Filed under: Audits, Business Expense, Gifting, Small Business Deductions, Taxes
If you give a gift as a part of your business it’s a deductible business expense. BUT! You can’t deduct more than $25 for gifts you give to a person during the tax year. This $25 limit has been in place for ages and hasn’t been adjusted for inflation for as long as I’ve been doing taxes. That makes keeping within the gift budget a little trickier every year.
I think some people do a lot of “fudging” on the gift expenses, but the IRS seems to be taking a closer look at everything these days so you need to know what you can and can’t deduct. And make sure you document everything and keep those gift receipts.
Here’s some real questions that people have asked me about deducting gifts on their tax returns.
What if I give two different gifts, like a birthday and a Christmas gift? Can I deduct $50 then?
No. Sadly, the $25 limit is on gifts for the entire year, not $25 per gift.
What if I give a $100 gift to my client’s family of four? Can I deduct the full expense?
No. Any gift you give to the customer’s family is considered to be an indirect gift to the customer. So unless you independently do business with each of the other family members, you may only deduct $25 for the gift.
My husband and I each own our own businesses and our businesses have some clients that overlap. Can we each deduct $25 for gifts to our overlapping clients? (Okay, nobody asked me this one, I saw it online and thought it was a good question.)
Surprisingly, No. Technically, a husband and wife are treated as one taxpayer and it doesn’t matter if you have separate businesses or separate employers. Partnership partners are also treated as one taxpayer when it comes to gifts as well.
I sent one of those holiday gift tins that cost $24.95. The extra Holiday message cost $1.95 and the shipping was $9.95 for a total of $36.85. Am I stuck only claiming the $25?
Actually, in your case, you can deduct the whole amount. The gift itself was under $25. You are allowed to deduct the incidental costs like shipping, wrapping or engraving on jewelry.
I gave my client two football tickets that cost $150 total. Am I stuck only claiming $25?
Anything that can be considered as entertainment can be deducted as an entertainment expense–even if you don’t go with the client. In this case, you could deduct $75–half of the entertainment expense.
If bought my daughter an IPad for Christmas. Since she sometimes does some work for me, can I write that off as a deductible business expense? (And yes, this was a real question.)
Ahem, really? Well, here’s the rules. An IPad counts as listed property. (Listed property is the cool stuff that might also make a good gift that the IRS looks at much more carefully than other business expenses.) Business use of listed property is not included in employee wages. Non-business use of the listed property is included in the employee’s wages and taxed accordingly. But you’ve got to substantiate it–and–if you don’t substantiate it, then the entire cost of the IPad is going to have to show up in your daughter’s wages. (By the way, since she does supposedly work for you, you are issuing her a W2 for her wages right? If you don’t issue a W2–then claiming she works for you probably isn’t going to pass muster with the IRS.)
Remember, small incidental gifts valued at less than $4 with your logo on it don’t count as a “gift” towards that $25 total. If you’ve been giving away mugs and pens for advertising, don’t worry–those are still 100% deductible.
If you own a business and you pay for services to an individual, and you expect to pay over $600 for those services, then you should have that person complete a W9 form for your files. You’ll need the information in order to prepare the 1099MISC forms next January. Also, you only need a W9 if someone is working for your business. For example: when I have Brad the Painter come to my house to replace my damaged siding—I don’t give him a W9, it’s a personal service to me. Now if I hired Brad to paint my office, then I’d have to collect the W9 because it would be a business expense.
The general rule here is if you’re writing the service off as a business expense, then you’ll need to collect a W9 from the vendor.
Who should I give a W-9 to? This is an important question because I received numerous complaints from people who were asked to complete a W9 form. Basically, if you’ve done work for a business and they’ve paid you over $600 you should just hand them a completed W9. That was the instruction I was given by the IRS for my own company. You might think you’re not self-employed, or that you don’t have a business—but if you are doing work, getting paid, and not on the payroll; that means you’re self-employed.
When you look at the W9, the check boxes indicate if you’re an S Corp, C Corp, or sole proprietor. The instructions also recommend that sole proprietors use their social security numbers instead of EIN numbers. This is where I’m going to disagree with the IRS, in light of the huge number of identity theft cases this past year, do not use your social security number on your W9 form. Anybody can get an EIN number for their business. You can do it for free and it takes about 5 minutes at the IRS web-site: http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Employer-ID-Numbers-(EINs)-
When completing the EIN application, a sole proprietor is anyone who is filing a schedule C (self employed), E (rental real estate) or F (farm) for their business. It’s important to know that the minute the IRS issues the EIN number, it’s good. If you have to submit a W9 but don’t have an EIN, you can go online, get the EIN, and use it on your W9. The business issuing you a 1099 must accept your EIN even if you did the work a year ago.
Is there any way to avoid having to complete a W-9 form or issue a 1099MISC? The easy way to avoid having to issue a 1099 MISC (and collecting a W9 form) is to pay by credit card. Credit card companies are now issuing 1099K forms so that revenue to the vendor is already being reported to the IRS by another reporting agency. If you don’t want to be collecting W9 forms and issuing 1099s, then use your credit card. This is the easiest way to avoid 1099MISC and W9s, but remember that there are lots of fees associated with using credit cards. As my Mom used to say, “Pick your poison.”
What about home office expenses? Do I need to collect a W9 from my landlord? I think this is a case of the overzealous W9 collector. If you have a home office, you’re reporting that on your Form 8829. Whether you are reporting mortgage interest or apartment rent, it is considered to be a personal expense that you are attributing a percentage of to your business expenses. You do not need to collect W9s from your mortgage company, landlord, or utility companies to claim your home office deduction. (I’ve been asked this question enough times that I felt it necessary to include it here.)
What about purchasing an item from an individual? Do I need a W-9 then? The example that was given to me was buying a claw foot bathtub from Aunt Bertha. I tend to think of this kind of like going to a garage sale—you wouldn’t dream of giving a 1099 to the person running the garage sale would you? Now if Aunt Bertha were in the business of refurbishing bathrooms; that might be another story. But if you just buy something, a private transaction between two people, that’s not a W9 issue.
What about small jobs that are repeated monthly so the total will be over $600. Do I need to get a W-9 for those? Once again, if you’re talking about business expenses then you should collect a W9 and issue a 1099MISC for the work. For example: I used to pay $50 a week to a guy to edit my blog posts and monitor my website. (Now Mike does that.) Although the payment was only $50, over the course of a few months, it exceeded the $600 threshold so I had to issue a 1099.
Generally, if you’re unsure about needing a W9, it’s safer to err on the side of collecting one and issuing a 1099MISC than it is to not have it.
I had a client that owned his own business and he wanted to buy an RV so he could go on vacation with his family. He wanted to know if he could write off the cost of the RV as a business expense if he put a sign about his business on the RV while he traveled around the country. The answer to that is a flat out no. The IRS is all over that idea and they don’t like it.
But, it may be possible to write of an RV as a business expense if you really do use the RV for business. For example, let’s say you have clients in another city that you regularly visit. When you are visiting those clients, you normally need to spend time in a hotel. So, maybe the RV might be a good choice for you. You could travel to the location in the RV and sleep in the RV instead of a hotel.
So I said you might be able to claim it—this isn’t a rock solid deduction. You’ve got to be able to prove it’s truly a business expense. There are a couple of things you must absolutely do.
- You must have a log of all of your miles you drive in the RV. Not one of those, oh I drove some business miles and write it down later—a very serious, a very real mileage log. Over 50% of the miles you drive must be used for business to try to take the RV as a deduction.
- You must also keep a log of all the nights that you sleep in the RV. Same rule—over 50% of your nights sleeping in the RV must be for business.
- You must also keep your business trips shorter than 30 days so that the RV counts as transient lodging. That means I can’t buy an RV and drive down to Florida for the entire tax season and spend my summers in Missouri. (Well I could, but I wouldn’t be able to write off the RV as a business expense.)
And the main point you must absolutely keep in mind—do not use the RV for entertainment. No business parties on the RV. The IRS is pretty strict about that. Entertainment facilities are not tax deductible (things like swimming pools, hunting lodges, and bowling alleys.) Make sure that your RV is for lodging or travel—not for entertainment.
So although my client with the sign idea couldn’t claim the RV as a business expense just for putting a sign on it, if he chose to drive the RV on his business trips and stayed in the RV overnight instead of a hotel—he might be able to claim part of the RV expenses for his business, as long as his business use was more than his personal use.
Remember, trying to claim an RV as a business deduction is kind of “out there” and highly likely to be audited by the IRS. You’re going to want to have really good documentation and a good accountant to back you up on this one.
Recently someone asked me if he could write off his iPad as a business expense. Now for that guy—the answer was a resounding, “Yes!” But I knew all of the circumstances and I knew he had an audit proof reason for the iPad. For most people though—deducting the iPad purchase is a resounding, “Maybe.”
First, you need to consider if the purchase of your iPad would be an “ordinary and necessary” expense for your business? Now in the case of my iPad guy, he’s a computer programmer and he had been hired to develop some apps specifically for the iPad. Although he felt confident that he could develop the apps without an iPad, he thought it might be useful to own one. (Okay, duh! I think he just wanted me to okay his iPad purchase to his wife.)
But you don’t need to be a programmer to justify the expense; there are plenty of really good uses of an iPad for your business. I could just set up a video camera and let my husband do a 20 minute infomercial about why every business person in America needs an iPad. He actually bought his for fun and found that it’s great for his business; he uses it all the time. I think many businesses would pass the “ordinary and necessary” requirements for the write off of a tool like that.
Second, you need to consider how much you’d use it for business. This is really important because the iPad counts as “listed property.” Listed property is the fun stuff. Cameras, computers, and stereo equipment—basically the fun stuff that you can get at Best Buy. Cars are also considered to be listed property.
So here’s the deal—if you buy business equipment that is not listed property—like a file cabinet, and then you quit using it—the IRS doesn’t really care too much about that. But if you buy some fancy video equipment “for business” and then don’t use if for business—well the IRS has some ideas about that and those ideas will all cost you some money! Basically, anytime your business use of listed property falls below 50%—then you’re going to have to “recapture” (that means pay tax) on the deduction that you took earlier on your next tax return. Yuck!
Let’s take that iPad for example. A new iPad costs $500. You buy it this year and you take the Section 179 deduction for it and write off the whole $500 as a business expense for your sole proprietorship. (A Section 179 deduction is what you call it when you buy a piece of equipment and expense the whole thing instead of depreciating it. Depreciation is where you buy something expensive and write off the expense over a couple of years—it depends upon the equipment to determine how long the write off is for.)
That’s all fine and dandy if you use the iPad 100% for business and you keep using it for business. But let’s say you buy it, write it off, and then next year you give it to your daughter for school. Now it’s not a business tool anymore. If you do that—the IRS will make you “recapture” the unused depreciation. So next year, you’d have $400 of extra income to pay tax on. (Because they’d let you keep the $100 expense deduction for the year you used the iPad for business.)
Now I realize that I’m oversimplifying things—but that’s the basic gist of it. It’s okay to buy cool stuff for your business. It’s okay to write it off. But if you’re not going to be using it for the full term of its use (most things are 5 years) then you might want to think twice before writing off the whole thing.
The first thing you need to know is that you can’t claim your dog as a dependent on your tax return. Never! Don’t even think about it. There are no special rules for St. Bernard’s or Great Danes. It doesn’t matter how much your dog depends on you or that he’s a regular member of the family. A dog can never be claimed as a dependent on your U.S. income tax return.
There are two places you can claim a dog on a tax return, as a medical expense, such as a service dog, or as a business expense. This post is about claiming your dog as a business expense. If you’re looking for information on dogs as a medical expense, then you need to check my other post http://robergtaxsolutions.com/2011/03/claiming-your-dog-on-your-tax-return-part-1/
If you intend to claim your dog as a business expense, you have to remember the two most important words for business expenses: regular and necessary. Is the dog a regular and necessary expense for your business? For example: my dog likes to help me when I work from my home office. She guards my door and prevents my college age children from coming into the room to bother me (i.e. ask for money.) Her favorite part of her job is barking at the IRS agents whenever I’m on the phone. How she can tell I’m talking to an IRS agent instead of a client amazes me. As you might have guessed, I cannot claim my dog as a business expense. Her service to my company is neither regular, nor necessary. (No matter how much I get a kick out her barking at IRS agents.)
Real working dogs, on the other hand, are a legitimate business expense. Sheep herders, guard dogs, bomb sniffers and rescue dogs all are legitimate working dogs. My dog neighbor used to star in the dog program at Busch Gardens—once again, a legitimate working dog, although now he’s retired.
Breeding dogs can be a little trickier. A real dog breeder is a legitimate business. Where it gets a little tricky is that fine line between dog breeding as a hobby versus breeding as a business. For example, if you’re treating your dogs as “livestock” they have a depreciation rate of 7 years. If you buy a full grown bitch with the intent to breed her, you may claim the purchase price as a section 179 deduction (that means you can write off the whole purchase price.) If you purchase a puppy—with the intent of breeding it when it grows up, you can’t write off the whole cost immediately. The best you’ll be able to do is to claim depreciation.
I once was consulted on a “dog breeder” case. The woman had purchased two “designer puppies” for $2,000 each with the purpose of mating them together and selling the puppies. She wanted to write off the entire $4,000. The woman had no experience with breeding dogs, no experience running any type of a business before, and didn’t seem to have a clue about raising dogs in general. First, the IRS is clear about not completely writing off “immature” animals so a total write off was out of the question. Additionally, because there was no income and the client just wasn’t meeting any of the business qualifications, claiming any kind of deduction would be problematic. I recommended holding off on claiming any deduction. If the business truly panned out, she could depreciate the dogs when (and if) they were put into service. Just because the puppies you buy are expensive, they don’t necessarily qualify as a business expense.
Once again, you have to make sure that if you are claiming a dog as a business expense, you really need to make sure you’re on the up and up. A dog on your return is going to be a red flag so you start out with the assumption that you will be audited. Document everything. Have receipts for your expenses, and proof that your dog is a necessary and regular expense for your business. Dot your i’s and cross your t’s and you’ll be okay.
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Filed under: Self Employed, Tax Deductions, Uncategorized
I’ve done a lot of posts about unusual small business deductions, but I haven’t done anything about the basics. If you’re new to the small business world, that’s what you really need to know. These are some of the basic, core facts that you need to know to prepare your small business taxes.
First, if you’re just starting out, and you haven’t filed any papers like articles of incorporation, and you don’t have any partners, then you’re considered to be a sole proprietor. Your business tax return goes on a form called a Schedule C, and that’s part of your regular 1040 form. Don’t file your personal taxes and then try to file your business return later, they’re one and the same thing.
What if I’m an LLC? An LLC is a limited liability company, it’s not a corporation. Most LLC’s will file as sole proprietors unless they have filed documents to be treated as an S corporation. Then they file tax form 1120S. LLCs that have partners will file partnership returns, form 1065. This post is about sole proprietors who file Schedule C with their 1040 return.
A popular question I hear is, “How much money do I have to make to file a return?” According to the IRS, if you make over $400 of self employment income, you are required to file a federal tax return. This is very different from the minimum filing requirements of regular returns. Once you’ve made over $400, that income is subject to self employment tax and the IRS is very keen on collecting your self employment tax.
Another common question is, “How will the IRS know that I’ve made over $400?” The easiest way for the IRS to find out your income, assuming that you haven’t reported it yourself, is from forms 1099MISC. Many companies hire people as contract labor and don’t withhold payroll taxes. If you make over $600 from them, they are required by law to give you a form 1099MISC, showing how much they paid you. A copy of that form also goes to the IRS. That’s the most common way small businesses can get in trouble for underreporting their income.
Another way the IRS can find out that you’re not reporting your income is through your bank records. Let’s say for example that all of your business transactions are for cash and you never receive a 1099MISC. Although you wouldn’t get caught as quickly, let’s say you had an annual income of $20,000 from your all cash business. Your spending would be out of line with your income and could trigger an audit. A quick look at your bank statements would prove you weren’t reporting your income. If you’re serious about starting a real business, do it right and have a plan for handling your taxes. It will save you a lot of trouble in the future.
Small business income, unlike wage income, has one big disadvantage–it get’s taxed twice. First, it’s taxed at your normal tax rate (10, 15, 25 or 28%) and then again at the self employment tax rate (15.3%.) Let’s say you’re already in the 25% tax bracket for another job you have, your self employment income would then be taxed at 40% (the 25% plus the 15%.)
Small business income also has one big advantage–you can reduce your self employment income by any expenses you had acquiring that income. You may even have more business expenses than you have income, in that case, you can use your business losses to reduce your regular income, that lowers your overall income tax bill. Now you don’t want your business to be losing money every year (that’s not really good business practice.) But when you’re starting up, being able to deduct your losses is very helpful.
So what kinds of expenses can you deduct? The key phrase that the IRS uses is anything that is “regular and necessary” for the business. A good guideline is right on the Schedule C form. Here’s a link to it right here: Schedule C. Advertising, legal and professional fees, auto expenses, insurance, rent, repairs and maintenance, supplies, and office expenses. Meals and entertainment are deducted at 50% of what you spend (since the idea is that you’d have to eat anyway.)
If this is your first time filing taxes for your small business. I recommend getting a professional to help you. Even if you have a knack for the paperwork, it really helps to have someone else go over the possibilities of what you can deduct and make sure that the big things like depreciation (if you have that) are handled correctly. If you get started on the right track, it’s easier to stay that way.
The small business bill that’s been kicking around in Congress (for what seems like ages) has finally passed. I usually don’t get too excited about small business bills because what Congress considers to be a small business is much bigger than the business I’m in or the ones that I work with. I have what’s called a “micro business”, us micro business owners work alone or have up to three employees. I even belong to a group called “Tiny Business/Mighty Profits”, we’re all in the same boat–we own tiny businesses and hope to earn mighty profits. We’re like the silent majority of the business world, we’re out there in great numbers but we are not who Congress is catering to with their tax bills.
Congress generally considers small businesses to have 100 employees or less. There are different standards for different industries. For example my industry is tax preparation. According to the standards set forth by the U.S. Small Business Administration, to qualify as a small business, a tax preparation service’s annual receipts must be $7 million dollars or less. I’m definitely in the “or less” category.
For us micro business owners, most of the legislation allowing increased deductions for new equipment and research and development won’t be affecting us. We’re not big enough to even reach the limits that were already available.
But the small business bill does throw a bone to us little guys! Now, we can write off our health insurance as an expense against our business income. We’ve been able to take a deduction for our health insurance to offset our regular income in the past, but now our health insurance reduces our self employment tax. Last year, I paid $6,000 for my private health insurance. Self employment tax is 15.3%–that would save me $918 on my health insurance. Woo Hoo!
The best part–this new rule is retroactive for the 201o tax season. The worst part, is it’s only good for the 2010 tax season. It may be a one shot wonder, but take it while you can get it.
Filed under: Self Employed, Tax Deductions, Uncategorized
I got my flu shot yesterday and I’m writing it off as a business expense. I wasn’t going to get one. I’m reasonably healthy (knock on wood) and I’m not in any of the target groups susceptible to the flu, so I wasn’t going to bother. What I didn’t know, was that without a flu shot I could be a carrier and infect other people with the flu. In my business I meet with hundreds of people during the height of flu season. I don’t want to be responsible for getting any of my clients or their family members sick.
But writing it off as a business expense? That might seem like a leap, but it’s really not. Every year when I’m preparing other people’s taxes, I write off all types of vacinations for health care providers because it’s an ordinary and necessary part of their jobs. I write of hepatitis vacinations for people in the food industry because it’s an ordinary and necessary cost of working with food.
The key phrase here is “ordinary and necessary.” It’s a term the IRS uses a lot in their small business publications. I honestly believe that protecting my clients from a potential life threatening illness is an ordinary and necessary part of my business. If you work with people, especially if you deal with senior citizens or children, protecting them is indeed ordinary and necessary. Therefore, in my professinal opinion, a flu shot is a legitimate business expense.
One final thing, much to my surprise — it didn’t hurt!