Declaring your freelance work as a business and writing off expenses

[Evan Wiener]

I'm a graphic designer with a full-time job, but I plan on making a push for more freelance design and illustration work this year. I could use some serious hardware and software upgrades in the next 6 months, and am looking to spend around $2200 on a Mac (my first! I'm switching!) and will need to spend about $1200 on Adobe's Creative Suite 3 (whenever that comes out).

So I talked to my accountant today, and he said that since I don't have employees, I don't need to get a tax ID. For freelance work, that is considered self-employed independent contract work, and any business expenses incurred for that income (separate from my full-time job) can be completely written off as a one-time expense against just the freelance income. Thankfully, it's not one of those things where you can only deduct a percentage up to a total, you can write the whole thing off from what I understand. However, all income that I make from freelancing is subject to income and self-employment taxes. The only questions I should have asked are:

What if I make $3000 freelancing and I have $3600 in expenses this year?
Is the income subject to the income & self-employment taxes, which in this case, would be a net of -$600?

Do I even need to pay any taxes on that since I'm operating at a loss for the first year?

[Taxman]

Sounds like you have decided to file a a sole proprietor. If so, you have to report it whether it is a gain or a loss. Only a gain is subject to income and Social Security taxes.

If there is a loss, it reduces the tax on other income sources.

[JoeE]

If you don't produce a profit in the next few years you may be subject to the hobby loss rules. Not immediately a concern, just something to think about for the future.

[edwardmblake]

Accountants are worth their weight in gold. Ask them your questions on Monday.
Hopefully you'll end up making a profit, in which case you will need to be prepared.

[Evan Wiener]

If you don't produce a profit in the next few years you may be subject to the hobby loss rules. Not immediately a concern, just something to think about for the future.

I don't expect to incur nearly as many costs in subsequent years of freelancing. Since a Mac Pro is an investment that seems like it would last for at LEAST 5-6 years, the upfront cost of $3600 in year one is pretty low considering.

[Taxman]

I don't expect to incur nearly as many costs in subsequent years of freelancing. Since a Mac Pro is an investment that seems like it would last for at LEAST 5-6 years, the upfront cost of $3600 in year one is pretty low considering.If you use this for something other than this specific buinsess venture, you are supposed to devise a method for determining the business use percentage. A PC is considered "listed property," so if the business use declines below a certain level in susequent years, all sorts of bell and whistles are supposed to go off.

[xyzzy]

I thought that business expenses could only be taken against the profit of that business?

[Shannon Chenoweth]

I thought that business expenses could only be taken against the profit of that business?

No, you usually have so many years to make a profit. I know as a writer, I've got like 5 years I believe it is. I can write off comics, any books, of course any con expenses, etc.

[Taxman]

I thought that business expenses could only be taken against the profit of that business?It depends on the entity type. This is true of a subchapter C corporation, but other types of entities can reduce an individuals taxable income under given circumstances.