Archives: Cut Down That Tax Burden

Freelancer tax insights…

Cut Down That Tax Burden

You know how to write off your outlays for purchases of equipment and other kinds of personal property, right? But like many freelancers, you may think there is only one way to deduct equipment purchases. As a result of this

mistaken belief, you may be paying more in taxes each year than legally required. Read on.

         Depreciation. When Form 1040 time rolls around, many freelancers go the "standard route" that allows them to recover their expenditures through depreciation deductions over varying periods. The general rules for depreciation specify periods that range from as low as three years to as high as 39 years, with the majority closer to three than to 39.

         Freelancers get to depreciate most of their equipment over five years (computers, copiers, camera equipment, scanners and the like) or seven years (furniture, and fax machines, for example). That usually translates into a cap on the first-year deduction of only 20 percent for five-year property and about 14 percent for seven-year property.

         Expensing. What most freelancers overlook is that Internal Revenue Code Section 179 authorizes an important exception to the general rules for depreciation. This exception bestows an option on businesses, whether full or part-time, that qualify as "small businesses" (typically, freelance photographers do). Qualifying outfits can dispense with depreciation and elect "expensing," if that is more advantageous. This tactic entitles them to write off the entire cost in the first year the equipment is "placed in service" (IRS lingo for made ready and available for a specific use), rather than the year it's purchased or eventually paid for in full.

         First-year expensing is subject to several limitations. However, in my experience, few freelance photographers are going to spend so high as to run afoul of the limitations.

         The key stipulation sets a dollar cap on the deduction. As the law now stands, the ceiling is $24,000 for last year (2002), and rises to $25,000 for this year (2003) and later years.

         Example. Here's how opting to immediately deduct outlays will work wonders for the overall tax picture and cash flow. Freelancer Wilma Dober falls into a top federal and state tax bracket of 35 percent for 2002, and needs to spend big bucks for equipment, which can be new or used, but can't be acquired by a trade-in or leased. Her purchases include $24,000 for computers and peripheral equipment such as printers and monitors, as well as desks, appliances, and carpets. Wilma needn't depreciate these items over five- or seven-year periods. Assuming it proves advantageous for her to immediately expense the $24,000 expenditure, that trims her taxes by $8,400. It makes no difference that Wilma's purchase payments extend beyond 2002.

         Other fine print imposes a spending cap of $200,000 on property for the year in question. As soon as acquisitions surpass $200,000, the deduction for first-year expensing begins to phase out on a dollar-for-dollar basis.

         To illustrate, Wilma purchases and places in service $210,000 of property. Her deduction ceiling drops from $24,000 to $14,000 ($24,000 minus $10,000, the excess of $210,000 over $200,000). The phase-out is complete once expenditures exceed $224,000.

         Caution. The amount you expense cannot exceed the taxable income from your business. Put another way, the

first-year deduction cannot create a loss for your stock photography business. But for purposes of this limit, taxable income has its own special meaning. Because, among other things, wages and salaries can be included, and because couples filing joint returns are allowed to use their combined income, this requirement can even be met by a start-up operation that shows little or no profit this year.

Tip. Write-offs for equipment purchases enable those who are self-employed to save more than just income taxes. They also reduce self-employment taxes owed for 2002 on the first $84,900 and for 2003 on the first $87,000 of net (receipts minus expenses) earnings, as calculated on schedule SE (Self-Employment Tax) of Form 1040.

Help From The IRS. For more information, take a look at IRS Publication 946, How To Depreciate Property. Publication 910, Guide to Free Tax Services, lists all of the IRS booklets. Get free copies of the booklets by calling 1-800-TAX-FORM. Call (703) 368-9694 for an automated fax service, or download copies from the IRS website (www.irs.gov).

Julian Block is available for private consultations on tax planning. E-mail him at julianblock@yahoo.com or telephone (914) 834-3227. His address is 3 Washington Square, Larchmont, NY 10538-2032.

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