Catch these year-end freelance tax deductions before the ball drops on New Year's Eve
There are only a few weeks left until the end of the year, which means your window for leveraging last-minute tax deductions for 2019 is rapidly closing. Here’s the run-down on what you can do to snag these tax-saving deductions for your freelance business before the ball drops.
Measure your home office.
If you work at home, like many freelancers do, you have the potential to save a significant sum of money every year by calculating the size of the space you use exclusively for business and claiming $5 for each square foot (to a maximum of 300) on your tax return. This is the simplified home office deduction allowed by the IRS, allowing you to deduct the business expenses associated with your office space, such as rent, mortgage, and utilities.
If your home office is larger or your associated expenses are higher, you can opt instead for the regular method — which requires you to track your actual expenses such as utilities, mortgage payments, rent, home repairs, home depreciation, etc., and then calculate your deduction based on the percentage of your home devoted to business.
The key to claiming this deduction is that the area of your home you claim must be used solely and regularly for the purposes of trade or business. This generally means that you have a separate room or space in your home that is clearly defined as an office.
Make last-minute buys on business and tech supplies.
If your freelance business needs additional supplies, office furniture, or new technology, the end of the year is the perfect time to make these investments and use the expenses as a deduction on your 2019 taxes. You can also take advantage of bonus depreciation by using an immediate first-year deduction on the purchase of eligible business property. This is a method of accelerated depreciation that allows for an additional deduction of 100% of the cost of qualifying new property in the year in which it is put into service in the tax years 2017-2023.
Schedule appointments for tax planning and other professional services.
One sure-fire way to ensure you are getting all of the tax breaks you can this year is to schedule a quick tax-planning meeting with a tax professional. You can also deduct the expense for this and other professional services on your taxes as long as they are considered “ordinary and necessary” expenses and only apply to your business, not your personal situation.
Spend on end-of-year marketing
Lay the groundwork for a successful 2020 with a social media or digital advertising campaign. This is another expense that you can deduct from your 2019 taxes, thereby reducing your taxable income while potentially boosting your business revenue in the process. Don’t forget about the other marketing-related deductions you may be able to take in the last few months of the year, such as costs for updating your website or design for a new logo.
Pay your estimated taxes now
While your fourth quarter estimated taxes aren’t due until January 15, if you pay them before the end of the year you can deduct the expense and potentially lower your tax obligation. Tax reform has limited the state and local tax deduction to $10,000 for non-business taxes but certain state and local governments have separate business taxes that are not limited. These taxes are reported as business expenses.
Be strategic with your accounts receivable
Be strategic on collections. Know your income tax bracket (See the 2019 tax bracket tables here.) and accelerate or slow down collections based on your tax bracket.
Contribute as much as possible to a qualified retirement account such as a solo 401(k) SEP IRA or an individual retirement account (IRA). This will allow you to defer the taxes on these monies and also save for retirement.
Revisit your business structure
If you own a business and you haven’t changed your entity type for several years, you may want to consider if another entity type may offer you tax advantages. This is one tip that should likely be done in concert with a tax professional so that you can be certain that any entity changes you make will be beneficial to you.
Accelerate charitable contributions
Make charitable contributions now to reduce your 2019 tax burden. If you are thinking about supporting tax exempt 501(c)(3) organizations this year, don’t delay. Be sure to get a receipt for your contribution so that you can itemize it on your tax return (as long as your deductions will not exceed the standard deduction that you’ll see on your 2019 return).
Finish up your client appreciation gift shopping
Another expense you can deduct from your 2019 freelance taxes, if you make it before December 31, is that related to business gifts. If you purchase gifts for clients during the holidays, you will be able to deduct up to $25 per person this tax year.
Time is short to cash in on these year-end tax deductions but making the effort to do so can net you significant tax savings when you are completing your 2019 return. Grab this list and check off the deductions which apply to you, then act before the ball drops on December 31 of this year!
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 consultation to members of Freelancer’s Union* and a monthly email newsletter covering tax, accounting and business issues to freelancers on his website, www.cpaforfreelancers.com — which also features a new blog, how-to articles, and a comprehensive freelance tax guide.
*Jonathan is happy to provide an initial consultation to freelancers. To qualify for a free consultation you must be a member of the Freelancers Union and mention this article upon contacting him. Please note that this offer is not available Jan. 1 through April 18 and covers a general conversation about tax responsibilities of a freelancer and potential deductions. These meetings do not include review of self-prepared documents, review of self-prepared tax returns, or the review of the work of other preparers. The free meeting does not include the preparation or review of quantitative calculations of any sort. He is happy to provide such services but would need to charge an hourly rate for his time.