You may be leaving money on the table if you forget about these tax deductions.
What’s the most confusing and stressful aspect of being a creative business owner? Ask a handful of creatives that question and there’s a good chance dealing with taxes will be at the top of that list.
At times, it seems as though the U.S. tax system is deliberately complex. There are so many forms, rules and instructions written in legalese. Getting help from the IRS is nearly impossible and sound advice can be costly.
Despite these headaches, it’s so important to keep track of deductions that can be used to offset business income and reduce the amount of tax you’ll owe.
Following are six of the most commonly missed tax deductions for creative businesses—and how not to miss them in 2021.
Deduction #1: Education and Conferences
The costs of educating yourself to improve your business is a deductible business expense. When you take courses online, buy instructional books, attend conferences or workshops, hire a coach or join a mastermind group to improve skills in your field, be sure to keep proof that the expense was business related. A copy of the course description or materials to prove that the expense was business-related should suffice.
Keep in mind that educational expenses to change careers or in areas not related to your current work are not deductible business expenses.
Deduction #2: Subscriptions
Most creative business owners use a combination of apps, software and online tools to run their business. However, these deductions are often overlooked because they might be small amounts, occurring monthly or annually, and paid for with a personal credit card.
Be sure you keep records of any expenses for cloud accounting software, productivity apps for your business, cloud storage apps, social media management tools, and online shopping carts. And don’t forget about analog subscriptions for trade or professional publications. All are deductible as long as they are used for your business.
To make it easier to remember them, pay for all subscriptions and one-time app purchases with a business debit or credit card. Then all your deductible subscriptions will be in one place.
Deduction #3: Internet and Cell Phone Expenses
Many creative business owners work from home and have only one cell phone they use for both business and personal purposes. In these cases, you can deduct a percentage of your home internet and cell phone expenses based on an estimate of how much you use them for business purposes.
The key to taking a deduction for your home internet and cell phone is to be reasonable and consistent. Unless you have a separate cell phone used only for business, you likely use the phone to call family members, play games and take photos and use your home internet to stream entertainment and other personal tasks. So don’t try to claim 100% of your monthly cost as a business expense.
To estimate your deduction, you might track the number of hours you work during the month. For example, say you work 40 hours a week. That’s roughly 160 hours a month out of 672 total hours (24 hrs x 7 days x 4 weeks) or 24 percent. If your home internet costs $100 per month, you will deduct $24 per month as a business expense. That’s not the only legitimate way to estimate costs, so do what works in your situation. Just make sure your deduction is reasonable, used consistently, and you keep copies of your itemized bills to support your deduction should you ever be audited.
Deduction #4: Car and Truck Expenses
Many creative business owners forget to track business miles driven by their personal vehicles. If you work from a home office and rarely meet with clients in person, you might think you don’t drive enough for it to matter, but even a few miles a month for running business errands can add up to a substantial deduction over the course of a year.
There are two methods to calculate deduction: Standard mileage or actual cost. You can use whichever method results in the larger deduction. With the standard mileage method, you keep track of how many miles you drive for business then multiply those miles by the standard mileage rate (57.5 cents per mile for 2020).
With the actual expense method, you keep track of how many miles you drive for business and how many miles you drive overall and use these numbers to calculate a percentage of business use. Then you apply that percentage to all your automobile expenses for the year, including gas and oil, repairs and maintenance, license and registration, insurance, car washing, etc.
Note that either method involved keeping track of how many miles you drove for business but logging those miles doesn’t have to be a chore. There are various apps to track miles, or you can even use an old-fashioned log book. Whichever method you choose, make sure you keep a good set of mileage records on hand at tax time so your tax professional can help you decide which method is most advantageous for you.
Deduction #5: Payment Processing Fees
It’s always a bummer to see those fees from PayPal, Square or other payment processing systems take a bite out of your income, but those fees are usually a necessary cost of doing business.
Typically, payment processing fees aren’t accounted for when you mark an invoice as paid in your accounting software. For instance, say you invoice a client for $500, and they pay you via PayPal. When you mark the invoice as paid, you’ll record income of $500. But behind the scenes, PayPal is deducting a fee of $14.80 (that’s 2.9% of the transaction amount plus 30 cents) from your account.
No matter how much or how little business you’ve transacted over the site in the course of a year, make sure you print out an account history at the end of the year and pick up these fees as bank or payment processing fees expense.
Deduction #6: Digital Downloads
Do you purchase fonts, stock photos, templates, workbooks or other digital products for business use? Again, these are typically modest amounts on an individual transaction level that can really add up over the course of a year. But they’re easy to overlook when you purchase them only occasionally.
Be sure you purchase these items using your business debit or credit card to make it easier to track these expenses throughout the year. You can lump them together and call the expense digital downloads or cost of goods sold when you deduct them on your return.
Dealing with taxes may be a necessary cost of doing business but paying too much in taxes doesn’t have to be. Make sure you’re aware of any unique deductions that can be used to defray your total tax bill and keep records of those expenses, no matter how small.
about the author
Janet Berry-Johnson, CPA, is a freelance writer with over a decade of experience working on both the tax and audit sides of an accounting firm. She’s passionate about helping people make sense of complicated tax and accounting topics. Her work has appeared in Business Insider, Forbes, and The New York Times, and on LendingTree, Credit Karma, and Discover, among others. You can learn more about her work at jberryjohnson.com.