DISCLAIMER: This article does not serve as legal advice. We highly recommend working with a tax advisor or certified public accountant (CPA) to best assess your personal situation.
Another tax day has come and gone, and for many people it brought an unpleasant surprise: a lower refund than anticipated or an unexpected liability. Even if you did okay this year, paying taxes is no one’s idea of a good time. It’s only natural to want to forget all about it until next spring. But if you’re a freelancer, tax season never really ends.
It’s never too early to start planning for next year’s income tax returns, and your friends at the Lunacy Productions Blog are here to tell you how. In a follow-up to our Loan-Out article, we’ll explore another way you can use the tax code in your favor as a freelance filmmaker: tax deductions!
One of the burdens of making a living as a freelance filmmaker (apart from the potential erratic income sources) is that it’s your responsibility to track your income and tax liability throughout the year. That can get complicated, which is exactly why it is important to keep meticulous records — every purchase receipt, every invoice, every time you sneeze needs to be recorded in the books for later.
Essentially, a deduction cuts the income you’re taxed on, which can mean a lower bill (but it’s not the same as a tax credit, which reduces the amount of tax you actually owe). Some common deductions that freelance filmmakers can utilize to write off their annual taxes include software, equipment for work, travel costs, office supplies, and even some of your subscriptions. A word to the wise, however: even though we might try to deduct just about everything under the sun, some expenses don’t qualify, and it is your responsibility to know what those are. (Yes, you can rely on your tax advisor, but if you ask her or him to review a bunch of deductions that don’t qualify then you’re literally throwing money away.)
One of the big changes in the new tax law — the Tax Cuts and Jobs Act (TCJA) passed in 2017 — came in regard to business and meal deductions for freelancers. The new law initially read that business meals are a form of entertainment and therefore no longer qualified to be deducted. However, Congress then expressed that they did intend for business meals to still qualify, so the IRS issued additional guidance to clarify: in order to be deductible, food-and-beverage expenses incurred at or during a business entertainment event must be purchased separately from the entertainment, or the cost of food and beverages must be stated separately from the entertainment’s cost on one or more bills, invoices, or receipts. This is good news for freelancers, because business meetings over meals and drinks are an integral part of the filmmaking industry.
As we said above, entertainment costs are no longer applicable, and this means no more straight deductions for taking clients to sporting events, concerts, or resorts. There may be some (barely) above board work-arounds to slide some of these types of things into different categories on a case by case basis — consult with your tax advisor. Additional yearly expenses that don’t qualify include business gifts over twenty five dollars, club dues (fitness and social clubs), federal or state income taxes, and capital assets like vehicles (vehicles can be depreciated over the life of the asset, but they cannot be deducted in one lump sum).
When it’s time to turn in your books, the easy option you can choose when filing is the standard deduction. This is basically a flat-dollar, no questions asked deduction applied to your AGI (Adjusted Gross Income). The other option is to itemize your deductions. Itemizing lets you cut your taxable income by taking advantage of the hundreds of deductions you qualify for; the more you’re able to deduct, the less you’ll have to pay in taxes. The choice between the two options boils down to whether or not your standard deduction is more or less than the sum of your itemized deductions. Itemizing will take more time and require more forms and proof of expenses, but it could be worth it to save money in the end. Your tax advisor can help by running your return both ways to see which will be best for your situation. They will also be able to check if you qualify for additional tax credits, such as the home office deduction, Saver’s Credit for your IRA, 401(k), 403(b), or Student loan interest deduction, if you’re still paying off your education.
This doesn’t cover it all by any stretch, but it’s enough to demonstrate that these categories add up over an entire year. You might find that your taxable footprint is smaller than you initially thought. Again, we recommend consulting with a trusted tax professional, but hopefully now you might be pointed in the right direction. It’s a tough world out there for freelancers — don’t trudge through it alone. And don’t forget to save those receipts!