Category: Business

Posted on by Jan Roberg

Tax Tips for Performers

Are You A Hobby or a Business?

Many performers don’t think they have a real business – they’re just doing a few shows on the side, it really is more of a hobby than a business.  And if you’re just getting paid in cash by private citizens that’s fine, you can get away taxwise with being a hobby.  But, if you’re working through a company and you earn over $600 in a year, then you’re required by law to receive a form called a 1099NEC.  And if you receive a 1099NEC, the IRS pretty much treats you like a business. 

So the question becomes, at what point does your performing become a business instead of a hobby?  A lot of your decision may be based on taxes.

 

Hobby Income Taxes  

Hobby income is taxed at your regular income tax rate.  It goes on line 8 on the Schedule 1 of the 1040 tax return.  Now in the past, you might have been able to deduct some of your hobby expenses but that option is no longer available.   So, if your federal income tax rate is 22%, and you earned $5,000 on your performing, then your tax on that $5,000 will be $1,100.

 

Business Income Taxes  

Business income is taxed at your regular tax rate plus the self-employment rate.  The self-employment rate is 15.3%.  So, if you’re in the 22% tax bracket, the tax rate on your performing income would be 37.3%.  That means that the $5,000 you made income would now be taxed $1,865.  Which sounds awful at first blush.

But the advantage to being taxed as a business is that you get to write off your business expenses directly against your income.  Let’s say you had $3,000.00 in business expenses, then your tax would only be $746.

 ($5,000 income – $3,000 expenses = $2,000 net income to tax)

($2,000 taxable income x 37.3 percent tax rate = $746 in taxes)

If you have business expenses, being able to claim your performance income as a business can be a good thing.  This is especially true if you have a business loss.  You can use your self -employed business loss to offset other income – like wages you receive from another job – on your tax return.  Be sure to read about QBI further on though because there’s more to business taxes than just this.)

1099NEC   If you receive a 1099 NEC, the IRS will automatically count you as being self-employed – even if you have another job somewhere else. 

 

 

What will be different about your tax return if you’re a professional performer instead of a hobby performer?

 

You won’t need to incorporate or file a special business return.  Most people will just include their performance income on a Schedule C form which becomes part of your 1040 tax return.  It will show your business income and expenses. 

Form Schedule SE will show your self-employment tax owed.

 

Common Tax Deductions for most Small Businesses

 

Most small businesses have these deductions on their tax returns:

  • Advertising
  • Home Office expense
  • Mileage
  • Supplies, etc.

The important thing to know is that as far as the IRS is concerned, you may deduct an expense that is ordinary and necessary to your business.

A few exceptions to the ordinary and necessary:  you might need nice clothes for an audition or an interview show – but clothing that you can wear in a normal situation cannot be deducted.  It’s one of the most common questions I get which is why I put it up here.  Costumes, on the other hand, are deductible.

 

Your two best Tax Deductions

 

The two best tax deductions for a small business owner are the Mileage and Home Office (Studio) deductions.  These deductions are great because they are expenses that you already are paying for anyway.

 

Mileage

If you want to claim mileage, you must keep a mileage log.  For every business audit I have ever worked on – the IRS requested the mileage log.  The IRS wants to know how many total miles you put on the car, not just your business miles.  This is the most forgotten about issue but it’s really helpful to know.  You can get a free mileage log on our download page

Super Silly Tax Tip:  When you’re watching the Rose Parade (or football game or something that you know you do every year) write down the mileage on your odometer on January 1st and stick that number with your tax records. This way you’ll be able to figure your total mileage for the year – just subtract last year’s odometer.

 

 

Home Office

 You don’t need a desk and a computer for your home office.  It could be a storage space for your supplies, the place where you do your work, or the room you keep your product or supplies in.   It doesn’t have to be a separate room in your house, it can be a section of a larger room.  It can also be very small. 

The most important reason for claiming a home office is so that you can claim your mileage to your gigs.  The important issue is “regular and exclusive”.  Maybe you work in your kitchen – that’s fine but you can’t claim your kitchen as a home office because you cook dinner there.  You have to use a space exclusively for your business in order to deduct it.  So, if you work in your kitchen, you need another space to maybe store your supplies that you can claim as your “exclusive” working space.

 

 

Should you become an LLC?  

Generally, performers tend to be “individuals”.  An LLC is not required.  An LLC is a limited liability company.  The idea is that your liability – meaning if someone wants to sue you – is limited.  If you decide to become a Limited Liability Company anyway there are rules you must follow.

 

  1. Get a Federal EIN number.
  2. Set up a bank account for the LLC.
  3. Run all of your business income and expenses through that bank account.

If you don’t do all those steps, you’ve “pierced the veil” of the LLC and you’re just wasting your time and money.

“Piercing the veil” means that someone could still sue you personally even though you have an LLC.   If you’re not going to bother with the separate bank account and getting a separate EIN number, you’re not protected by your LLC. 

In most cases, a decent business insurance policy might be all you need.  But if you decide you want to set up an LLC, it only costs $50 in the state of Missouri.  It only takes about 10 minutes to do it online. 

If you choose to become an LLC unless you make a special election to be taxed differently, you would still claim your business income on a Schedule C like an individual.

 

 

DBA Doing Business As  

You might have a business name that you want people to use, like “Willie’s Writings”.  You can file paperwork for “doing business as” with the Secretary of State’s office.  It only costs $7.00.  That way you can receive checks under your business name instead of your own name.

 

A word about making Estimated Tax Payments

 

If your business is successful, you’re going to be making money.  And if you make money – you have to pay taxes.  If you’re going to have a tax balance due of more than $1000.00 federal, you should start making estimated tax payments.   A good rule of thumb – if you make over $6,000.00 after deducting your expenses then you should make estimated payments.

It’s easy. You can go online at IRS.gov and click on “Pay”.

 

The Qualified Business Income Deduction

QBI – What you need to know about your business income for 2021

As a small business owner, there is something called the Qualified Business Income Deduction.  QBI for short.  QBI is a 20% deduction off your business income from your taxable income.  It’s really pretty awesome.

Simply speaking – remember that example above where you have $5,000 of income, but after expenses you only had $2,000 of taxable income?  Well, with the QBI deduction, you still pay your self-employment tax on the full $2,000 – so that’s 15.3% = $306.

But then, you get to deduct 20% from the $2,000 before you pay the regular tax.  In this example you’d take 2000 – 400 = 1600, then take 1600 times 22% and you get $352.  So, really, instead of paying $746 like in the earlier example, you’ll only pay $658 – a savings of $88.  

That doesn’t seem like much, but if you had a net income of $50,000, at the 22% tax bracket you’d be saving $2,200!  The QBI can be a really important tool for you. 

But not everyone can qualify for the QBI deduction.  For an automatic QBI deduction – meaning – you don’t have to jump through any hoops to qualify, a single person would have to have income below $164,900.  A married person would need to be below $329,800.

You might be thinking – I’m just starting out as a performer, I’m not Johnny Depp.  I don’t make anywhere near those numbers.  But I’m talking about your total income.  So, if you’ve got a day job, or a spouse with a high income, your QBI deduction could be lost.  (For what it’s worth, Johnny Depp doesn’t make anywhere near $329,800 – he makes a lot more!)

But there are strategies for QBI if your income exceeds those limitations.  That’s where it makes sense to talk with your accountant about what’s best for your situation. That’s really outside the scope of this little blog post.

 

 

Posted on by Jan Roberg

A Dog as a Business Tax Deduction

Welsh corgi Pembroke red white color with a long tail grazing sheep. Sports standard for dogs on the presence of herding instinct. A beautiful and intelligent little shepherd dog.

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 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 barks at the UPS truck. As you might have guessed, I cannot claim my dog as a business expense.  Her service to my company is neither regular, nor necessary.  

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.  I know a dog that used to star in the dog program at Busch Gardens, that’s a legitimate working dog.

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.  If you purchase a puppy—with the intent of breeding it when it grows up, you can’t write it off yet. You can’t breed a puppy so it’s not working yet.

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.

Don’t be greedy! Only claim legitimate business expenses. If you own 4 dogs and 2 of them are pets, you can’t write off the dog food and vet expenses for the non-working dogs.

Obey your state and city laws! If you’re claiming a dog breeding business on your federal tax return, and you live in a city that doesn’t allow dog breeding, you’re going to have some explaining to do. That’s one of the rules for owning a business – know your state and local business laws. So do your homework.

Remember, if your dog is a pet, let it be a pet and don’t try to write it off on your tax return.

For more information check out this article from the AKC web-site: Tax Tips for Dog Breeders

Posted on by Jan Roberg

Taxation of Egg Donors

Egg donors can expect to pay self-employment tax on the money they earn from their donations.

Egg donors are generally between the ages of 20 and 30, non-smokers with a normal height to weight ratio.

 

Egg donors typically receive between $5,000 and $10,000 for an egg donation.  And while you may feel that you are being compensated for pain and suffering, or that you are doing a charitable deed, the IRS treats that pay as self employment income.

 

How do they figure that?  Well, for one thing, there’s the 2015 Tax Court case of Perez v. Commissioner of Internal Revenue.  In that case, the court ruled that the money paid to Perez was indeed taxable income.

 

Now the Perez case really only argues whether the money is taxable or not.  It doesn’t actually argue the merits of whether it constitutes self-employment income,  but much of the language of the case implies that providing eggs and being compensated for it is a service business.

 

So, if you’re thinking about becoming an egg donor, you need to look at the tax consequences before you put your body through that painful process.  Let’s say you’re a first time donor and the fee you should receive is $5,000. Now suppose you’ve got a job already and you’re in the 15% tax bracket.  This extra $5,000 will be taxed as self employment income meaning that the 15.3% self employment tax on that income, plus the 15% regular tax on that income.  The self employment income is really taxed at 30.3% to you.  (And of course, it’s higher if you’re in a higher tax bracket.)

 

So if you’re getting paid $5,000 for the egg donation, then you’re coming out of the deal with just $3,485.  Here’s how the math works on that:

$5,000 times 30.15% tax rate equals $1,515 in taxes

$5,000 minus $1,515 in taxes  equals $3,485 to keep

The point here is that you’re not getting that $5,000 free and clear.  You’re actually earning less than $3,485 if you add state income taxes to the equation.

 

So what about the argument that you’re not providing a service, that you’re really selling body parts?  Okay, I have to admit here that I have a hard time with that argument.  I guess I’m a little old-fashioned.  (Excuse me, I can hear my daughter reading this and yelling, “A little old fashioned?  How about stone age!”)  But perhaps more importantly, it is still illegal to sell body parts in the United States.

 

But let’s take this argument to the extreme anyway.  What if you could sell body parts?  How would you value them? I think, I would use the example of livestock.  That’s as close as I can come to the body part argument.  If you buy an adult cow for $1,000 and later sell it for $2,000, you would pay a capital gains tax on the $1,000 profit from the sale of that cow.

 

But, if that cow gave birth to a calf while you owned her, and then you sold that calf for $500 – that $500 would be taxed as ordinary income.  It would be the sale of inventory that you didn’t pay for so the full $500 would be taxed as ordinary income.   And, since selling cattle would be your business – well then you would pay self employment tax on that calf that you sold.   I think that egg donation is more like selling the calf–you’re not buying the eggs to re-sell, you’re “manufacturing” then.  (You see how I find this a very uncomfortable argument?)

 

So whether you doing the egg donation as a “service business” or a “sale of property” business – you are still going to be subject to self employment tax on that income.  As you make your decision, take into account the taxes you’ll be required to pay and whether or not you’re being compensated fairly for your efforts.

 

 

 

 

 

 

Posted on by Jan Roberg

Deducting Your Starbucks Coffee on Your Income Tax Return

Starbucks coffee as a business expense

Meeting for coffee is a deductible business expense.

If you deduct business expenses on your tax return, then you probably already know that if you meet someone for a meal that you can deduct 50% of the bill as a “meal and entertainment” expense. You can’t deduct the cost of just yourself going to lunch, since you have to buy your own lunch anyway. For example: if I go to McDonald’s by myself this afternoon and get a Big Mac; even though I go during my business lunch hour–it’s not a deductible expense at all. But if I take Mike, my employee, to McDonald’s for lunch and I pay for his meal as well–then I can claim 50% of the bill as a business expense because we’ll be talking shop.

This is where Starbucks comes in. I suspect that more business is conducted at Starbucks coffe shops than anywhere else. It’s sort of every small business owner’s “office away from home”–neutral networking territory. If you do the whole networking thing, certainly you’ve had the “Let’s meet for coffee” meeting.

Coffee meetings are safe. Generally you’re not billing for time at a Starbucks meeting. Being an accountant, I think some people are afraid to come to my office. They think that if they walk though my door I’ll put the meter on and start billing them. (I’m not that bad, really!)

Many small business owners don’t have offices, so Starbucks is a good place to hold a meeting. I know some small business owners who spend hours at Starbucks. For the price of a cup of coffee you also get a table to work at and an internet connection.

So, how do Starbucks coffee receipts fit into your tax return? I’ve got two ways:

  1. 1. You meet a business acquaintance for coffee and you pick up the tab for both of you. Keep track of the meeting and you easily meet the 50% deductible rule.

  1. 2. You meet a business acquaintance for coffee but you only pay for your own coffee. (This is pretty common.) You can still probably claim this as a business expense but you have to be a little more careful. There’s an old 1953 court case (Sutter v. Commissioner of Internal Revenue http://www.leagle.com/decision/195319121ttc170_1172) that states that you can’t deduct entertainment expenses just for yourself if you’re paying what you normally pay for something.

So — If you’re going to Starbucks everyday and picking up a latte whether you’ve got a meeting or not– that’s a normal expense for you so a Dutch Treat Starbucks coffee isn’t a deductible business expense for you.

On the other hand, if you’re not buying gourmet coffee unless you’re at a business meeting, then you’d be allowed to claim that expense. The whole key here is to document, document, document.  For me–I pay a $30 fee to my office manager so that I may have coffee at work. At one cup a day, that works out to $1.50.  At Starbucks, my coffee costs $4.50;  so clearly, I’m not normally spending $4.50 on coffee unless I’m having a meeting.

Under the Sutter rules, I don’t have to subtract my normal coffee cost from what I spend, I can deduct 50% of the whole cost. I just have to be able to prove that my normal coffee cost is less than $4.50.

Does the IRS really go back to 1953 tax court cases when they audit returns? Yes, as a matter of fact, they do. Even though there have been significant changes to tax law since that case, Sutter is still invoked in audit cases with high entertainment expenses.

Personally, given how many people use Starbucks for their meeting rooms and internet connections, I think the IRS should allow a 100% deduction for Starbucks as a rent and computer expense. But don’t try that, it won’t fly with the IRS. The best you’ll get is a 50% deductible meals and entertainment expense.

Posted on by Jan Roberg

Sole Proprietor: You Gotta Have a Home Office

Home Office

Photo by f.x.l. at flickr.com.

Right now, I’m sitting in my comfy chair in the corner by the window of my home office and drinking a freshly brewed cup of coffee from my favorite mug.  The dog has done her security patrol of the perimeter, deemed me to be safe from the local deer and bunny rabbits, and has settled in for her morning nap. I’m having one of those, “This is why I’m doing this,” kind of moments and it’s nice.

As a tax person who specializes in small businesses, I get asked a lot of questions about different business practices–Should I set up an LLC?  I always answer, “That depends.”  Should I lease a car or buy it?  That depends.  Should I set up as a sub-chapter S corporation?  That depends.  You get the picture.  But when people ask me about a home office I always say, “Yes!  Every small business owner who files a schedule C should have a home office.”  My answer has nothing to do with the comfy chair and coffee either.  As usual with me–it’s all about the money.

 

A home office is good for your tax return.  First, you get to use a portion of your living expenses (that you would already be paying anyway) to offset your self employment income.  Remember–your self employment income is taxed at 13.2% more than your regular income tax so even something like your mortgage interest-which is already deductible, is a better deduction when it goes against your self employment income.  Kaching!

a home office is foThe other reason you want r your mileage.  Yes, you read that right–you want the home office deduction to claim mileage.  Here’s the deal–let’s say you’re a contractor, you drive to jobs all over town.  You probably put close to 20,000 miles on your truck a year for business.   You claim that on your tax return and get audited.  (Side note:  claiming exactly 20,000 business miles on your tax return will get you audited it’s a red flag.)  Anyway, you go through the audit process and the IRS disallows all 20,000 miles because you’re commuting to those job sites from your home and commuting miles are not tax deductible.  That’s over $3800 worth of tax money that you just lost right there.  Add the fines and penalties and you’re well over 5 grand in tax debt.

But if you had a home office–all of that mileage becomes deductible because ou’re traveling from your office to a job site.

But what if I don’t really have a home office? Seriously, you need to set something up.  It doesn’t have to be a whole room–it can be a corner of a room (like my comfy chair spot although most people have a desk or table.)  You can’t just say you have a home office on your tax return and not really have one.  (You’ve heard of fraud, right?)  Be be realistic.  If you have a small business–you’ve got something–files, or a computer, or make up, or something–and it needs to be put someplace.  You need a spot to make phone calls from, pay the business bills, do your adminsitrative work–that’s your home office.

Aren’t I more likely to get audited if I claim a home office? To be honest, I keep hearing that, but my experience says no.  The only time I’ve seen home office expenses audited was when they really were wrong and it was part of a broader audit.  (Oh yeah, and when I redid those numbers correctly the taxpayer got a bigger home office deduction.)  Be honest about it and you’ve got nothing to worry about.

But what if I have a real office in a business building that I go to every day? Can I still have a home office?  Yes you can.  You make your home office your administrative office.  Like I said, pay bills, balance the business check book.  I never meet clients in my home office, they always come to my “business office” location.  My business office doesn’t prevent me from having an “administrative” office at home.

If you’d like more information about claiming a home office, try this link:  http://robergtaxsolutions.com/2010/09/can-you-claim-a-home-office-deduction/ It has more information about the rules and what the IRS is looking for.  But seriously, if you’re a sole proprietor, you need a home office.

 

 

 

Posted on by Jan Roberg

How to File an Extension for Your Sub-Chapter S Corporation

Form 7004

Sub-Chapter S Corporation tax returns (1120S) are due on March 15th. Are you done yet? If not, you might need to file for an extension. Here’s how:

First, make sure you really are a Sub-S Corp. I know that sounds silly, but every year (really, every year) I run into someone who thinks they have a Sub-S Corporation and doesn’t. It’s really important not to file paperwork for an entity that you’re not. If you’re an LLC that wants to be a Sub-S and you’re filing a “Whoopsie, I forgot to do the right paperwork clause,” you can’t file an extension, you’ve got to get your stuff in by March 15th.

But if you’re already a Sub-S corporation, then you can file for an extension if you need to. What you want is Form 7004. Here’s a link to it: http://www.irs.gov/pub/irs-pdf/f7004.pdf.

It’s easiest to just file it online and be done with it. But if you don’t have access to the software, you can paper file. Here’s the official list of mailing addresses: http://www.irs.gov/file/article/0,,id=177836,00.html . Basically, if you’re east of the Mississippi you’ll mail it to:

Department of the Treasury
Internal Revenue Service
Cincinnati, OH 45999-0045

If you’re west of the Mississippi it will go to:

Ogden, UT 84201-0045

For some reason Florida and Louisiana are listed with the “west of the Mississippi states.” Anyway, Florida and Louisiana get mailed to Ogden. Also, any Sub-S with income of over $10 million sends its extension to Ogden no matter where the business is located. (Any Sub-S with income of over $10 million should have an accountant that can file the extension for them and you shouldn’t be reading a how-to blog about it. Seriously.)

You’ll have to check with your state to determine if you are required to file a separate extension for your state. Here in Missouri, your federal extension will serve as your state extension – you’ll just attach a copy of your Federal 7004 to your Missouri 1120S when you file it. You only need to file a MO 7004 if you have a franchise tax liability.

Why should you care about filing an extension? Money! If you don’t owe any money on your tax return, the penalty for filing late is $195 for each month (or part of a month) that the return is late, multiplied by the number of shareholders. So let’s say you and a buddy have a Sub-S corporation and you forget about the March 15th deadline and file on April 15th instead. You’ll owe a $390 penalty on a tax return with no balance due. That stinks. Of course, if you totally blow things off and file in August, the penalty will be $1,560 – on a tax return with a zero balance due! See why it’s important to file that extension?

Sub S corporations generally don’t pay tax with their corporate form, but if you do owe money for some reason the penalties are even higher.

Even though extensions are fairly simple forms, you still might not want to do it yourself. This is one form that Roberg Tax Solutions can prepare for you over the phone for $25. You’ll need your business name, address, EIN number and a credit card and we can do it while you’re on the phone with us. It’s that easy. You have no reason not to get your extension in on time.