When you’re running your own business, managing your expenses is crucial to making sure you turn a profit. If you’re a freelancer or a small business owner, make sure you have a clear idea of your tax deductible expenses.
When you have paid for things that directly relate to your work, you can claim tax relief. For example, if you bought something worth £100 and are a basic rate taxpayer, you can claim for £20 relief – 20% of the total.
The problem for many self-employed professionals is knowing what actually counts as a tax deductible expense. A general rule of thumb tells us that you can offset your tax against items that are used solely for your business. However, for smaller businesses and individuals the lines are often blurred between their business and personal expenses.
We’ve gathered together a list of items that are tax deductible, and what the specific requirements are regarding each of them.
Home Office Expenses
Provided there is space in your home that is dedicated to work, you can claim a home office deduction. This can be slightly tricky to calculate, but there are two ways you can go about it. You can measure the square footage of your home office (up to 300 sq ft) and multiply it by $5 per square foot.
Alternatively, you can calculate the percentage of your home’s square footage that is dedicated working space and multiply that by the expenses of maintaining your home, such as mortgage interest, property taxes, maintenance etc.
Other Business Premises
If you don’t work out of a home office but do rent space in the form of a traditional office or a coworking space, you can claim expenses.
You can offset the cost of the rent, maintenance and repairs if you are in charge of this, utility bills, property insurance and security. However, you can’t offset the costs of building or buying your own business premises.
Travel and Transport
If you regularly travel to meet clients, attend conferences, deliver goods or services etc, you can deduct the costs of getting to and from your location and accommodation.
If you use a personal vehicle, be particularly vigilant in keeping records of your mileage as well as receipts for gas, insurance, repairs etc.
Only apply travel expenses when your travel is fully business related. If you attend a conference and then stay on for a few days to sightsee, you may only deduct the expenses that can be attributed to your business.
Materials and Clothing
If you stock produce to sell or buy raw items that allow you to create produce or operate your business, then you can offset these costs against your taxes.
You can also offset the cost of specific protective clothing or uniform that is necessary to do your job against your tax. Of course, this doesn’t count for the standard clothes you would wear to work every day, only specialist clothing.
Most freelancers use their personal phone to take client calls, and this can make it complicated when it comes to offsetting tax against your phone bill.
The biggest consideration here is to be reasonable; think about how much you realistically use your phone for work versus personal use. An itemized statement from your phone company or tracking your usage across a few days, then calculating an average, are good ways to figure out what percentage of your phone bill you can realistically deduct.
Membership Fees and Subscriptions
Business-related subscriptions could include trade journals, professional associations, trade bodies etc. Remember that even if you meet clients through a personal membership (sport club etc), you cannot offset these against your taxes.
Payments to Subcontractors
If you do outsource certain tasks or extra work you may have, you can also deduct tax against the fees you pay subcontractors.
Be sure to have a formal agreement in place that clarifies you are not employing an individual and have an independent contractor relationship with them, or you could find yourself facing payroll taxes.
Legal and Financial Costs
If you hire a solicitor, accountant, architect or any other professional for business reasons, you can include these costs in your tax deductible total.
You can also include bank, loan and overdraft charges, interest and leasing payments.
If, as a self-employed professional, you purchase your own health, vision, dental insurance or long term care, you may be able to write off tax on these costs.
There are a couple of requirements you must meet for this one though.
The first is that if you are married and your partner is eligible to participate in an employer-sponsored plan, you won’t be eligible.
The second is that the tax you deduct cannot exceed the income you collect for your business. So, if you do generate a loss from your freelance business, you can’t claim a reduction here.
Credit Card Interest
A lot of businesses choose to use a credit card for their business expenses, and if you do carry a balance from month to month, you can write off the interest paid to the credit card company.
This can get more complicated if you’re using a personal credit card for business costs, so it’s worth having a card that you restrict to specifically business expenses.
Certain business insurance such as public liability insurance and professional indemnity insurance are also tax deductible.
A huge part of being an entrepreneur is developing yourself and keeping your skills fresh and relevant. Any courses relevant to what your business does can be deducted.
If you’re learning a skill that will become a hobby, or something you hope to make a career of in the future but isn’t relevant to what you currently do, these can’t be included in your tax deduction.
Advertising and Marketing
Advertising and marketing expenses could include anything from hosting a website, throwing an event or hiring a marketing agency to run a campaign promoting you.
All of these expenses can be tax deductible provided they have a clear business purpose.
What tips would you give for staying on top of your taxes? Have you ever encountered any road bumps with tax returns? We’d love to hear your thought in the comments below!