Category: Business Expense

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

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

What Business Gifts Can I Deduct on My Tax Return?

If your business is buying gifts for clients, remember that you can only deduct $25 per person that you buy a gift for.

If your business is buying gifts for clients, remember that you can only deduct $25 per person that you buy a gift for.

 

 

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?

Before the Taxpayer and Jobs Act, anything that could have been considered as entertainment could be deducted as an entertainment expense–even if you didn’t go with the client.  So prior to 2018, you could have deducted $75–half of the amount as an entertainment expense.  But now, after the Taxpayer and Jobs Act, you can’t deduct entertainment at all.  So no part of that gift would be considered to be deductible.

 

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.)

Since she does supposedly works 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.

But let’s be realistic.  You’re either buying an IPad for the business, or you’re buying an IPad for your daughter.  If you’re wrapping it up and putting it under the tree as a present from Daddy – that’s a gift.  And it’s not a business gift.  If you really want to call it a business gift, fine, but you only get to deduct $25.

If she really works for you and she needs an IPad to do her job, you buy her an IPad for her job and it goes on your business asset list.  She might have some incidental personal use – that’s fine, but it’s a business asset not a gift.  

 

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.

 


Updated 7/20/2019

Posted on by Jan Roberg

Small Business Expenses: Advertising vs. Charity (Purple Pig Purchases)

Purple-Pig

 

 

 

At first blush, you might think that advertising and charity don’t go together at all.  But when you own a small business, your advertising and charity might just go hand in hand.  Let me explain.

 

When you own a small business, you’ll get lots of calls from organizations wanting your business to make donations to charities.  When you’re a sole proprietor, partnership, or S Corporation, your charitable donations don’t reduce your business income, they only count as a charity donation on your Schedule A personal tax return.

 

So—let’s say you want to donate $100 to Cystic Fibrosis from your business.  That’s all fine and good, but that donation doesn’t reduce your business income by $100.  It doesn’t reduce your business income by anything at all.  You still get to deduct it on your Schedule A—but if you don’t itemize your deductions, that $100 donation doesn’t help your tax return at all.

 

This is where advertising comes in.  Instead of just donating $100 to a charity, you can buy an ad in a charity event program, that way you’re giving money to the charity, and getting a 100% business write-off for the advertising.  The charity still gets your money, and you get a better write-off.

 

Why do you want to your business donation to be  advertising?  The taxes!  If you have a sole proprietorship and you’re in the 25% tax bracket, your business income is actually taxed at 40.3%.  (25% regular tax rate plus 15.3% self employment tax.)  If you itemize your deductions, your $100 donation would really only cost you $75 (but only if you can itemize your donations.)  But if you can count it as a business expense, then your $100 donation would really only cost you $59.70. ($100 minus $40.30) See why this is a good thing?

 

Of course, there are some things that are just going to be charitable donations no matter how you try to align them.  Your tithe or temple dues simply won’t count as advertising.   But when you’re looking at charities that you like to support, be sure to check out the advertising opportunities.

 

So what’s with the purple pig?  A not for profit I support held an event for kids.  Instead of just donating money, I got to set up a booth and hand out my fliers to the parents.  The pig was part of a pig race game for the kids.  The pig is a 100% deductible business expense—and he’s really cute.   Cute and deductible—that works for me.

Posted on by Jan Roberg

Claiming Meals as a Business Expense

Photo by loop_oh on Flickr.com

I was working on a client’s tax return and he had a whole lot receipts for business meals.  A whole lot.  I do a lot of tax returns and I’m pretty familiar with claiming meal expenses.  This guy wasn’t in one of the jobs that I normally associate with lots of meal expenses – so I had to ask him about it.

 

He told me, “Well yeah, I own my own company and my wife helps me and so we go out to dinner together all the time and we talk about work so I write it off as a business expense.”

 

Here’s the problem – that’s not going to fly with the IRS.  If you are just going out to dinner with your spouse, even if you do nothing but talk about business – well then, it’s not a deductible business expense.

 

I deal with this issue all the time.  Heck, my own husband will say, “Hey we talked about business, you can deduct our dinner!”  And yes, my husband often gives me excellent business advice during dinner (he’ll read this blog post so I have to say that) but I still can’t deduct having dinner with him for business purposes.  (As smart as he is at business, he stinks at taxes.)

 

Here’s the IRS rule:  “Generally you cannot deduct the cost of entertainment for your spouse or for the spouse of a customer.  However, you can deduct these costs if you can show you had a clear business purpose, rather than a personal or social purpose for providing the entertainment.”

 

So, I can bring my husband, Mark, along if I’m entertaining a client who needed to bring her husband along as well.  For example, someone is in from out of town and wouldn‘t want to leave her husband all alone in the hotel.  But if I’m just having dinner with my husband alone – no deduction.

 

There are lots of other rules about claiming meals as well.  You’re supposed to record the expense “contemporaneously”.  That’s a fancy way of saying you should write down on the receipt who and why.  For example, Helene is one of my advertising people.  We both like the grand slam breakfast so I’ll meet her at Denny’s.  On the receipt I would write, “Helene, advertising.”  Quite frankly, Helene is the only person I meet at Denny’s so if I’ve got a Denny’s receipt, I know who I was meeting and what we were talking about.  But a Bread Company receipt?  Well I probably meet someone there once a week.  If I don’t write that down that might not survive an audit.  It’s just a good business practice to write who and what on the receipt every time.

 

Here’s a silly little tip that makes the IRS happy:  when you’re paying for a business meal with your credit card, write the name and reason for the meeting on the slip that you sign and give to your waitress.   That way, your “contemporaneous reporting requirement” is proved on your receipt carbon.  Your waitress might think you’re a little weird but chances are she won’t even notice.

 

If you want more information about entertainment meal expenses, you can check out the IRS publication 463:  http://www.irs.gov/pub/irs-pdf/p463.pdf

 

And now, I’m headed off to a non-deductible dinner with my husband!