Everywhere I turn, I am hearing about the upcoming tax code change and who it will benefit. Until January 1, my eyes are solely on 2017 income and what advantages photographers can utilize to reduce their tax burden this year. Time is of the essence for what you can do this year to save money before the ball drops on December 31 at midnight.
Prepping your taxes in time to do something about it is paramount to saving the most money you can. There are a few things you can do before it is too late to claim deductions on this year’s taxes. Run a mock tax return to evaluate approximately what your tax burden will be this year. I assess what my total billings are for the current year versus what my deductions are. Totaling up your receipts and money put out this calendar year from your total billings will give you a good picture of if you are going to owe the IRS money. This may take a bit of time, so be sure to spend a day sorting these numbers before B&H has their last purchase day of 2017 this Sunday. If an item is purchased on December 31, it does not matter when you receive it.
Here are a few things you can do to get last-minute deductions this tax year:
Under Section 179, you can fully deduct business equipment all in one year. In the past, you had to depreciate business equipment over several years, which meant you could only deduct one-fifth of the cost of photo gear bought. Section 179 is amazing for photographers and is best utilized if you have a clear picture of how much in deductions you need. All purchases have to be done by December 31. There have been years I’ve bought $70,000 to reduce tax burden in the last hours of the year. Now, you can deduct up to $500,000 per year. Qualified business equipment includes any computers, lighting, cameras, grip supplies, and off-the-shelf software readily available for purchase by the general public with a non-exclusive license and not substantially modified. Note that websites do not qualify here but rather fall under business expenses. Think of it this way: whatever tax bracket you fall into, that is how much of a discount you are getting on your gear. For example, if you pay in the 28 percent tax bracket (adjusted gross income of $91,900 to $191,650), then the $1,899 Canon EF 70-200mm f/2.8L IS II USM lens you have had your eye on effectively will cost you $1367.28 as you save 28% via a tax deduction. This is $531.72 that you would pay the IRS in taxes that you instead invest into gear that you can rent to yourself when a paying client comes your way to further offset the cost.
If you are an LLC or S-corp, you can apply section 179 to a vehicle titled under the company name. Vehicles with gross vehicle weight ratings above 6,000 lbs. can qualify for a $25,000 deduction, but passenger vehicles that will be used for 50 percent or more for business have a cap of $11,060 for cars and $11,160 for trucks and vans. If you have had a great year and need a sizable deduction, you may want to consider some business car shopping this weekend.
If you have children, you can also set up a 529 education savings plan intended to pay for college tuition and other secondary training educations costs. Many states have allowed a deduction up to $5,000 per year if single ($10,000 if married filing jointly) from your state taxes. Note this is not a federal deduction but a state income tax deduction. Even though this is not a federal deduction, any money put in grows tax-free and will not be taxed upon being taken out for college. Pennsylvania has one of the most generous 529 tax breaks, as you can donate $14,000 for a married couple. Check your state to see if this benefit is offered.
SEP IRA is also a great option to get a tax deduction this year if you draw your income from photography on a freelance basis and are self-employed. The great thing about a SEP IRA for a photographer is that you can deduct up to the lesser of 25 percent of your yearly compensation or $54,000. Contributions to a SEP IRA can be made up to the due date (including extensions) for filing your tax returns (April 15, 2018 or October 15, 2018 with extension for 2017 tax year). This means that contributions for a given tax year can be made up to the final tax filing date the following year after you have had some time to really dig in and know exactly what you may owe the IRS. A SEP IRA is tax-deferred, which means you deduct the amount deposited from your taxes now and pay taxes on the money when you take it out in retirement after the age of 59 1/2. Any withdrawal before age of 59 1/2 is subject to an additional 10 percent tax. I’ve used the Sep IRA to neutralize my current year tax burden while saving for my future.
Perhaps the most important 100 percent tax deductible item is the office holiday party. It is not too late to have a New Years party, and every toothpick, piñata, keg of beer, or amazing bottle of whiskey (I recommend Michters American Unblended whiskey) is allowed under both the 2017 and the new 2018 tax code. So, you have a couple days to save a significant amount of what you made this year. Time to get to shopping and partying.
For more commercial photography business information and tips, check out our online tutorial "Making Real Money" in the Fstoppers store. The $300 you spend on it is deductible as research for a photographer. You will also learn many other tips I have used throughout my career to increase the money flowing into your photography business.
Disclaimer: This article is for informational purposes only. Consult a professional before making any financial decisions.
I worked for a company that was fined by the SEC (Securities and Exchange Commission) for booking revenue on December 32nd.
that is really funny! I guess they were making revenue late into the New Years holiday party!
I was taught that items must be put into service before December 31st, not just purchased. They may not care though? Here's the IRS publication: https://www.irs.gov/publications/p946
I love your work btw Monte, I wrote an article about your Step Up All In shoot a few years ago when I was writing for SLR Lounge. Extremely well done.
It makes a ton of sense if those purchases are already planned however, and even more so if that purchase will drop me a tax bracket and save on healthcare expenses. Expenses were planned within the next 6 months anyways, and I had money to float that wasn't already part of an emergency fund. In addition, equipment items were on sale for end of year. It would have cost me more in the long run not to make the purchase at the beginning of December like I did, and the extra income I will gain from using said equipment is also well worth it.
I think the key word here is "essential". Will it make you money? Were you going to purchase it within the next few months anyways? Is there a better use for the money, and do you need it to maintain financial security?
Surely there are plenty of reasons to take those deductions, and plenty reasons not to. It depends on the situation.
Dan, thanks for your comment. I agree that overspending beyond your means is never a good idea. There are multiple options for different people's individual situations. I know for me a piece of equipment is an investment as I rent said equipment to my clients hence recouping the full cost over time and making profit on it. The SEP IRA is a great overlooked deduction that can offset a HUGE portion of your income while saving for the long haul.