The IRS got me good last year, my first delve into the wonderful life of freelance journalism. The moral of the story is, as always, that tax deductions might not save you as much money as you think.
Remember all those gadgets we buy for work, dismissing the expense as a write-off? The deduction is from income, not from the tax bill itself. In practice, this means you only get a portion of your outlay back, depending on your income bracket. Even under Section 179, that $3,600 laptop isn’t so cheap now, is it?
But don’t trust my advice: talk to your CPA. Or to the software with which you have replaced it.
Err, yeah, and thank goodness. Because otherwise, it wouldn’t be a tax deduction, it’d be we bought it for you. And we’ve already got this three trillion dollar war to pay for, so….
You got it. If you are paying 40% in taxes (not uncommon here in Maryland where we have 7.5% state income tax), you end up spending $1 to save $0.40. So, yes, your investment in gadgets and stuff for the biz is a deduction (from income), but not a dollar for dollar reduction of income tax. I cringe when I hear other CPAs telling people to buy a larger house to save money on taxes! Or donating a car just to save on taxes!
Wait, what? When I was a freelancer, I turbotaxed part of my apartment (the, uh, you calculate the square footage of your workspace?), and I think it only went so far as emphasizing to the government that my gross income was Enough to Pay for Rent and Nothing Else. In the future, should I not be doing that?
I can’t think of any business deductions that result in tax credits, as opposed to deductions from gross income. Whether you expense the equipment or amortize it, it reduces your income, not a direct deduction against taxes. Been doing this for almost 20 years, and never had a problem. And so your “deduction” is worth only as much as your tax bracket, although this is a little ripple effect as reducing your income also reduces the hurdles on personal deductions like medical expenses.