The IRS begins accepting tax returns soon, which means if you want to expedite any potential deductions so you can get your return sooner rather than later and reduce your tax burden as much as possible you should consider completing your tax return and consider these deductions:
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 was 58.5 cents per mile for January through June of this year and then was raised to 62.5 cents per mile for the remainder of the year, or use the actual expense method. The actual expense method uses the actual costs incurred when operating your car for business needs including maintenance, fuel, and incidental expenses.
3. Large business asset purchases. You may also want to consider bonus depreciation allowances which enables businesses to depreciate qualifying property at an accelerated rate. Instead of taking tax deductions for the cost of an asset over its useful life (or to the extent an asset will be used in the business), bonus depreciation front-loads a larger percentage of the deduction into the tax year the business starts using the asset.
Qualifying property is any asset that has a recovery period of 20 years or less using the IRS-approved modified accelerated cost recovery system (MACRS). This includes assets like machinery, equipment, computers, appliances, furniture, and vehicles. Prior to the Tax Cuts and Jobs Act, only new assets were eligible for bonus depreciation, but the definition has since been expanded to include certain used property as well.
Bonus depreciation may now also be taken on qualified improvement property (QIP). This means that if a business makes certain improvements to the interior of a commercial building, such as any electrical or plumbing upgrades, interior door replacements, drywall replacement, etc., then the business may be able to accelerate depreciation on the total cost of the improvement efforts. Not included in the QIP definition are elevators and escalators, enlargements to the property, or enhancements to the internal structural framework of the building.
The TCJA also widened the scope of bonus depreciation by including ”non-tangible” assets such as qualified films, television, and live theatrical productions that were acquired after September 27, 2017, as qualified property.
Currently, bonus depreciation is set at 100%. This means that 100% of the cost of the items can be deducted the year the asset is placed in service. Unfortunately, bonus depreciation is set to phase out. The bonus percentages over the next few years are as follows:
- 100% for 2021
- 100% for 2022
- 80% for 2023
- 60% for 2024
- 40% for 2025
- 20% for 2026
- 0% for 2027 and beyond
Accelerating depreciation deductions can reduce your tax liability, but there are other tax implications of purchasing new business assets beyond bonus depreciation. For example, if you purchase new computer equipment to replace older models, you’ll need to dispose of the old equipment. This could result in a taxable gain or loss when you report the disposition to the IRS. You must consider both the purchase and the sale/disposition of the asset being replaced.
Bonus depreciation is not mandatory, so you may opt to forego the accelerated deduction. Depending on your situation, it may make sense to deduct the cost of the asset over several years using traditional MACRS depreciation, or to leverage bonus depreciation in later years when you have more taxable income to report. Regardless, bonus depreciation can play an important role in multi-year tax planning.
4. 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.
Normally, the deduction for business meals is limited to 50% of the meal’s total cost. However, the cost of food and beverages provided by a restaurant that is paid or incurred in 2022 is 100% deductible (assuming the meal qualifies as a business meal). If you use the per diem method to reimburse employees for business expenses, you can treat the entire meal portion of the per diem rate paid or incurred in 2022 as being attributable to food or beverages provided by a restaurant, making the meal per diem 100% 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.
5. Retirement Plan Contributions. If your freelance business doesn’t already have a retirement plan, now’s a good time to consider one. You can make deductible contributions to several types of retirement plans, while earnings in the plan accumulate tax-free until they are withdrawn. For example, if you’re self-employed and set up a SEP-IRA, you can contribute up to 20% of your self-employment earnings, with a maximum contribution of $61,000 for 2022. If you’re employed by your own corporation, up to 25% of your salary can be contributed, with a maximum contribution of $61,000.
Other small business retirement plan options include 401(k) plans (which can be set up for just one person), defined benefit pension plans, and SIMPLE-IRA plans. Depending on your circumstances, these other types of plans may allow bigger deductible contributions.
If you have a retirement plan, consider making the maximum deductible contribution in 2022. Note, that in some cases, you can take a 2022 deduction for contributions to a retirement plan made as late as 10/16/23. This reduces the time frame for generating tax-deferred earnings.
In addition to making deductible contributions, you may be eligible for two tax credits when you establish a retirement plan for your business. If you start a new retirement plan, you may be eligible for a nonrefundable income tax credit of up to $5,000 for the administrative and retirement-education expenses of adopting a new qualified plan including a 401(k)], a SIMPLE IRA plan, or a SEP. There is also a tax credit for small employers who include an auto-enrollment feature.
6. Continuing Education Expenses, 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. No itemization is necessary when claiming the fees and tuition deduction.
7. Home Office Deduction. The IRS allows you to deduct expenses that are directly related to working from home. This means that if you use a portion of your home exclusively to conduct business, you could deduct your home office as a business expense. Also, your home must be the principal location for your business.
If you worked from home regularly in 2022, you can deduct costs covering utilities, rent, repairs, security, and renter's insurance on Form 8829 and your Schedule C. The IRS-declared deduction amount for every square foot of home office space to $5 for your 2022 taxes. Using the simplified home office calculation, the number of square feet that can be claimed is 300.
8. Mortgage Interest Deduction. The mortgage interest paid on your business property is an allowable deduction. With this deduction, you may deduct the interest and payments on your private mortgage insurance. While this is an itemized deduction, after the 2017 tax reform, itemization no longer applies. The IRS caps the deduction limit at $750,000 for mortgage debt incurred after 15th Dec 2017 and up to $1 million for mortgages before that point.
9. Interest on Investment Property Loans. If you took out a loan to purchase an investment property, you could write off the interest payable on that loan by itemizing the deduction. The deduction applies to loans on investment properties, but excludes securities, stocks, or bonds that produce tax-exempt interest.
10. State, Local, and Foreign Income Tax Deductions. You can claim foreign, local, and state income taxes as itemized deductions, which include state and local sales taxes as well as real estate taxes. You may also be able to write off mortgage interest and insurance premiums paid for your home during the tax year. Property tax and state income tax have their upper limit capped at $10,000.
If you live in New York City, the Unincorporated Business Tax is a deductible business expense.
Make sure you track all receipts related to your business deductions. To make the most of your tax deductions, make a habit of tracking all your business-related expenses. You should also check to make sure you have proper documentation for each expense. This will ensure that you never miss out on claiming a legitimate deduction, allowing you to pay the lowest amount of tax possible.