade your website. Plus, you may be able to claim a tax deduction this tax year as long as you follow the IRS guidelines for business expense deductions and appropriate keep records.
One note of caution: Be careful about deducting expenses that should really be depreciated as supplies (i.e. if the useful life of a piece of equipment such as a printer is greater than one year it would be considered a capital asset). When in doubt, contact your tax professional for clarification.
3. Become even more awesome
A refund can give you the financial wherewithal to upgrade your business assets, but it can also be used to upgrade your own intellectual assets, too. If there’s a course you want to take to gain new skills or polish your existing ones, using your tax refund to pay for them is a smart move.
4. Fortify your financial future
Working your tax refund means looking beyond immediate gratification and planning for your retirement years. If you’re not already contributing to a qualified retirement plan (which provides a nice tax deduction in and of itself), use this year’s refund to start your golden years nest egg—if you’re already saving, then maximizing your contribution is one of the few things in life that you’ll truly never regret. FYI: The 2016 IRA contribution limits are $5,500 if you’re under 50 years old or $6,500 if you’re age 50 or older.
There you have it. Four key moves to really work that refund, baby! Even if you choose not to put any of these into motion, I offer one last piece of advice—don’t treat your refund like found money. Remember, a refund is just the IRS returning your hard-earned money back to you, so don’t waste it! Make it work for you and your business.
Jonathan Medows is a New York City based CPA who specializes in taxes and business issues for freelancers and self-employed individuals across the country. He offers a free monthly email newsletter on his website, www.cpaforfreelancers.com which also features a new blog, how-to articles, and a comprehensive freelance tax guide.