Between the increase in expenses due to inflation and potential end-of-the-year deductions you can take, there is a lot to consider as you work to finalize your freelance business finances before Dec. 31.
For this tax season, however, it is important to consider how inflation may play into your calculus, especially when it comes to deductions or if you raised prices to keep up with inflation. Many of the changes that were introduced in the Inflation Reduction Act will not go into effect until January 1, 2023, but there are still deductions you can take advantage of now that can help save you money when it comes to filing your 2022 taxes.
A word of caution before you throw caution to the wind when it comes to deductions, for a business expense to be considered deductible by the IRS, it needs to be ordinary as well as necessary for the type of work you do. This means that you need to be honest and reasonable in claiming deductions.
Given that the IRS has new funding to increase their oversight and follow up on taxpayer issues, it is critical to ensure that you can substantiate all of your deductions with accurate records because the environment is ripe for more small business audits. With all of these caveats in mind these are the top ten freelance business expense deductions to consider claiming on your 2022 tax return:
1. Business travel expenses. If you travel for work to attend conferences or see clients related to your business, you are generally eligible to subtract any ordinary and necessary expenses you incurred such as transportation, airfare, meals, and accommodations.
2. Using a vehicle for business purposes. You can deduct the costs related to running your car if you use it for business purposes. As such, you can use a standard mileage rate which is 62.5 cents per miles in 2022 or pick the actual expense method. The actual expense method indicates the actual costs incurred when operating your car for business needs including maintenance, fuel, and incidental expenses.
3. Health insurance premiums. You can deduct health insurance premiums as long as you have a taxable profit greater than the cost of your total premiums. In addition, if you use the healthcare exchanges to get your health insurance, keep in mind that Health insurance subsidies that were extended under the ACA remain available.
The Act includes an extension of the temporarily expanded health insurance subsidies, originally instituted as part of the American CARES Act (ACA) as tax credits, which were put in place for 2021 and 2022 as part of Covid relief. There are more generous subsidies in the Act which remain available through the end of 2025.
If you are self-employed and are getting your health insurance through the government health insurance exchanges with subsidies, then you should be able to avoid any significant premium increase, all else being equal in terms of your coverage, etc.
4. Training and continuing education classes. You can deduct up to $4,000 in tuition and fees expenses incurred when pursuing continuing education to improve your skills and maintain licensing. To claim this deduction, you need to fill in Schedule 1 and Form 8917. In addition, if you are taking classes toward a degree from an accredited education institution, you can claim the American Opportunity Tax Credit if your income is less than $90,000 individually or $180,000 (married filing jointly).
5. Home office deduction. You can deduct expenses that are related to working from home in proportion to the space you use exclusively for this purpose as long as your home is the principal location for your business. Costs such as utilities, rent, repairs, security, and renter's insurance can be claimed. Or, instead of tracking and calculating these costs, you can use the simplified deduction which allows for $5 per square foot of space dedicated to your business with a maximum of $1500.
6. Business meals, entertainment, and gifts. In 2022, business meals and beverages are 100%, which includes takeout and delivery meals as long as the expenses are reasonable and related to your business. Entertainment for client-related activities is not deductible.
Gifts purchased for business purposes are deductible either in full or partially, depending on the business circumstances. For example, a gift given to one individual is deductible up to $25. However, you could write off the full amount of a promotional item featuring your business’ logo given to everyone on a client’s team.
Once you have your current year deductions squared away, take time to look ahead to the 2023 tax year as part of your year-end business plans, consider these Inflation Reduction Act deductions which you may be able to take advantage of:
More tax credits for energy-efficient purchases including new and used electric cars. The new law, when enacted, has a far-reaching and expansive list of tax credits to support energy-efficiency and climate preservation measures such as:
- Increasing the $500 lifetime tax credit limit for qualifying energy-efficient improvements to a $1,200 annual tax credit.
- Removal of the manufacturing limit on qualifying electric vehicles, (currently impacting General Motors, Tesla, Lexus, and Toyota electric vehicles) for the credit under current law.
- Limits on claims of the electric vehicle credit to Adjusted Gross Income (AGI) limits of $300,000 for married, $225,000 for head of household and $150,000 for single filers.
- An electric vehicle credit for used electric vehicles of 30% or $4,000, whichever is lower, with AGI limits of $150,000 for married, $112,500 for head of household and $75,000 for single filers.
If you have been thinking about making upgrades to your home for energy efficiency or purchasing an electric vehicle, then now may be the time to do it based on the tax incentives included in the IRA. However, there are a few finer points to be aware of on the qualifications for the electric vehicle tax credits:
- There is a requirement that, to qualify for the credit, an electric vehicle must contain a battery built in North America with minerals mined or recycled on the continent.
- For the full credit of $7,500, 40% of the metals used in a vehicle’s battery must come from North America. By 2027, this required threshold increases to 80%.
If the metals requirement is not met, buyers are eligible for half the tax credit or $3,750.
- The bill also requires that after 2024 no vehicles would be eligible for the tax credit if its battery components come from China. This is to incentivize production in the United States.
Wrap up your year-end tax planning with these tips and tighten up your recordkeeping to avoid a 2022 business tax audit.
Maximizing tax deductions for your business really comes down to careful planning and meticulous recordkeeping. If you are not already doing so, make 2022 the tax year you create a habit of tracking all of your business-related expenses so you can ensure you capture every possible deduction with the proof necessary if the IRS becomes inquisitive about items on your return.
You will need to keep all of your receipts to substantiate the deductions you are claiming. You can use an app to make this easier. Remember, a credit card statement is not sufficient in the eyes of the IRS, you need actual itemized receipts.
If you are not sure about some of the deductions your freelance business may qualify for, be sure to contact a tax professional early so you can have expert advice available before tax season reaches its peak.