Tax Writeoff
July 23, 2010 12:53 PM Subscribe
Freelance Writer Tax Write-Off Question: I'm a first time independent contractor and want to know how and if I can write-off a laptop.
I started freelance writing a few weeks ago and have made $530 so far. If this keeps up, in the next month and a half or so I'll have made enough to cover the costs of a laptop I'm looking to purchase ($1,000).
I've read about the high self-employment taxes so writing off your expenses is a good incentive to reduce how much tax you'll pay.
I understand that in order to write-off a certain item your total income has to cover how much it costs and the item has to be work-related. I think I can make a strong case as to why I need a $1,000 laptop for this particular freelance writing job.
But I have a feeling that the company I'm writing may go under soon. Hopefully I'll make it over a $1,000 but what if I make it to $1,100 and my job ends? Can I still write off a $1,000 laptop and just pay taxes on $100? Is there anything I should be careful about? And what exactly do I do (yes, I don't know how to do taxes) save the receipt and when the time comes staple it to my tax form?
NOTE: I don't know how much I'll be able to make in total with freelancing nor if there is a minimum amount I need to surpass before one would be expected to pay taxes. Due to some complicated mess, I am going to have to pay taxes on what I make regardless of the amount.
I started freelance writing a few weeks ago and have made $530 so far. If this keeps up, in the next month and a half or so I'll have made enough to cover the costs of a laptop I'm looking to purchase ($1,000).
I've read about the high self-employment taxes so writing off your expenses is a good incentive to reduce how much tax you'll pay.
I understand that in order to write-off a certain item your total income has to cover how much it costs and the item has to be work-related. I think I can make a strong case as to why I need a $1,000 laptop for this particular freelance writing job.
But I have a feeling that the company I'm writing may go under soon. Hopefully I'll make it over a $1,000 but what if I make it to $1,100 and my job ends? Can I still write off a $1,000 laptop and just pay taxes on $100? Is there anything I should be careful about? And what exactly do I do (yes, I don't know how to do taxes) save the receipt and when the time comes staple it to my tax form?
NOTE: I don't know how much I'll be able to make in total with freelancing nor if there is a minimum amount I need to surpass before one would be expected to pay taxes. Due to some complicated mess, I am going to have to pay taxes on what I make regardless of the amount.
My understanding is that you can always deduct expenses related to your business, even if they exceed your related revenue for that same year. After all, not every business turns a profit every year.
I have heard (but haven't exactly checked it out with the IRS) that you have some number of years after starting a business to turn a profit, or else the IRS will think you're just scamming them so you can write off hobby-related expenses. Personal and first-hand anecdata suggests, though, that as long as you show some revenue from the business, the IRS seems satisfied that it's a genuine business.
posted by DrGail at 2:56 PM on July 23, 2010
I have heard (but haven't exactly checked it out with the IRS) that you have some number of years after starting a business to turn a profit, or else the IRS will think you're just scamming them so you can write off hobby-related expenses. Personal and first-hand anecdata suggests, though, that as long as you show some revenue from the business, the IRS seems satisfied that it's a genuine business.
posted by DrGail at 2:56 PM on July 23, 2010
As I recall, you may have to depreciate it over time rather than write it off all at once. Or maybe you can choose which. Right, ask an accountant. We don't know your details.
posted by fivesavagepalms at 3:53 PM on July 23, 2010
posted by fivesavagepalms at 3:53 PM on July 23, 2010
You can deduct the portion of the new computer used for business. For example if it is used 50% for business and 50% for personal use, then you can deduct $500 of the $1000. If you keep your old computer for personal use and use the new laptop only for business, then you can deduct the entire $1000.
Normally business equipment like a computer is expensed by depreciation over 5 years, so that you would deduct only $200 per year for 5 years. But for small businesses you use the Section 179 deduction (up to $250,000) and deduct the full cost of equipment in the first year.
If your business earns less than $1000 this year so that you have a net loss after the deduction for the computer, you can carry over the loss as a deduction for future years. The deduction must be against business income. It cannot be deducted against any regular W-2 wages.
If you are working from home, you should also look into the home office deduction. You may be able to deduct some of your home or rent expenses.
If you have to purchase your own health insurance, you may also be able to deduct 100% of the premiums.
posted by JackFlash at 5:11 PM on July 23, 2010
Normally business equipment like a computer is expensed by depreciation over 5 years, so that you would deduct only $200 per year for 5 years. But for small businesses you use the Section 179 deduction (up to $250,000) and deduct the full cost of equipment in the first year.
If your business earns less than $1000 this year so that you have a net loss after the deduction for the computer, you can carry over the loss as a deduction for future years. The deduction must be against business income. It cannot be deducted against any regular W-2 wages.
If you are working from home, you should also look into the home office deduction. You may be able to deduct some of your home or rent expenses.
If you have to purchase your own health insurance, you may also be able to deduct 100% of the premiums.
posted by JackFlash at 5:11 PM on July 23, 2010
As I recall, you may have to depreciate it over time rather than write it off all at once.
Generally speaking, capital purchases must be capitalized and the value is amortized over a period of time, usually three tax reporting years. So you get to claim for part of the capitalized cost the first year (usually 50%), then 25% the second year and 25% of the original value the third year versus your earnings each year. As a rule of thumb, capital purchases of $1000 or more should be dealt with in this way, but talk to an accountant or a bookkeeper.
posted by KokuRyu at 6:48 PM on July 23, 2010
Generally speaking, capital purchases must be capitalized and the value is amortized over a period of time, usually three tax reporting years. So you get to claim for part of the capitalized cost the first year (usually 50%), then 25% the second year and 25% of the original value the third year versus your earnings each year. As a rule of thumb, capital purchases of $1000 or more should be dealt with in this way, but talk to an accountant or a bookkeeper.
posted by KokuRyu at 6:48 PM on July 23, 2010
Best answer: Generally speaking, capital purchases must be capitalized and the value is amortized over a period of time, usually three tax reporting years.
The depreciation schedule varies from 2 years to 20 years depending on the class of property. Computers are 5 years. However, as I pointed out above, Section 179 allows businesses to deduct up to $250,000 of equipment in the first year without using a depreciation schedule. So you can deduct the full cost of the new laptop in the year you purchase it.
posted by JackFlash at 9:09 PM on July 23, 2010
The depreciation schedule varies from 2 years to 20 years depending on the class of property. Computers are 5 years. However, as I pointed out above, Section 179 allows businesses to deduct up to $250,000 of equipment in the first year without using a depreciation schedule. So you can deduct the full cost of the new laptop in the year you purchase it.
posted by JackFlash at 9:09 PM on July 23, 2010
Others have pretty much covered it, but I'll Nth that it's probably worth hiring a tax preparer. With one source of self-employment income (and maybe some w2 income) it shouldn't cost too much. The fees may even negate savings on s/e taxes but it's still worth it. Figuring out how to prepare a return can suck up hours, and if something goes wrong with IRS, you'll lose many more hours.
You don't provide a receipt with your return (but IANAA, do whatever your tax preparer says...). Just keep it with other records in case you ever need to prove something.
For a 1K laptop, probably worth writing it off right away (assuming you have the revenue to cover it), especially if you might not have self employment income in future years.
posted by powpow at 9:20 PM on July 23, 2010
You don't provide a receipt with your return (but IANAA, do whatever your tax preparer says...). Just keep it with other records in case you ever need to prove something.
For a 1K laptop, probably worth writing it off right away (assuming you have the revenue to cover it), especially if you might not have self employment income in future years.
posted by powpow at 9:20 PM on July 23, 2010
Response by poster: I'm a poor student so I don't think hiring an accountant is a smart move right now especially because I'm not even sure if this company is going to survive for very long.
That being said, besides the IRS website are there any websites that break down taxes? Or those that might specifically be of interest to me as an independent contractor?
posted by bluelight at 10:31 PM on July 23, 2010
That being said, besides the IRS website are there any websites that break down taxes? Or those that might specifically be of interest to me as an independent contractor?
posted by bluelight at 10:31 PM on July 23, 2010
If you want to do your own taxes, spending a few dollars on TurboTax would be a good investment. TurboTax will walk you through all of the steps to fill out your Schedule C for your business. You can google Schedule C and find lots of information, but it's not the same as actually filling out the form, which TurboTax can assist. TurboTax Home and Business version provides the most guidance for Schedule C, but the cheaper versions might be sufficient for your case since you only have simple income and few expenses.
posted by JackFlash at 11:49 PM on July 23, 2010 [1 favorite]
posted by JackFlash at 11:49 PM on July 23, 2010 [1 favorite]
June Walker. Grab the RSS feed. It's great.
She answer reader questions like this all the time, by the way. Check out her archives or buy her book; both address the topic exhaustively.
Don't dismiss the IRS site too readily, by the way. It's got a lot of stuff that's clearly explained. e.g. business or hobby, who counts as self-employed, business expenses guide. Might as well go to the expert source if you're not going to be able to lean on an accountant for such things.
posted by nakedcodemonkey at 12:03 AM on July 24, 2010 [1 favorite]
She answer reader questions like this all the time, by the way. Check out her archives or buy her book; both address the topic exhaustively.
Don't dismiss the IRS site too readily, by the way. It's got a lot of stuff that's clearly explained. e.g. business or hobby, who counts as self-employed, business expenses guide. Might as well go to the expert source if you're not going to be able to lean on an accountant for such things.
posted by nakedcodemonkey at 12:03 AM on July 24, 2010 [1 favorite]
A few years ago, at least, the rule allowed for deduction of a large percentage of a first-time purchase. I got a big break on a laptop, printer and scanner. You do have to earn a minimum, about $500 then. Second the suggestion of checking with an account beforehand to make the most of this option.
posted by Mertonian at 1:24 PM on July 24, 2010
posted by Mertonian at 1:24 PM on July 24, 2010
If you do this job and only this job, earning $1000 or whatever you need to buy the computer, and then purchase it (and then cease doing freelance work because the company's gone under), I fail to see how you can ethically consider that a business expense. You would not have used the equipment at all in your business.
If you buy it now on credit and use it in doing your work from here on out, or if you continue to freelance in the future, the situation would be somewhat different--though if you freelance a few hours a month and use the laptop for personal use several hours a day, the percentage of "business use"--and hence the portion of the expense that would be deductible--would be extremely small.
Tax prep software is very helpful in this regard. I am a successful full-time freelancer with a much more complicated tax scenario than you face, and I've never felt the need to hire an accountant. And the cost of the tax prep software itself is deductible :-)
Save the receipt, obviously, but you don't need to submit it with your tax form.
posted by drlith at 11:03 AM on July 25, 2010
If you buy it now on credit and use it in doing your work from here on out, or if you continue to freelance in the future, the situation would be somewhat different--though if you freelance a few hours a month and use the laptop for personal use several hours a day, the percentage of "business use"--and hence the portion of the expense that would be deductible--would be extremely small.
Tax prep software is very helpful in this regard. I am a successful full-time freelancer with a much more complicated tax scenario than you face, and I've never felt the need to hire an accountant. And the cost of the tax prep software itself is deductible :-)
Save the receipt, obviously, but you don't need to submit it with your tax form.
posted by drlith at 11:03 AM on July 25, 2010
This thread is closed to new comments.
posted by runningdogofcapitalism at 2:38 PM on July 23, 2010