Working from abroad still has business expenses
Do you pay for a co-working space in an exotic location?
Are you thinking about taking that online course to improve your marketing skills?
Do you need to renew web-hosting and domain names for your business websites?
All those could be tax-deductible business expenses for location-independent professionals, or digital nomads, whichever name you prefer. Read here which expenses you can deduct from your US taxes.
What is a tax-deductible business expense?
To be deductible, a business expense must be, in the words of the IRS, “both ordinary and necessary”. An ordinary expense is one that is common and accepted in your field of business. A necessary expense is one that is helpful and appropriate for your business. An expense does not have to be indispensable to be considered necessary. So what does that mean in real life?
Legitimate business expenses and deductions for nomads
Here is a list of typical expenses that location-independent professionals, like traveling freelancers or entrepreneurs, may have:
- Domain and webhosting for your business website(s)
- Telephone/internet – only the portion that is related to your business, keep records!
- Apps and online tools, e.g. Adobe Creative Cloud, Dropbox
- Software
- Equipment, e.g. a laptop, or camera gear if your business is photography – again, only the portion related to your business
- Advertising for your business
- Office supplies, printing
- Business meals – keep records of place, time, business purpose and attendees of the meal
- Books, magazines, reference material, including online subscriptions
- Rent for office or co-working space
- Memberships (professional organizations)
- Messengers, private mail carriers, postage
- Business insurance if you have it
- Business travel – but only if you have a tax home. A tax home is a place, where you stay long enough for it to be the primary place of your income. Many nomads move often and therefore don’t have a tax home, so they can’t deduct travel expenses.
- Legal and professional fees, for example for tax preparation
- Safe deposit box rent
- Health insurance premiums
There is a catch – the 2% rule
There is a caveat when it comes to deducting business expenses. You can deduct typical miscellaneous expenses for your business only when combined they total more than 2% of your Adjusted Gross Income. Adjusted Gross Income, or AGI, is your income for the year minus personal exemptions and itemized deduction, so it is a bit lower than your total gross income.
So only if your business expenses exceed 2% of your AGI can you deduct them from your taxes, and only the amount that exceeds the 2%. If you are just starting out and have a low income, this threshold should be easy to exceed.
One expense that does not fall under the 2% rule is health insurance. If you’re self-employed, you may be able to deduct the entire premium you pay for your health insurance.
Keeping good records is key for claiming business expenses
You can only deduct expenses on your tax return that you have proof for. Therefore it is important to keep good records of your businesses expenses as well as your income. Be diligent because self-employed people are more frequent targets of IRS audits.
A good way to keep track is to always use the same payment method for business expenses, like a credit card tied to your business bank account.
If you find this helpful, please share with your nomadic US friends. And don’t forget to check out the Quick Guide to US Taxes for Nomads – In Plain English, that I just published.
