Tech Deductions You Should Know for Your Freelance or Small Business
Tech Deductions
Both freelancing and operating your own small business can be incredibly rewarding. These things can also be a lot of work, and it’s important to track every expense and claim every deduction for which you qualify. Nearly every type of business has become reliant upon technology, and therefore it’s important to know what tech-related deductions you can claim. While we’ve noted before that a good CPA can help you maximize your tax return, we also wanted to share a few deductions you should always plan for each year.
Home office deduction
Although not specifically tech, odds are your home office takes advantage of a computer, fax, printer, and the internet. We’ve mentioned this elsewhere before, but it’s worth repeating since many freelancers and small business owners work from home, if not primarily then at least infrequently. Remember that the space you intend to claim must be used primarily and first and foremost for business (i.e., even if you work from your dining table on occasion, you cannot claim your dining room as part of the deduction). Deductions can also be extended to certain home costs, such as utilities.
Internet and phone costs
Internet and phone bill costs directly related to your business can be deducted from your tax liability. For example, if you have one phone that you use for work and personal use, you cannot deduct your entire bill. But if you have a second phone line that you use exclusively for business, you can deduct that entire bill.
Computer for business use
If you purchase a computer for business use, you can deduct the entire cost in a single year. In order to qualify, the computer must be for business use more than 50% of the time. However if you also use the computer for personal use, you can only deduct the percentage of time for which you use it for work. For example, if you use the computer for work 80% of the time, and use it to stream movies and play games 20% of the time, you can only claim 80% of the cost.
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Tips to Maximize Your 2017 Tax Refund
Tax Refund Money
The holidays are here, which means that it’s almost tax time. We’re sure that in the midst of travel, friends, family, and food comas, that the last thing you want to think about right now is taxes. However, many of us tend to have some extra down time around the holidays, and we believe that’s a good time to start organizing and strategizing for next year’s taxes.
Get started early
While it’s impossible to project all of your expenses and income, it’s not a bad idea to start budgeting and planning now to get ahead of the game–especially if you plan any large purchases.
Get organized now
Planning to build a home office? Major home upgrades? New degree? Sending a child to college? Develop a roadmap for your major expenses or changes to income.
Research deductions
Deductions are numerous – all of the aforementioned examples could qualify for a tax deduction. Know your deductions; doing so may help you plan any major expenses and can get you ahead for subsequent tax years.
Get an app
From spreadsheets to dedicated tracking apps, expense and income tracking software is truly indispensable. Shelling out a few dollars for some budgeting software can help keep you organized for tax time, which can help you both balance your budget and increase your tax refund. That being said, always remember to back up your records!
Consider a CPA
Although we’ve often lauded the benefits of budget balancing software, that doesn’t mean it’s an adequate replacement for a good CPA. Rather the two are complementary: software can keep you organized, which can help your CPA make sense of your finances. In turn, a good CPA can help you with tax deductions and business recommendations, thereby maximizing your tax refund.
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Freelancers and Expense Tracking
Expense Tracking
Freelancers are often busy: outside of working odd hours, they have to track their own business expenses, invoices, and taxes. Whether you decide to hire a CPA or take on everything by yourself, these tips will help you keep your finances in order.
Be transparent about your income and expenditures
Avoid the dreaded audit and always have a clear sense of your finances by simply being honest. Doing so will make filing taxes easier, and should you ever hire a CPA he or she will thank you.
Know your deductions
Do you have a home office? You can deduct some operating costs. Do you have to travel to meet a client or do research for a job? You can deduct those expenses. It behooves every freelancer to know what is and is not eligible for a tax deduction.
Use a separate bank account
Don’t count on your memory to track expenses and income. Doing so can lead to unfavorable discrepancies: if you overstate your income, you’ll pay too much in taxes; if you understate your income and the IRS finds out, you’ll have to pay back taxes which may include penalties and interest.
Utilize software
There’s an app for that. Even if you employ an accountant, proper software will help you stay organized and be able to present your expenses, invoices, and income.
Backup everything
Millennials and older generations remember tracking everything with paper records. While the tactile feeling of books may still be appealing, in the age of the cloud it’s a largely irresponsible way to track expenses by the simple fact that paper is hard to backup.
Backup your backups
This probably sounds absurd after we just pitched you on digital records over paper records. However cyber security threats are real and cloud storage is cheap–and in some cases free.
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Some Do’s and Don’ts of Business Expense Tracking
Do:
Business Expense Tracking
Track everything
If you want to maximize your tax return, there’s no such thing as having too many records. Keep receipts and invoices. Log mileage. Keep records of any and all business-related expenditures.
Backup everything
One record is not enough, and you should always backup for your backups. Many expense tracking apps provide backup options, or the ability to export data so you can back it up to your personal cloud or external hard drive.
Be honest about your expenditures
Don’t round up. Or Down. If you are unable to procure a record of an expense, ask your accountant for options if you had planned to claim a deduction.
Track as you go
Don’t rely on your memory to claim mileage or expenditures. In the event of an audit, any discrepancies or inaccuracies will only invite further scrutiny.
Don’t:
Fudge the numbers
As previously mentioned, don’t round or estimate your income or expenses. Doing so may come back to bite you during tax time.
Rely on one set of records
We’ve recommended software before, but we can’t stress enough how indispensable expense tracking software can be. More robust offerings will also allow you to export and backup your files, meaning you can keep backups of your backups in case of a disaster or cyber attack.
Mix business and pleasure
At least do not mix them when it comes to tracking expenses. While there are some potential workarounds to a family trip–for example if you have a legitimate business trip and decide to bring your family along, you can deduct your own transportation expenses but if you start trying to claim business trips for yourself, spouse, and kids, or claim a day spa as a business expense, you’re sure to draw the attention of the IRS at tax time.
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On the Road: Traveling and Taxes
Travel Expenses
Traveling can be exciting, but it can also be costly. The cost of traveling can be somewhat insulting if the travel is required for work and you don’t have an employer who reimburses your out-of-pocket expenses. But good news: many costs you incur can be deducted from your taxes. Here are a few well-known – and some less well-known – expenses that you can claim while on the road.
It’s worth noting that expenses you intend to claim must be business-related (e.g., if you call your mother long distance from a hotel while on a business trip, you cannot claim the phone call as a “business expense”). Further, your expenses must be necessary, reasonable, and ordinary expenses–in other words lavish expenditures or indulgences are not deductible.
Also, always remember to track your expenses!
- 50% of the cost of meals: why eat fast food, when you can eat reasonable food? This deduction not only makes traveling less expensive, but also makes healthier food choices less cost-prohibitive. Bon apétit!
- Airfare, bus fare, railway fares, and baggage fees: often the most expensive part of traveling, these expenditures are, in fact, deductible.
- Local transportation costs: taxi, Uber, and bus fares are all deductible.
- Expenses of operating and maintaining a car used for business commuting or travel: this includes the cost of gas, oil and fluids, parking fees, tools, even parts and repairs.
- Cleaning and laundry fees: look sharp for business!
- Computer and hardware rental fees: internet cafes are generally a thing of the past in the US, but if you need pay for wifi, or to rent a computer, projector, etc. for your business purposes it is deductible.
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End of Year Tips to Prepare for the 2017 Tax Season
Preparing for Tax Season
It’s autumn, which means that the holidays are almost here: time for food, family, festivities, and perhaps traveling. It also means that tax season is just around the corner, and while no one wants to think about taxes early, getting organized now will prevent headaches when you’re filing your 2016 return.
Here are a few tips to help you prepare:
- Catch up on records from previous months: if you’re behind on your financial and expense records from previous months, there’s no time like the present to get that all in order. Don’t wait until tax time to get caught up, as you’ll have an even longer backlog come February.
- Organize everything: this may seem like a no brainer, but the sooner the better. Plan ahead if you’re planning to claim deductions or tax credits, and organize the associated documentation. Dig up receipts and invoices now, so you won’t have the extra hassle of rummaging through records at tax time.
- Take time to put everything in order: with the holidays coming up, you’re bound to be busy, but after the festivities you’ll likely have some extra downtime. Use some of that extra time to organize things.
- Find a good CPA: you’re organized, but you don’t feel like going through the hassle of crunching numbers? A good CPA can help you with that, and can help you maximize your tax return.
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How to Maximize Your Tax Refund
Tax Refund
Taxes may not cross the minds of many people until January or February, but planning ahead can greatly benefit the size of your return. From planning to tracking, here are a few tips to help you get the most out of your return.
Be organized: keep records of everything! For expense tracking, make copies of receipts or keep the originals, write down mileage, and hold onto any bills or invoices. Keeping the originals will be helpful to both you and your CPA. Make all your files easy to access and manage, which will make your life easier in the event of an audit. Your CPA will thank you, too.
Maintain records throughout the year: as previously stated, keep track of everything! Logging expenses and deductions throughout the year can save you a ton of time and stress at tax time. You don’t want to play catch up at the 11th hour; doing so is stressful and could cause you to overlook deductions or make mistakes on your return. Struggle with organization? Never underestimate the usefulness of spreadsheets, or a good expense tracking app. Or both.
Dedicate time to researching deductions: plan ahead for which deductions and credits you want to claim. Doing so will minimize stress when you are filing taxes, and will help you ensure that you qualify for the deduction. If you employ a CPA, discuss your intended deductions and tax credits: they can make sure you qualify and can help you maximize your return.
Find a good CPA: returns, deductions, credits, tax shelters, it can all be confusing and a good CPA can help you make sense of all of it.
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How to Correct or Amend a Tax Return
If you recently filed a tax return but had any incorrect information on it (number of dependents, filing status, total income, deductions or credits), you will need to fill out an amended tax form, Form 1040X. Here are some tips to help with filing this form.
- You don’t need to file an amended return if you made a simple mathematical error. The IRS tends to fix this and sends out a letter notifying you of these changes. If you are missing a paper, the IRS usually sends out a request for the missing information, so you won’t need to file the Form 1040X.
- You cannot e-file an amended tax form. Regardless if you’re amending a 1040, 1040A, 1040NR, 1040EZ or 1040NR-EZ, you need to file your form 1040X through a paper submission that needs to be mailed into the IRS.
- If you have to file multiple amended tax returns, file and send each one separately. Never combine your amended tax returns for multiple years because the IRS will send it back and request you fill it out separately for their records.
- If you’re changing the tax forms or adding in more forms and documents, make sure to attach them to the Form 1040X to help expedite your amended returns.
- If you are expecting more money, wait until your original tax has been refunded to you before filing the amended tax file. You can cash in the original amount on the check and the IRS will send out the remaining balance after receiving your Form 1040X.
Expect processing times to take around 8 to 12 weeks to receive your refund for your amended tax form.
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How to Spot IRS Posers
IRS
Hackers, fraudsters, and scammers are among the top reasons many people lose money in the world. The Internal Revenue Service (IRS) warns that people may be after your sensitive information and may contact you impersonating an IRS agent.
Here are warning signs that the IRS is not contacting you:
- You receive a call demanding immediate payment. The IRS never calls you about your taxes without first mailing out a bill. They usually follow up a month after sending it, so you’ll have an advanced notice if they would be calling you about it.
- Receive a call or letter demanding you pay taxes and they don’t offer you with a choice to question or appeal the stated amount owed.
- Demanding payment via prepaid visa debit card or western union. The IRS will never limit your payment options to these and it’s often a sign of a scammer.
- Requesting sensitive information such as social security number, credit or debit card number is not a policy of the IRS. They request payment either through mail or via their website. If you’re asked to pay over the phone, it’s a scammer.
- Receiving phones calls threatening local police or law-enforcement agencies on you if you refuse to pay. The IRS will take you to court if they want to take action against you, so don’t listen to anyone on the phone threatening to send you to jail. They are a scammer.
These are the most efficient tips to help you watch for scammers and fraudsters who are only interested in stealing your sensitive security information. The IRS will always send a letter out to you if they need correspondence. If you feel you’re unsure if it’s the IRS contacting you, it’s best to call and ask if they sent the letter to your home.
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Why Paying More in Taxes is Great for Workers
Paying taxes is an onerous task for most people, but paying more taxes may have a number of beneficial side effects.
Tax Withholdings
Over the course of 2016, the growth of employee tax withholdings, as well as the growth of payroll taxes being withheld by the government, has increased over a steady rate this year. Compared to last year, these withholdings have increased up to 4%.
So how is this good for you, as a worker?
The increase in tax withholdings gives insight onto two noticeable benefits. The first is that when taxes increase for workers, both individually and as a whole, a steady wage inflation takes place. Basically, workers are getting paid more money now versus previous years. This means the economy is showing a significant growth in employment.
The second benefit that is noticed through higher taxes from workers will be their refund amounts. With higher taxes and withholdings, the more workers can expect back in the beginning of the year after they file taxes. Most people fall within the tax bracket to get a return back, so filing more money in advance can reassure you have paid all your taxes. Increasing your withholdings can also be a little investment savings annually.
Although paying higher taxes seems detrimental at first, it can be more beneficial for workers than they realize. With a constant inflation in the economy, we can expect workers to pay even more in the following years in taxes.
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