ILLUSTRATION BY SELÇUK DEMIREL www.marlenaagency.com
Taxes. They’re an integral part of the budget process for many graphic designers and design firms, especially as April 15 fast approaches (at least for those who choose not to file an extension).
It’s not too late to benefit from last year’s transactions on this year’s tax returns. In fact, the way you handle many of last year’s transactions on your tax return may have a significant impact on this year’s budget figures. Generally, under U.S. tax laws, a transaction must be completed prior to the end of the tax year (that means December 31 for designers and firms that operate on a calendar year for budgeting and accounting purposes). So it’s vital that you track legitimate tax deductions year-round.
Take advantage of the following top tax deductions for small businesses. As always, be sure to consult a financial or tax professional for advice on your own situation, as the Tax Code is thick with rules and exceptions. Whether you’re budgeting for next or trying to keep this year’s tax bill to a legitimate minimum, you should understand the basic tax deductions.
Essential Tax Write-Offs
Every graphic design firm—sole proprietorship, partnership or corporation—is permitted to deduct (from gross income) all the ordinary and necessary business expenses that were paid or incurred in the tax year.
However, capital expenses are not fully tax-deductible. Capital expenditures are for anything with a useful life of one year or longer that a business might purchase—computers and printers, furniture and fixtures, even reference books. Generally, those capital expenses must be deducted by means of depreciation, amortization or depletion.
In some cases, you can choose whether to deduct a business expense in the current year, or to treat it as a capital expense and write it off over time. Does the design firm have considerable taxable income that could be offset with an immediate deduction? Or is it more beneficial to capitalize some expenditures now to create larger depreciation deductions down the road? A tax advisor can help you make smart decisions.
When looking at those expenses and scheming to reduce the cost of financing them, keep in mind that using credit to finance business purchases means paying interest and carrying charges. Both are fully tax-deductible as a legitimate business cost—even if it’s a personal loan—as long as the proceeds are used for the business. Good record-keeping is essential, since the interest expense deduction could be disallowed if the IRS considers it a personal expense.
This is a good time to think about the structure of your design business. While the IRS’s check-the-box tax rules permit many business owners to choose to be treated as a corporation or a partnership by marking a box right on the tax return, the decision is far more complex—and longer-lasting—than that. Now might be a good time to discuss your firm’s operating status with a tax professional. In fact, it’s always a good idea to run all tax-related strategies and transactions by the advisers your operation should be relying on, including a CPA, financial planner and attorney.
If you regularly work at home, you may be entitled to a tax deduction for expenses related to operating that home office. In fact, this deduction may also be available even if you have an outside office and do the bulk of your work at home. Keep in mind, though, that the deductions claimed for the home office may have to be repaid, or tax benefits lost, when the residence housing the home office is eventually sold.
However, many graphic designers have outside studios or offices where they work. An outside office—whether rented or owned—offers many opportunities for tax deductions. Virtually all outside office expenses are deductible, including rent, utilities, insurance, repairs, improvements, maintenance and the like.
Those with legitimate home offices can deduct the cost of traveling from that office to meet with clients/customers, while others are limited to deductions for the cost of traveling between the sites where business is conducted. And designers who travel overnight for business can deduct their airfare, hotel bills and other expenses. In fact, if you plan your trip right, you can mix business with pleasure and still qualify for a tax deduction. The IRS closely monitors this deduction. So make the purpose of the trip mainly business, and keep good records.
Legal & Professional Fees
When it comes to the fees paid to those all-important lawyers, tax professionals or consultants, they’re generally deductible in the year incurred. If, however, that work clearly relates to future years (like planning for the sale of your business three years from now), the expenses must be deducted over the life of the benefit received from the lawyer or other professional. Note that business books, including those that help you do without legal or tax professionals, are fully deductible as a cost of doing business.
Tuition & Education
Don’t overlook yourself in that budget process. Uncle Sam wants you to get better at what you do, as well as enjoy the fruit of your labor—after taxes. A designer can, for example, deduct expenditures to maintain or improve existing skills, as long as that training relates to his present profession. (However, the cost of education that qualifies you for a different job or profession is not deductible.) The IRS doesn’t limit the types of courses or the types of educational institutions providing those courses; workshops, seminars, conventions and conferences may all qualify.
A design firm can establish a tuition-reimbursement program that’s open to all employees, and the company can deduct a certain amount per employee, per year for education expenses. With such a program, there’s no requirement that the education be strictly job-related. (A design firm could, for example, pay tuition for a staffer to earn an MBA and deduct the expense up to a certain amount.)
Health & Retirement Benefits
If you’re a business owner, you have an additional advantage when it comes to health care: You can deduct many of your health insurance costs from your taxes. In addition, you can deduct a variety of uninsured medical expenses, including non-prescription medications, acupuncture and eyeglasses.
Likewise, self-employed designers are better off than employees when it comes to retirement benefits—they can establish a personal retirement plan that generates tax-deferred savings. Design firms, too, benefit from establishing retirement programs—such plans reduce a company’s tax bill and also provide non-taxable income to the owners and staff. Be sure to work with an advisor when setting up a retirement program for your firm.
Some tax deductions are enjoyable: Frequently, business meetings, client contacts and marketing efforts occur at restaurants, golf courses or events. Under U.S. tax rules, designers can deduct half the cost of their business-related entertainment. Remember, however, that taxpayers continue to abuse this deduction, forcing the IRS to limit the types and amount of entertainment costs that are tax-deductible.
A design firm’s payroll tax liability depends on the people working for it. The question of who’s an independent contractor (or freelancer) vs. who’s an employee is highly complex and still unresolved under tax law. (Generally, a freelancer or independent contractor is someone who offers his services to the public, not just one company, and who controls the way he manages and works on a project. An employee works for a single company, and the company directs the manner and content of his work.) If you hire designers as independent contractors, you avoid paying payroll taxes. And many designers prefer to work as independent contractors because they gain flexibility and control over their work and also realize certain tax benefits.
But the independent contractor/employee classification can be murky, and lawmakers and the IRS have yet to present substantial guidelines to fully resolve this question. Even worse, many states have become more aggressive in re-classifying workers even before the IRS does. Check with an adviser to guarantee that all independent contractors used by your operation qualify as such—both at the federal and state levels.
Deciding whether a design-firm owner is an employee of his or her own business is a far less controversial area. The courts have ruled that a shareholder who provides substantial services to his or her incorporated business is an employee, so the firm must withhold payroll taxes on the owner’s salary. Withholding payroll taxes is another year-round issue. While business entities withhold payroll taxes and remit them to the government, the sole-proprietor, shareholder or partner in many graphic design studios is responsible for paying his own tax liabilities. And the government wants it now—usually via quarterly installments during the tax year.
Taxes—and the related hazards and benefits—are on everyone’s mind at this time of the year. There’s no better time to guarantee that you’ve taken full advantage of all the deductions your firm is entitled to, while building savvy tax strategies into next year’s budget.
This article originally appeared in HOW Magazine. Subscribe today to get the latest career tips, advice and more.
If you’re a professional designer, you know what it’s like to lose creative battles. Design and marketing have changed from a purely idea-centric field, to one that has to provide creative business solutions. Marketers now hold agencies and designers accountable for their creative ideas, and as a result, success is measured in conversions and marketing ROI. The creative who understands the business of design is king (or queen). In the online course, Creative Strategy and the Business of Design, you’ll learn how to integrate business considerations into your creative strategies.