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.
I see a lot of internet questions about flat taxes and progressive taxes. It seemed that since I do a tax blog, it was time to tackle those basic questions.
A flat tax is a tax that is the same for everyone, under all circumstances. A good example of a flat tax is the sales tax rate. It doesn’t matter whether you are rich or poor; everyone pays the same sales tax percentage. Some cities have a flat income tax. For example: The City of St Louis, Missouri has a 1% income tax on wages of people who live or work within the city limits. It doesn’t matter whether you make $15,000 a year or $150,000 a year; you still pay the 1% city tax.
A progressive tax increases as your income goes up. This is what our current federal tax code is like. For a single person, the first $9,750 isn’t even taxed. Then the next $8,700 is taxed at 10%, the next $26,650 is taxed at 15%, the next $50,300 at 25%, the next 93,300 at 28%, the next $209,699 at 33% and anything over $388,351 is taxed at 35%.
Those rates change if you’re married or filing as head of household. I’m not going to post all the tax rates here. If you want to look, check out the tax rate tables at the IRS website: http://www.irs.gov/pub/irs-pdf/i1040tt.pdf The tax rates are all listed on page 14.
Tax Incentives are tax rules that are intended to influence behavior. Things like the mortgage interest deduction which is designed to help people buy homes, or the charitable donation deduction which is designed to get people to donate to charity are examples of what would be considered tax incentives.
There’s been a lot of talk about changing the tax code. Right now, we have a progressive tax code with lots of tax incentives. Major changes to the tax code will be difficult to pass; there are many lobbyists and interest groups that all have their own agendas. There will be lots of pressure on our representatives to keep the tax loopholes. The whole concept of changing the code is so controversial that the Senate Finance Committee leaders have offered to keep Senator’s ideas secret for 50 years. http://www.businessweek.com/articles/2013-07-25/congress-will-keep-senators-tax-reform-wishes-secret-for-50-years
The tax code has nearly doubled in length over the past two years. If I had any say in the voting, I’d like to see the tax code made easier. Yes, a difficult tax code keeps me employed, but I can live with the consequences. I think a simplified tax code is good for the country.
What changes would you make? What deductions do we really need, if any? What needs to go? Post your answers, I’m curious. Your post won’t show up immediately. My site has a delay to screen for spam. You wouldn’t believe what kind of weird comments there’d be without it. But if you make a post, it will show up within a day or two. Thanks.
Update: I posted this blog on Tuesday morning, August 6. Tuesday evening I saw this segment on The Daily Show. I’m pretty sure that John Oliver doesn’t read my blog, but he’s at least on the same wave length. http://www.thedailyshow.com/watch/tue-august-6-2013/don-t-mess-with-taxes
The short answer: probably not!
This is a sentence I hear at my tax desk every year, “I bought this for my business or I did that for my business but I’m not going to claim it because I have too many deductions!” Seriously? No you don’t.
I guess I should back track a little on this—if you’re claiming stuff you shouldn’t be claiming—that’s another story. But if you own a business and you have a legitimate business expense—then claim it.
Often times, small businesses, especially in the beginning, have losses. On your tax return it’s called a net operating loss or NOL. If you have an NOL, you carry that back two years and use it to offset income that you had two years ago. If you still have a loss, you can carry it forward for another 20 years!
Now sometimes you have an expense that gets limited if your business doesn’t have enough income—like a section 179 deduction or a home office expense. That doesn’t mean that you can’t claim these things, they just get carried forward to be used to offset your future income.
Don’t skip your deductions! I can’t stress this enough. Often, at the “big box” stores, they’ll skip your home office deduction because they’re “saving you money by not claiming it” since they charge you for each form. But it’s like that old expression, “pennywise and pound foolish.” Sure, you save a few bucks by not filing the 8829 form, but you just lost the carry-forward of a few hundred dollar deduction. This is especially important this year with taxes most likely going up next year. Even if your deductions won’t help your tax return right now—do not just leave them off. Otherwise, you would have to amend your prior returns to carryforward the deductions which will cost even more money in the end!
It’s still November, you have plenty of time to round up your receipts, review your mileage log, and make sure that you’re doing everything you need to be doing to maximize all of your deductions. Obviously you can’t claim stuff that’s not a real business expense. But you can claim everything that is a legitimate expense for your business. Not only can you claim it—it’s the right thing to do.
For those of you who do not have a home office, these posts will help get you started:
When you live in a state that has an income tax, like Missouri, you need to be aware of the state’s little deductions that aren’t automatically on your federal tax return. One of these is the Health Insurance deduction.
It’s very difficult to claim any medical deductions on your federal income tax return because you have to meet the requirement that your medical expenses exceed 7.5% of your adjusted gross income. In Missouri, you don’t have that. If your health insurance isn’t already exempt from taxes, you can claim your health insurance as a deduction on your Missouri State income tax return.
You’ll find the deduction on line 11 of the Missouri schedule A. For most people, its just a straight, direct entry on the form. If you happen to have been able to claim your health insurance on your federal schedule A, or had medicare payments withheld from your Social Security, there’s a worksheet to determine just how much of a deduction you’ll get to claim on your Missouri return. (For some people, your computer software will automatically calculate the amount of medicare insurance you can deduct, but you need to watch out if you’re adding additional insurance payments that you don’t delete the medicare payments.)
The health insurance deduction is especially valuable to senior citizens who may qualify for the Missouri Property Tax Credit. It not only reduces their taxable Missouri income, but by reducing the income, it can increase the amount of property tax credit they receive. Many seniors who qualify for the property tax credit don’t have any Missouri taxable income so the preparers don’t bother to look for deductions and that’s a mistake.
If you’d like to take a look at the worksheet for the qualified health insurance deduction, click on this link:
You’ll have to go to page 16 of the directions to find it.
Also, if you happen to be self employed, be sure to check my post about the Missouri Self-Employed Health Insurance Tax Credit. If you qualify for that, it’s even better for your taxes than the deduction.
There’ve been a lot a changes this past year with some states legalizing gay marriage, some authorizing civil unions, and of course the end to “Don’t Ask Don’t Tell” in the military. But despite all these changes, US federal tax law still does not recognize gay relationships in tax law. Even if you’re in a state where your marriage rights are fully recognized, you’ll still be considered unmarried for federal tax purposes and social security benefits. These tips are for couples who are legally married, or would be legally married if they lived in a state that allows gay marriage.
There are two main issues here that you have to deal with. The first is working to reduce your current tax liability and the second is to ensure that you’ve got sufficient coverage for both of your retirements. To that end, you need a tax professional and a financial advisor that can sit down with you and your partner to develop some long term and short term strategies. Right now, if you’re thinking, “I’d never even tell my tax guy I’m gay,” then it’s time to hire a new advisor.
Couples where both partners earn wages and have similar incomes: are pretty straight forward for tax purposes. You can both take advantage of IRA contributions, you’ll both receive equal social security benefits from your wage earning, you won’t lose any tax benefits from the married filing separately status, and your tax rates will be fairly comparable to folks filing as married. In this situation, many couples just split everything evenly and that’s a pretty fair arrangement. But, it may make sense to load all of the deductions onto one partner and let the other partner take the standard deduction.
For example: let’s say that Jen and Gina together would have itemized deductions of $13,000 a little more than the $11,400 they would claim as a standard deduction if they could file as married. Filing as single they can each claim a standard deduction of $5,700. If they’re splitting the itemized deductions, they can each claim a deduction of $6,500. But, if we load all of the deductions onto Jen and have Gina claim the standard deduction, then together they’d have a combined deduction of $18,700 and that would save them a substantial amount of money.
Now, remember, it’s not that perfectly even. In most cases, part of the $13,000 would be state income tax, you can’t load that onto your partner’s return, but with planning, you can put your mortgage, real estate tax, and charitable contribution deductions all on one person and enjoy a substantial tax savings.
Couples where there is self employment income: The biggest tax issue facing sole proprietors is paying the self employment tax. If you’re already in the 25% income tax bracket, and you add that 15% self employment tax to that, then you’re paying 40% tax on your income. Anything you can do to reduce your self employment tax is a good thing.
One possibility is to hire your partner as an employee. This in itself doesn’t really eliminate your self employment tax as you’re just shifting it to your partner and paying the employer’s share. But, hire your partner and provide health care benefits and now you’ve got something. For example: let’s say Jack and Dean have been together for 10 years. Jack has modest income from a part time job but spends a lot of time helping Dean with his small business as a professional entertainer. Dean is fairly successful and averages about $100,000 a year in income. Jack books appointments for Dean and makes sure that Dean is where he needs to be at all times. If Dean were to have to hire someone to do Jack’s job, he estimates that it would easily cost him $15,000 or more. So instead, he hires Jack as an employee. Instead of taking a salary of $15,000, Jack chooses a smaller wage but wants health insurance benefits. Because Jack would be Dean’s only employee, Dean can afford to have his employee package include health insurance benefits. And, more importantly, Dean could provide a health care plan that covered Jack’s partner (which happens to be Dean.) Now Jack and Dean have just excluded all of their health care costs from self employment tax.
Here’s why: Health care benefits reduce the employer’s taxable income. Health care benefits are not included in the employee’s taxable income. It’s a win/win situation for both of them.
Everyone’s tax situation is unique and the laws keep changing so you have to stay on top of things. Right now though, with the tax laws as they are, doesn’t it make sense to take advantage of them instead of letting them take advantage of you?
Do you own your own small business as a sole proprietorship? Do you have kids? If so, did you know that you can pay your kids to work in your business and they won’t be subject to social security and Medicare taxes? Now if you pay them more than their standard deduction, they could be subject to income tax withholding but even so, not having to pay the employment tax is a big savings. You also don’t have to pay Federal Unemployment taxes either.
Why is this good to know? Well if you pay your kids wages from your business, it’s a business deduction and that’s money you’re keeping in the family and not paying self employment taxes on. It’s important to keep the wages commensurate with work that the kids actually perform. The IRS isn’t going to buy the idea that your 4 year old is earning $50,000 a year doing statistical analysis for your company. But what can your kids actually do?
My first job was handling all of the scut work that the secretaries in the office wouldn’t do. I cleaned the white board in the meeting room, made the coffee, made photocopies and ran errands. I was happy because I was getting paid, the secretaries were happy because they didn’t have to do those jobs any more, and the boss was happy because his staff was happy. I was 15 at the time, but frankly a much younger kid could have handled that job.
My son’s in college now, but he used to be my IT guy. For the cost of a Chucky Cheese pizza and some tokens, he’d take care of any computer problems I had. After he left for school, I had to hire a professional to help me. The freelance IT person I hire costs me $99 per hour. I had no idea how valuable my son was as an employee until he went away. I had never paid him a wage. (Granted, I’m paying through the nose for tuition but that’s another story.) What I should have done was pay him a wage and let him buy his own pizza. That would have reduced my self-employment taxes.
So what about your kids, do they help you with your business? Can they? Would they? If the answer is yes, then you might want to consider putting them on the payroll.
Who’s allowed to do this? There are only two categories of businesses where you can put your children on the payroll without paying employment taxes. One is sole proprietors; that’s businesses that file a schedule C with their 1040 tax return. The other is partnerships where both of the partners are the parents of the children working. If there is even one partner who is not a parent of the child, then you must pay the payroll taxes. Also, if you own a corporation of any kind, you must pay employment taxes on your child’s wages.
With the year end fast approaching, and winter break heading this way, now might be a perfect time to test the waters for hiring your kids. The money you pay them now will reduce your taxable income for 2010.
The idea of tax deductions for high income earners must sound preposterous, especially if you’re a high income earner. You know how it goes, you try donating money to charity or taking advantage of any of the other tax deductions only to find that your deduction is “limited due to your income.” So what’s the point?
Well this year, there is a point. Itemized deductions and exemptions aren’t phased out for high income taxpayers for 2010. Last year, if you earned over $166,800 you started to lose out on your deductions. The higher your income, the less valuable your deductions were. Only for 2010 are you allowed all of your itemized deductions. You also get 100% of your exemptions also.
But what about the Alternative Minimum Tax or AMT? Won’t that get us anyway? Well, yeah. AMT is a problem for high income earners. But, and this is important, charitable deductions aren’t eliminated in the AMT calculation. AMT dings you for your state tax payments, miscellaneous deductions (like employee business expenses), and some types of mortgage payments. Your charitable contributions still count as a deduction in the AMT calculation. Even if you’re stuck paying AMT, you’re still better off having that charity deduction on your tax return.
Bottom line: If you are a high income earner, there has never been a better time for you to make a charitable contribution.
Let’s face it, divorce sucks and paying alimony is even worse. But if you have an arrangement where you are supposed to be paying alimony (and I mean alimony, not child support) it’s to your advantage to pay up for the year before December 31. Here’s why:
Money that is paid out as alimony is a tax deduction for you. (And, if it’s any consolation, it’s taxable to your ex.) Child support, on the other hand, gives you no tax deduction and your ex pays no income tax on it.
Alimony is considered to be an “above the line” deduction. That means it lowers your adjusted gross income. Now that sounds like a lot of accounting jibberish, but on your tax return, it’s valuable. It can make the difference between whether or not you qualify for other deductions or tax credits. Made simple: above the line deductions are good.
Now here is the really important part: if you pay both alimony and child support, and you’ve missed some payments, then whatever payments you have made get counted as being child support first, and alimony second. Okay, in plain English: Let’s say you’re supposed to pay $100 a month for alimony and $200 a month for child support. $300 a month total. (Okay, that must sound like a fantasy but I like easy numbers.) Anyway, suppose you were good all the way up through September at paying $300 a month but then something happened and you didn’t make any payments from October through December.
For those first nine months you paid a total of $2,700. In your mind you paid $900 in alimony and $1800 in child support, right? Except that’s not how the IRS sees it. To them you paid $2,400 in child support and $300 in alimony, because for tax purposes you pay the child support first. So with the money that you did pay, you don’t get your full deduction. And let’s be real here, we’re probably talking about bigger numbers in real life. This tax deduction can really make a difference.
Bottom line: if you want to claim your full alimony deduction, all of your alimony and child support for the year must be paid in full by December 31st.
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.
Filed under: Jobs, People, Self Employed, Tax Deductions, Uncategorized
What do you do for a living? Are you in advertising, construction, real estate? When you tell people what your job is do they seem to have a grasp of what that means? Some people’s jobs aren’t so easily defined, like Superman for example.
Actually, his name is Charlee Chartrand and he dresses as Superman for his job. This is not your every day occupation. Now I don’t know Mr. Chartrand and I don’t do his taxes, if I did, my confidentiality rules wouldn’t allow me to talk about him. I read about him in Sunday’s Post Dispatch. I did contact him and ask for his permission to use him as an example though.
The main part of Mr. Chartrand’s job is that he dresses as Superman, hangs around at Cardinals games and collects tips for posing in pictures with fans and tourists. He’s also been performing at birthday parties. If you think there’s no money in this, think again, he can earn as much as $400 in tips in a day. And that’s why he’s going to need to figure out his deductions before he files his tax return.
So what can Superman deduct? Let’s hit the obvious thing first: the costume–all of it. Cleaning, repairing, replacing, clearly this is one clothing expense that will count as a business expense. I would also include his undergarmets. You can’t dress as Superman and wear any old boxer shorts.
The hair: most of the time hair cuts and styling products, etc are not considered legitimate expenses for business, even if you are a professional actor or television personality. In Superman’s case here, I would claim his hair expenses. He has to dye his hair black to be Superman, and he uses four different products to get just the right effect–including the “S” shaped curl on his forehead. I think that goes far beyond what would be normal for Mr. Chartrand during his off duty hours.
I can’t tell from the photo if Superman is wearing make-up or not. He doesn’t look like it, but if he was, I’d allow it. (He might need to darken his eyebrows to match his hair.) A note about make-up: generally, make up is frowned upon by the IRS as a business expense. A clown wearing clown make-up would qualify for a deduction, but most women in any business would not. I once helped a dancer with her return and as we went through her expenses she claimed “a gallon of eyelash glue.” Now, I thought that was an excessive amount even for a professional dancer. “Not for eyelashes,” she said, “It’s to keep my costume on!” Evidently, during a dress rehearsal she had had a “wardrobe malfunction”. In order to keep herself looking decent, she glued her costume on to make sure she stayed covered. That clearly fit the category of “necessary” and I put it in. (Even the meanest IRS agent couldn’t argue that one.)
Let’s get back to Superman, He can probably claim either a home office deduction or rent for his work space. And, since he travels from his home office to his gigs, he can deduct his mileage as well. These are expenses that are pretty normal for many small businesses. It’s important to remember that even unusual businesses have normal types of expenses. Another normal type of expense for Superman might be advertising, if he has flyers or cards that he distributes to get new business.
Here’s another expense that I would use for Superman that might seem out of the ordinary: comic books—Mr Chartrand uses comic books to compare against his costume and maintain the authenticity of his look. I’d count it as a valid business expense.
Also, Mr. Chartrand has a goal of moving to Los Angeles. Making a permanent move to Los Angeles would count as a moving expense, as opposed to a business expense. But, if Mr. Chartrand makes a trip to Los Angeles, to test the market so to speak, he could probably write off most of that stay as a business deduction. This would give him a chance to test out the market and give himself an out to come home if he found Los Angeles wasn’t the place for him.
When claiming business deductions, the key phrase the IRS uses is “ordinary and necessary”.
To be deductible, a business expense must be 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.
When you’ve got a one-of-a- kind type of career, it’s not always easy to figure out what ordinary means. Hopefully, Superman’s example can give you some ideas about what’s ordinary and necessary for your business.
To read more about Charlee Chartrand, aka Superman, this link will take you to the St. Louis Post-Dispatch article about him: