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10 Tax Deductions You May Not Have Thought of If You Are Self Employed

reprinted from Freelance Switch

Tax time can be especially stressful for freelancers: despite paying estimated tax payments throughout the year, it’s rare that a freelancer doesn’t still have to come up with some money for April 15 — or come up with a long enough list of deductions. There are quite a few deductions available to freelancers that may not seem obvious when you first sit down with all those 1099s and receipts. But as long as you have the right documentation, you can write off plenty of deductions you may never have thought of.

1. Unpaid Invoices

Did one of your clients disappear over the course of last year, leaving you with an unpaid invoice or two? The IRS allows you to write off those invoices as bad debts. Writing them off as a freelancer is a little more complicated than for other types of businesses: that invoice must be included in your gross income, which means that you must use the accrual method of accounting (reporting income as you earn it). If you use the cash method, you didn’t need to report an unpaid invoice to the IRS at all. For more information, look at IRS Publication 535.

2. Niche Research

If most of your business comes from a specific industry — like a website designer who primarily creates websites for real estate agents — you can write off research into that area. Conferences, books and other research-related expenses are deductible. You’ll want to hang on to receipts for your research expenses.

3. Meetings at the Coffee Shop

Do you head to the local Starbucks whenever you want to discuss a project in person? If you buy coffee for the pleasure of meeting with a client, partner or other business contact, you can write off half of your expenses. It may seem like a small amount, but if you’re a freelancer who routinely uses a coffee shop as a work space, coffee costs can add up. Keep your coffee receipts and, to make things easier if you have to go back through your receipts later on, make a note directly on the receipt of who you had coffee with and why.

4. Job Hunting

Any payments you make to access job boards and other lists — even if they aren’t for permanent jobs — are deductible. The same goes for any costs associated with joining a website that lets you bid on projects or other methods of buying leads on new opportunities. You’ll want to hold on to your receipts for any such expenses. If they’re online, either save them as PDFs or print them out.

5. Paypal Fees

Businesses are able to deduct credit card convenience fees because they’re a necessary cost of doing business. You can write off PayPal’s fees if you accept payment through that website, no matter how much or how little business you’ve transacted over the site in the course of the year. The easiest way to document those fees is to wait until the end of the year and print out your account history.

6. Virtual Assistants and Other Subcontractors

Subcontracting part of a project to another freelancer or hiring a virtual assistant can be an easy way for a freelancer to take on more work and make more money — and the expense to do so is tax deductible. You’ll want to document any such transactions carefully so that you can prove that your use of freelancers and virtual assistants is purely a contract arrangement, rather than employment — which you would have to pay extra taxes for. You’ll want an invoice from whoever you work with, as well as a record of when you paid the invoice.

7. Your Home Expenses

If you work out of your house, you can deduct part of what you pay towards utilities, insurance and mortgage interest. The home office deduction is one of the more complicated deductions you can take, but it’s worth it. You’ll need to use IRS Form 8829 in most cases to document your use, and you’ll need to know the exact area of your home as well as of the space you use as an office — you’ll figure the percentage of your expenses you can claim based on the percentage of your home you use as office space.

8. Cell Phones and Skype

According to the IRS, you can’t deduct the expense of the first telephone line in your home, regardless of your use your home for business. However, in addition to any second phone line you might have, you can deduct your expenses for your cellphone (assuming you use it primarily for business) and applications like Skype.

9. Professional Advice

If you find yourself in a situation where you need to consult with a lawyer or an accountant, for any reason related to your freelancing, you can write off those professional fees. Documenting such expenses is just a matter of having an invoice or receipt.

10. Payments to Non-Profits

While charitable donations are not deductible as business expenses, you can write off payments you make to non-profit organizations. The IRS’ favorite example is paying for an ad in a local church’s directory, but the cost to attend networking events held by non-profits and similar expenses are all deductible as well. You’ll need receipts. And, by the way, just because you can’t write off donations as business expenses doesn’t mean that you can’t write them off at all — they’re personal deductions instead.

It's Not Too Early to Start Thinking About 2011 Taxes

The George W. Bush-era tax cuts have been extended, the alternative minimum tax is patched and capital gains rates are set. Tax breaks are in place for students and teachers, and for the most sizable estates. Congress established some of the parameters for the 2011 tax year even before the year began. The big question confronting lawmakers was whether to extend the Bush tax cuts and for whom. Democrats had argued that the nation's richest taxpayers should be excluded from any extension. But as a part of a compromise deal worked out with President Barack Obama, Congress approved an extension for all taxpayers through 2012. The net result: Workers won't see their take-home pay reduced because of taxes.

In fact, they'll actually see an increase.

Congress declared a 2 percent payroll holiday in 2011, temporarily reducing Social Security withholding. People who are self-employed will see the savings when they file their estimated taxes.

"People are going to spend it or they're going to save it" depending on their goals and financial situation, said Greg Rosica, tax partner with Ernst & Young. "It's a great opportunity to look at it as an opportunity to increase their 401(k) or make an IRA contribution."

"That could multiply tax savings," said Barbara Weltman, author of tax guides for J.K. Lasser. "If they give to charity, it's tax deductible. If they put it into an IRA, that's deductible."

Other options could be to put it in a 529 plan to save for a child's education, or open a Roth IRA and create tax-free income for retirement. A note of caution: Roth IRA contributions are not tax deductible.

The reduced withholding for Social Security took the place of the Making Work Pay tax credit, which had been in place for 2009 and 2010. That credit was worth up to $400 for individuals and $800 for married couples filing jointly, but was phased out for those at higher incomes.

For those people and others, the payroll holiday will work out better. Earnings up to $106,800 are subject to the Social Security payroll taxes. That means a maximum savings from the payroll tax holiday of $2,136. Also, unlike the Making Work Pay credit, the payroll holiday does not phase out at higher incomes.

Some lower-income workers will be worse off, however, said Weltman. A married couple earning less than $40,000 a year or an individual earning less than $20,000 gets a smaller benefit under this year's tax break.

For tax year 2011, the standard deduction increases slightly to $11,600 for married couples filing joint returns, $8,500 for heads of households, and $5,800 for singles and married couples filing individually. The personal exemption increases to $3,700, up $50 from 2010.

Congress in December patched the alternative minimum tax to adjust for inflation for tax years 2010 and 2011. The AMT exemption for 2011 is $74,450 for joint returns, $48,450 for singles and heads of households, and $37,225 for married couples filing separately. Without the patch, millions more Americans would be subject to the AMT.

Other 2010 tax provisions in effect for 2011 include:

* A top capital gains rate of 15 percent.

* Personal exemptions and itemized deductions won't be phased out for higher-income taxpayers.

* The American Opportunity credit, an expansion of the Hope credit. Qualified taxpayers can get a credit of up to $2,500 toward tuition and other fees at colleges and universities.

* The maximum $4,000 deduction for qualified tuition and fees.

* The option of deducting state and local sales tax, geared mainly toward taxpayers in places that don't have state income taxes.

* The maximum $250 deduction for out-of-pocket expenses incurred by teachers in grades kindergarten through 12th grade.

* The deduction for mortgage insurance.

Some of those credits and deductions phase out at higher incomes.

By the same token, some credits and deductions in place for 2010 were allowed to expire and are unavailable to taxpayers for 2011.

Among them is the first-time homebuyers credit. A smaller homebuyers credit for people who had owned homes before also expired. An exception was made, however, for active duty military and members of the Foreign Service or intelligence community stationed overseas. They may still qualify for the maximum $8,000 credit if they enter into a contract to buy a home by April 30, 2011. There are income limits and limits on the price of the home.

For those already in their homes, a limited credit is available for new windows, doors, furnaces or other energy-efficient improvements installed in 2011. A more-generous credit for energy-efficient improvements expired at the end of 2010.

A year from now, when it's time to do your 2011 taxes, remember that professional tax preparers will have been required not only to register with the IRS, but also to have passed a competency exam. Certified public accountants and others who meet other qualifying standards are exempt from the exam.

Since many things already are in place for 2011, Rosica says people should do some planning now. For example, if you're thinking about selling your home in the next year or two and the value has increased, should you sell it in 2011 since the lower capital gains rate are in effect only until the end of the year? The same with selling a business. "All items ought to be on the list to be examined," he said.

There's one big caveat: The economy, political environment and many other factors can change. And Congress still has a full year to amend the tax laws.

Read more: The Marietta Daily Journal - It s not too early to think about next year s taxes

10 Steps to Be Prepared for 2011 Taxes

Plan Now for Next Year's Tax Season

reprinted from SmallBusinessComputing.com

"Once you've completed 2010 taxes, set aside time -- while this year's paperwork challenges are still fresh -- to establish better habits for 2011," said Alice Bredin, small business advisor to American Express Open, a credit card company and the home of AcceptPay, an online electronic billing and payment acceptance program for small businesses. "A little work now on better tracking income and expenses will make next year's tax season go much more smoothly."

Certainly starting early makes it easier to file your taxes, but there is another striking advantage as well. With all the tax changes for 2011, you can get many of the things you previously thought you couldn't afford -- such as more employees, new equipment and more-affordable health insurance.

However, those tax benefits come with strings, primarily in reporting and percentage-based requirements. Therefore, you need to start tracking your actions now. The easiest way to do all this is to use accounting software and to plan ahead using these helpful tips.

10 Easy Steps to Prepare for 2011 Taxes

1. Sync Small Business Accounting Software with Your Accountant

Sync your small business accounting software with your accountant's, which simply means either use the same software he or she does or a compatible program. By doing so, everything from payroll taxes to quarterly P&L statements and end-of-year tax filing becomes automatic.

Several software programs allow your accountant access (with your authorization, of course), so the accountant can access your books and do his work without you having to do anything. Other software programs let you send the data to your accountant with just a few clicks. In any case, you want to use accounting software that provides an IRS-approved electronic audit trail, such as Peachtree Accounting or QuickBooks, so that even a tax audit becomes a no-brainer, less-stressful affair.

2. Use Online Banking

Online banking can help you keep records straight for tax time and help you stay on track from month to month. Most accounting software lets you automatically import data from your online checking account, but there are other ways to use online banking info, too.

"Most banks will let you download your transactions into an Excel spreadsheet or some type of electronic, sortable format," said Karla Dennis, a Licensed Enrolled Agent and CEO of Cohesive, a California-based tax preparation and consultancy firm. "If you download your transactions using your iPad, desktop or laptop, you can then put a 'T' next to the items that are tax related. If you do this every month, you will have a nice record of tax deductible items when it's time to file your 2011 tax return," she said.

3. Record Everything Electronically

"Scan bank statements (if you're not using online banking), vendor statements, receipts, credit card statements, everything. Scan it all as soon as you receive it," said Andrea Moe, senior director of product management and marketing at Sage, the makers of Peachtree Accounting. By creating an archive of all your records, you'll always have everything you need, anytime you need it.

4. Backup Electronic Records

To prevent financial ruin as a result of man-made or natural disasters, or even from a spiteful employee or an errant finger stroke, make sure you backup everything routinely and regularly. "Don't just back it up on a flash drive or CD, back it up to a remote location," said Moe. "That way, if your building burns or floods, your backup isn't destroyed along with your primary records."

There are a number of programs that can automatically back-up everything on your computer --including some that come pre-installed on new computers such as Dell DataSafe Online -- and others that you can downloaded, such as Mozy and Carbonite. Check to see if your accounting software supplier also has an automatic backup service -- several do. The added advantage to backing up online is that you can access your financial info any time -- even when you're away from the office.

5. Track Health Insurance Policies

The Small Business Jobs Act entitles a sole proprietor to reduce self-employment tax by the amount of deductible health insurance premiums. "For small businesses that pay at least half of their employees' policies, there are substantial tax credits available. Check with your accountant for details, but do track policy costs throughout the year. That way you'll have an exact record if you change insurance companies or coverage.

6. File Online -- It's the Law

"Small businesses are now required to file 941 forms (quarterly payroll taxes) and unemployment forms electronically," said Moe. "If you're not using automated accounting software or a third-party payroll company, you may find it really difficult to file these electronically." Be warned, the fines for failing to file online and on time can be significant.

7. Use Electronic Calendars

Odds are you already use an electronic calendar on your computer or smartphone. You can also use it to jog your memory as to which trips and meals qualify as tax deductible -- thus giving you a good way to double-check your deductions at tax time.

"Make a note of any appointment that is tax related by indicating so with a 'T' right in the subject line," said Dennis. "At the end of the year, you can print out your appointments, and anything with a 'T' next to it is something you need to follow up on for your taxes."

8. Profit by Hiring

In the current economy, many businesses are reluctant to hire employees. However, the government is offering employers a $1,000 tax credit for each employee hired. "The business owner must retain the new employee for at least a year," said Mike D'Avolio, senior tax analyst at Intuit, the makers of QuickBooks.

"Also, the employee's wages during the last 26 week period must equal at least 80 percent of the first 26 week period." In order to benefit from this tax credit, it's important to track length of employment and to calculate earnings against this rule – a task some accounting software will do for you automatically. In comparison, the shoe box won't track this at all, and you can end up working short-handed and paying more taxes.

9. Buy More Assets with Tax Credits

The government is encouraging small businesses to purchase assets by expanding several incentives. Businesses can claim a 100 percent bonus depreciation deduction for new assets purchased in 2011. "Personal property, such as machinery and equipment, qualifies; but real estate does not," said D'Avolio.

Even though the purchase of used property does not qualify for this 100 percent bonus depreciation provision, D'Avolio said it does qualify for a section 179 expense deduction. There is a $500,000 limit for 2011. Certain types of real estate qualify for the section 179 expense deduction with a $250,000 limit.

10. Avoid Huge Penalties for Late Reporting

According to Greatland, the parent company to tax-filing software such as FileTaxes.com and speedEfiler, the Small Business Jobs and Credit Act of 2010 will increase 1099 and W-2 reporting penalties across the board. This will apply to information returns filed on or after Jan. 1, 2011, and therefore, all payments made in 2010.

The maximum failure-to-file penalty increases to $500,000 (up from $100,000) The maximum penalty for issuing corrections within 30 days increases to $75,000 (up from $25,000) while the penalty for issuing corrections more than 30 days past the due date, but before Aug, 1, increases to $200,000 (up from $50,000).

Additionally, a new provision in the healthcare reform legislation is aimed at improving reporting and closing the tax gap. "It will require all businesses to not only issue a 1099 to document income paid to contract workers, but also issue a 1099 form to any business from which they purchase at least $600 in goods or services," said Bob Nault, Greatland's CEO. "Some estimate that this change will have the average business seeing its 1099 reporting increase tenfold -- a burden expected to only be compounded next year if businesses don't begin to prepare in 2011."

Accounting software can automatically issue these 1099s for you. If you fail to start issuing 1099s and W2s according to these new laws, the penalties could rob you of your business. In the end, you could be left with nothing but your shoe box of receipts.