How To Write Off Business Expenses 101
If you’re a freelancer or self-employed individual, you are a business owner. And along with all the perks that come with owning your own business and being your own boss, there are also certain responsibilities you need to stay on top of.
Among the most important of those responsibilities is learning how to track and write off business expenses.
While this aspect of bookkeeping is often less exciting than tracking your income, it’s especially important when it’s time to file your taxes or do any year-end reporting necessary. It’s also important to know which of your expenses are tax-deductible because it will help you save a lot of money and increase your business income over time.
In this guide, we’ll go over the most important tax deductions you should be aware of as a self-employed individual or small business owner. Then, we’ll share some best practices to help you track your finances and expenses so you’re ready for tax time.
Let’s get straight into it.
7 tax deductions for the self-employed
The key to lowering your taxes as a small business owner is taking advantage of all of the deductions that you’re entitled to.
Even expenses that may seem inconsequential can add up over the course of a year, and knowing which business tax deductions are available to you when your taxes are due is incredibly valuable.
You may find that you have more tax deductions than you expected, reducing your tax liability.
Here are the most common tax deductions you can write off that are related to your business:
1. Home office expenses
Did you know your home office expenses are tax-deductible? This includes everything from your computer and tech equipment like laptops, desktops, monitors, hard drives, etc. to home office essentials like office supplies, your desk, or your ergonomic chair. It also includes your internet bill!
If you don’t like working from home, you’ll be glad to know coworking spaces are also a tax write-off.
So are other places you rent for work, like spaces you may use to host workshops, meetups, or to create other business-related content.
2. Business travel
You can also deduct your expenses when you go out of town or travel for business. This includes the cost of airfare, gas mileage, or other transportation. It also includes lodging expenses like the cost of your hotel or rental home.
3. Advertising costs
The money you spend promoting yourself and your small business is another tax deduction you should know about. Think about things like web hosting for your professional website, your domain name, plugins, stock photography, or any other services or platforms you use to promote your small business.
4. Software, tools, & apps
Another business expense to write off is any software you use to do your job. As long as you’re using it for your trade of business, it’s deductible.
This can include things like digital assets you purchased to complete client work, subscription services that help you manage your business, or any apps you use related to your business.
5. Educational materials
You can also deduct education expenses if they’re related to your business or work. Just know that these expenses must be used to maintain or improve skills that are required in your current business.
Examples of this include classes, books, webinars, or any other reference materials that help to improve your business.
6. Legal and other professional services
Self-employed freelancers can also deduct fees paid to other professionals such as attorneys, consultants, accountants, tax professionals, etc. if it’s business-related.
Now that you know which tax deductions are available to you as a small business owner, let’s get into how to actually track these expenses in order to maximize your tax return.
Use a dedicated bank account
One of the best ways to track business expenses is to make sure you have a dedicated bank account for your business.
All of your freelance expenses and all of your income should go into this account. You’ll be able to easily review what you spent by looking at your bank statements, without having to wade through what might be personal and what might be business-related.
While a business bank account is often best, if you’re operating as a freelancer working under your own name (rather than a business name), you may be able to simply set up a second personal bank account for this.
Talk to an accountant or someone at your bank to find out your options and which one will be most cost-effective and appropriate for your specific use.
Use expense tracking apps
There are a wealth of expense tracking apps and tools out there, both free and paid. There are apps specifically for tracking expenses, while others are more complete accounting suites.
Try a few apps out before you decide on the best one for your needs. We recommend using an app that has both desktop and mobile versions. That way you can enter receipts on the go while also having access on a larger screen than your mobile device for reviewing expenses later on.
We highly recommend Bonsai to manage your financial records. You can track expenses, identify write-offs, set tax reminders, and more from one easily managed platform.
Use a dedicated credit or debit card
Similar to using a dedicated bank account, using a single credit or debit card for your business expenses makes bookkeeping much easier. You can review your card statements at the end of each month and make sure that you’ve accounted for all of your expenses.
The other advantage of using a dedicated credit card is that you may be able to qualify for a card with rewards, either in the form of points or cash back. It’s like getting a tiny discount on every purchase.
One word of advice, though: be sure that you pay your balance in full each month to avoid interest charges.
Hang onto your receipts
Most of your expenses will come with receipts. Be sure you hang onto them in case you have any issues with your expense tracking and need to refer back to them.
Keeping all of your receipts doesn’t necessarily mean you need to file away the physical copies (or toss them in a shoebox). You can scan them and save them digitally.
There are apps specifically for doing that, or you can use a more general scanner app (like Genius Scan) and just keep them in a dedicated folder.
Backing up those digital copies to the cloud is also a good idea (and makes it easy to share them with your tax pro or accountant if necessary).
Talk to an accountant or tax pro
Before you start your small business, you should speak with a qualified accountant or tax professional to make sure you’re meeting any requirements related to your locality. That’s because every locality has its own rules and laws around how business expenses should be tracked.
Don’t wait until tax time
One of the biggest mistakes you can make is waiting until it’s time to file your taxes or do year-end reporting to start worrying about your expenses.
It can be overwhelming to try to compile a year’s worth of expenses in a short period of time, and you’re almost certainly bound to miss some of them.
By taking time on a weekly or monthly basis to make sure your expenses are properly entered into your bookkeeping or expense-tracking system means you’ll be all organized when it’s time to file your taxes or figure out what your profit was for the year.