The WMF Archives

by Taqiyyah Shakirah Dawud

The new year ushers in bean-counting time! I interviewed Ryan Himmel, CPA, registered securities analyst, and founder and CEO of BIDaWIZ.com to get some valuable information on tax rules of thumb, and learned of some surprising mistaken and overlooked write-offs for freelancers. Read on.

Q: First of all, what makes a deduction acceptable?
The IRS requires business deductions to be “ordinary and necessary” for your profession. Take advantage of deductions for things like office supplies, mileage for travel to client meetings, professional books and journals, and means of communications such as cell phones and the Internet.

Keep in mind that only a portion of some purchases can be written off. If you buy new fonts for a project and use them half the time for work and half the time for personal use, deduct just half the cost of their purchase price. The same goes for things like landlines and Internet connections. Estimate how much you use them for business use, and deduct that portion.

Q: How should we use depreciations and deductions?
For bigger ticket items like computers, depreciate the purchase over five years, or deduct the entire amount the year they’re purchased. To determine what’s best, think about possible changes in your income over the next five years and whether you think tax rates will go up or down in that time. Take the largest deductions when income and tax rates are highest.

Q: What about home office space?
If you have a dedicated home office, you can write off related expenses. If your home is 1,500 square feet and your office is 150 square feet, deduct 10 percent of your mortgage or rent, utilities, insurance, real estate taxes, and similar expenses.

Q: What is the most common mistake freelancers make in their write-offs?
Commingling Funds. Many freelancers don't set up separate business bank accounts, or they don't account for personal and business expenses separately. Interest on credit cards and vehicle and travel expenses for business purposes can get mixed into personal funds, making it more difficult and time consuming to figure out what is really deductible. It also makes it difficult to provide a clear audit trail if you need to track down expenses for an audit.

Q: What is the most common overlooked write-off?
Self Employment Tax (13.3% = 10.4%* Social Security/2.9% Medicare). It’s shocking how many people miss this tax deduction. It may be so obvious that it's overlooked. You can deduct 50% of your self employment tax. Also, keep in mind that the new Bush Tax Cut Extension Bill provides a 1-year 2% reduction in social security tax; it’s normally 12.4%, but in 2011 it will be 10.4% for all wages earned up to $106,800.

Q: What is the most unique write-off you've seen legally submitted?
Customer clarinet lessons. Not for freelance music teachers, but for their students. The IRS maintains a rule that clarinet and lesson expenses can be considered treatment for the improper alignment of a child's upper and lower teeth, so parents can deduct it. Some teachers even use that as an incentive for prospective customers. Definitely one of the stranger deductions I've seen.

Q: Is there any other related information you'd like to provide?
Make sure you’re up to date on the ramifications of the Bush Tax Cut Extension recently signed into law by Congress. There are many changes impacting freelancers.

BIDaWIZ.com is a leading online marketplace where business owners and consumers alike can get answers to tough finance and tax questions from licensed business experts. Ryan Himmel has been quoted in The Wall Street Journal, Forbes, Fox Business, Crain’s New York, among other notable publications; and regularly contributes to the community with his finance and tax blog. Contact Ryan at ryan@bidawiz.com or on Twitter @BIDaWIZ.

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