16 Tax Deductions for Self-Employed Creative Professionals
Make sure you write-off these important deductions in the 2018 tax year.
While many of you may be aware of the types of deductions available to self-employed creatives, the changes to tax laws under the JOBS act were quite significant and worthy of some discussion. Please consult with your CPA or Tax Adviser before implementing any of these suggestions.
1. Deduction for ½ of Self Employment Tax FICA and Medicare
You get to deduct half of your self-employment tax from your adjusted gross income calculation. What’s more, you only pay self-employment tax on 92.35% of your net, not gross, business income. So please check to make sure that this deduction was taken.
2. Home Office
The home office deduction is a complex deduction. Simply put the cost of any workspace that you use ‘regularly and exclusively’ for your business, regardless of whether you rent or own it, can be deducted as a home office expense. The requirements are to first measure the entire space and then measure the portion you use ‘exclusively’ for your business, then divide the ‘office’ space by the total to get a percentage. Apply this percentage to the annual rent to get your deduction. Example: Your apartment is 870 sq. feet and the office you use is 290 sq. feet so the percentage is 290 / 870 = 33.33% — so if your annual rent was $30,000 for the year you would deduct $10,000 on your self-employment deductions. In addition, you may deduct 33.33% of your gas, electric, Insurance, Maintenance as well. This is usually a big deduction so don’t forget it. There are two choices for calculating the home office deduction: the standard method and the simplified option. The standard method requires you to calculate your actual home office expenses. The simplified option lets you multiply an IRS-determined rate by your home office square footage of just $5 per foot ☹
3. Internet and Phone Bills
Even if you don’t take the home office deduction, you can deduct your business phone, fax, and internet expenses. You may only deduct the expenses directly related to your business. If you have just one phone, you shouldn’t deduct your entire monthly bill, which includes both personal and business use. You should only deduct costs that specifically relate to your business.
4. Health Insurance Premiums
If you are self-employed, pay for your own health insurance premiums and were not eligible to participate in a plan through your spouse’s employer, you can deduct all of your health, dental and qualified long-term care insurance premiums as a deduction to Adjusted Gross Income. You can also deduct premiums that you paid to provide coverage for your spouse, your dependents and your children who were younger than 27 at year-end, even if they aren’t dependents.
5. Meals and Entertainment
A meal is a tax-deductible business expense either if you are traveling for business or entertaining a client. The meal should not be lavish or extravagant under the circumstances, and you can only deduct 50% of the meal’s actual cost if you keep your receipts. The lunch you eat alone at your desk is not tax deductible.
6. Travel
To qualify as a tax deduction, business travel must last longer than an ordinary workday, require you to get sleep or rest and take place outside the city where your business is located.
You should also have a specific business purpose and you must engage in business activity — such as finding new customers, meeting with clients or learning new skills directly related to your business (like at a seminar out of town). Keep complete and accurate records and receipts for your business travel expenses and activities, as this deduction often draws scrutiny from the IRS. Deductible travel expenses include the cost of transportation to and from your destination (such as plane fare), the cost of transportation at your destination (such as a car rental, Uber fare or subway tickets), lodging and meals. Your travel expenses for business are 100% deductible, except for meals, which are limited to 50%.
7. Vehicle Use
When you use your car for business, your expenses are partially tax deductible. Make sure to keep excellent records of the date, mileage and purpose for each trip, and don’t try to claim personal car trips as business car trips. You can calculate your deduction using either the standard mileage rate (determined annually by the IRS; it’s 54.5 cents per mile in 2018 and .58 in 2019) or your actual expenses.
The standard mileage rate is the easiest because it requires minimal record keeping and calculation. Just write down the business miles you drive and the dates you drive them. Then, multiply your total annual business miles by the standard mileage rate. This amount is your deductible expense. To use the actual expense method, you must calculate the percentage of driving you did for business (by keeping a mileage log) all year as well as the total cost of operating your car, including gas, oil changes, registration fees, repairs, and car insurance. There are now Smartphone App’s to help you track mileage. (Sherpashare, MileIQ, etc.)
8. Interest
Interest on a business loan from a bank is a tax-deductible business expense. Credit card interest is not tax deductible when you incur the interest for personal purchases, but when the interest applies to business purchases, it is tax deductible. That said, it’s always cheaper to spend only the money you already have and not incur any interest expenses at all. A tax deduction only gives you some of your money back, not all of it, so try to avoid borrowing money.
9. Publications, Dues, and Subscriptions
The cost of specialized Professional organizations dues (AIGA), magazines, journals and books directly related to your business is tax deductible. A daily newspaper, for example, would not be specific enough to be considered a business expense, but a subscription to “Zagat’s” would be tax deductible if you are a restaurant owner.
10. Education and Seminars
Any education expenses you want to deduct must be related to maintaining or improving your skills for your existing business; the cost of classes to prepare for a new line of work isn’t deductible. If you’re a real estate consultant, taking a course called “Real Estate Investment Analysis” to brush up on your skills would be tax deductible, but a class on how to teach yoga would not be.
11. Depreciation
Depreciation on all your equipment (Computers, Printers, Cameras, Furniture, Professional Library, etc. There is a special section of the IRS Code called Section 179 that allows you to deduct 100% of equipment purchases up to $1 m for 2019– naturally, this is a one-time event.
12. Rent
If you rent out an office space, you can deduct the amount you pay for rent. You can also deduct amounts paid for equipment you rent. And if you have to pay a fee to cancel a business lease, that expense is deductible, too. You may NOT deduct for office-in-home AND an office you rent, unless they are in different cities and you are required to be in both places from time to time.
13. Start-Up Costs
The IRS usually requires you to deduct major expenses over time as capital expenses rather than all at once. However, you can deduct up to $5,000 in business start-up costs. Examples of tax-deductible start-up costs include market research and travel related to starting your business, scoping out potential business locations, advertising, attorney fees, and accountant fees. If you set up a corporation or LLC for your business, you can deduct up to $5,000 more in organizational costs such as state filing fees and legal fees. Professional fees to consultants, attorneys, accountants and the like are also deductible any time, even if they aren’t start-up costs. Business expenses such as buying equipment or vehicles aren’t considered start-up costs, but they can be depreciated or amortized as capital expenditures.
14. Advertising
Do you pay for Facebook ads, Google ads, a website, a billboard, a TV commercial, or mailed flyers? The costs you incur to advertise your business are tax deductible. You can even deduct the cost of advertising that encourages people to donate to charity while also putting your business’s name before the public in the hope of gaining customers.
15. Self-Employed Retirement Plan Contributions
One deduction you can take going into business for yourself that is especially worthwhile: the deduction for self-employed retirement plan contributions. Contributions to SEP-IRAs, SIMPLE IRAs and solo 401(k)s reduce your tax bill now and help you rack up tax-deferred investment gains for later.
16. Qualified Business Income Deduction 20% of Net Income — NEW for 2019 and going forward!
This is part of the new 2018 Job Act — new tax deduction — for Single taxpayers the maximum amount subject to the 20% is $157,500 and for married filers and $315,000. So, if you made a Net Profit from Self-Employment of $46,500, you will get a 20% deduction or $9,300 which will reduce your taxable income.
Use the following to guide you on the deductibility of an expense: An expense is usually deductible if it is incurred as a direct or indirect result of doing or attempting to do business, provide it is ordinary and necessary, real and reasonable.
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About the Author
Errol Gerson is the Managing Partner at The Gerson Group Consultants, with offices in Los Angeles, London, and Johannesburg, South Africa. They specialize in strategic Financial Management planning, Strategic Tax planning, Succession Planning, Strategic Marketing and Management, Merger and Acquisition Strategies and Blue Ocean Strategy consulting.
