Tax Rules for Your Side Business
If I start a freelance writing business, can I take advantage of the common business write offs even if I keep my current full-time job with a corporation?
You bet. In fact, you can deduct more than you earn in self-employment income for the year, as long as you are running a legitimate business.
As a freelance writer, you can deduct all sorts of business expenses on Schedule C -- including the equipment you use primarily for freelance work, such as a new computer, fax machine, printer, separate phone line for business calls and office furniture. You can also write off business-related travel, advertising and printing costs. You can deduct a portion of your mortgage interest or rent, as well as utility bills, if a space in your home is used exclusively for your freelance job.
If business expenses exceed business income, subtract the extra costs from your other income. Taking a loss, however, might raise a red flag for the IRS. So be sure to document your expenses carefully, to prove that your business is legitimate, says Paul Gada, a senior tax analyst with the CCH Business Owner's Toolkit. If you lose money in three years out of five, the IRS generally considers your pursuit a hobby rather than a business, which makes it much more difficult for you to deduct expenses.
Use your profits to make tax-deductible contributions to a small-business retirement plan –- for instance, an individual 401(k), which gives you the highest contribution limits even if you've already maxed out your 401(k) in your other job. For more information about your options, see Do-It-Yourself Retirement Plans.
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