(Art Credit: Andrea Hernandez)
If you haven’t been keeping tabs on all of the tax news over the past few months, this rounds up will bring you up to speed—and help you keep track of the changes that will have the most impact on your freelance business.
1) Student loan interest will be forgiven, through 2025. If you are a freelancer with student debt, the passage of the American Recovery Act in March 2021 brought you some good news: all student loan forgiveness and discharges became tax-free on the Federal level, regardless of loan type or program. This eliminated the previous burden for some repayment plans where borrowers had to worry about paying significant taxes on the amounts they owed. This issue is now cleared through 2025.
It is important to be aware that state taxes may still apply to your student loan forgiveness, and every state varies with its tax treatment of student loan forgiveness.
2) Tax reporting regulations are becoming even more rigorous. The Biden administration is putting in place measures (and money) to fund the IRS to do more proactive tax collection with the objective of narrowing the gap between what people owe and what they actually pay.
3) The IRS will focus on revenue beyond traditional W-2 and 1099 income taxes. If approved by Congress, the Biden administration’s budget plan will double the size of the IRS workforce, which has been seriously reduced over the past several years. The funding is supposed to focus on higher-income earners whose income is derived or supplemented by less transparent means such as rental income, cryptocurrency transactions, businesses using payment platforms such as Venmo, and holdings in foreign bank accounts.
4) R & D tax credits will also be under the tax deduction microscope. With billions of dollars being deducted from business taxes through the research and development tax credit, it is understandable why this credit is drawing increased scrutiny. This makes it critical to ensure you are claiming valid expenses if you are going to use this credit.
Some key points:
- Activities that are eligible for the credit usually involve a new product or process.
- The project cannot be supported by external funding sources. This means that the taxpayer must have rights to the research and risk in the outcome of the research or new product being created or tested.
- If you are part of a project that involves R&D tax credits, be sure that you also have a noticeably clear engagement letter if you subcontract services (or provide subcontracted services).
If you are not sure if the expenses you are claiming qualify for the R & D tax credit, seek the opinion of a tax professional who can help ensure you claim any R&D tax credit for which you are eligible.
These are some of the key changes on the radar for the 2022 tax year and beyond. As you finish filing your 2021 taxes, it is important to track new regulations and reporting requirements so you can leverage tax advantages and minimize adverse tax actions.
If you have not already worked with a tax professional to do tax planning for your freelance business, 2022 might be the year where it makes the most sense to do so.