Category: Taxes

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

Claiming a Dog as a Medical Expense

There are only two places where you could claim a dog on your tax return. The first is as a medical expense and the second is as a business expense.   Most importantly, it has to be a legitimate expense.  Dog expenses claimed on a tax return are likely to get audited so you’ll want plenty of documentation.

You may never, NEVER, claim your dog as a dependent on your taxes.

Today I want to look at dogs as a medical expense.  According to the IRS medical expense publication:  You can include in medical expenses the costs of buying, training, and maintaining a guide dog or other service animal to assist a visually-impaired or hearing impaired person, or a person with other physical disabilities. 

A seeing eye dog is an easily proved legitimate medical expense that you can deduct.  The same goes for a hearing assist dog. Note that the IRS definition only discusses “physical” disabilities. Mental disabilities are conspicuously absent from this category.

If your service dog is meant to help with a mental disability, you may not win the deduction in the event of an audit.  That doesn’t mean shouldn’t claim a legitimate mental health service dog. You just need to recognize that the bar is going to be set higher in the event of an audit.

 Here’s a question to ask yourself—if you were to be audited for your dog expense, could you obtain written letters from your doctor that your dog is necessary for you to work or function?  This is important. 

I worked on an audit once where the man had claimed his dog as a medical expense.  The IRS auditor was willing to allow the expense if the man obtained a letter from his psychiatrist. All it needed to say was that yes, the dog was part of the man’s treatment.   Although the psychiatrist admitted that he had recommended that the man get a dog, he refused to issue a letter. He said the dog was a good idea, but not official treatment. We lost the case. 

If you are self-employed, you may be able to claim your service animal as an impairment related work expense.  To qualify here, you must have a physical or mental disability that functionally limits your being employed. Or, have a physical or mental impairment that substantially limits one or more of your major life activities such as performing manual tasks, walking, speaking, breathing, learning, or working.  If you’re able to claim your service dog as a business expense in this way, it’s usually a better deduction for you than the medical expense deduction. (A business expense is a direct write-off, a medical expense has other hoops before you get any benefit.)

I cannot stress enough the importance of legitimacy here.   You can’t just go online and purchase a “service dog” vest for your pooch and take him to work with you.  The service your dog provides must be necessary for you to do your work in a satisfactory manner.

 If you intend to claim a dog as a medical expense (other than a seeing eye or hearing assist dog), it is absolutely essential that you have the support of your doctor.  I’d get the letter from your doctor before claiming the dog on your taxes. Keep it with your tax paperwork in case you need it later.  If your doctor refuses to give you a letter, it’s a good hint that you shouldn’t try to claim your dog as a medical deduction.

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

Filing Your Uber Driver Taxes

If you’ve been earning money driving an Uber in 2021, here’s some things that might help you when filing your taxes. 

Whether you’re doing them yourself, of paying someone to prepare your tax return for you, the most important thing you need is your Uber statement.  Here’s an example of one from the 2020 tax year. 

As you can see, it shows the gross payment, the expenses, and the net payout.  Also, what’s really important is that it shows the miles that you drove.  You really need that mileage number for your taxes. 

There’s a second page to that statement and it looks like this:

This is really helpful because it breaks down what those expenses were.  It also breaks down any additional compensation that you received.  You’ll see in this example that the taxpayer received $704.40 in incentives and $1.77 in other miscellaneous payment. 

You would think that Uber would send out a 1099NEC for the $9,622.15 – the gross payment that they reported on page one – but they’re a little different.  They only give you a 1099NEC for your Additional Earnings.  In this case, the taxpayer got a 1099 for the $706.  She still has to report the full $9,622 of earnings though. 

So how do you do that? 

For the vast majority of people, you’re going to be doing this on a form called Schedule C.  And it’s just another form that’s a part of your regular 1040 tax return.  You don’t file a separate return for your Uber income, it’s all combined with your main taxes. 

Here’s a link to get the form: https://www.irs.gov/pub/irs-pdf/f1040sc.pdf

Ideally, you should be using  tax software to prepare your taxes.  I’m showing you the forms and where things go so that you know what it’s supposed to look like when you’re done. 

You see that Box B?  Enter code from instructions?  If you’re an Uber driver (or Lyft, or Door Dash, anything like that) your code is 485300 for taxi, limousine and ride sharing services.   

One line F it asks your Accounting method:  you’re going to pick cash.

Line G – did you “materially participate” in the operation of this business in 2021?  Well Yes – if you drove, you participated.

Line H – you just check that box if it’s the first year you’ve done it.

Line I – Did you make payments that require you to issue a 1099?  Probably not.  Uber drivers are solo workers.  So you’re probably not issuing any 1099s.  If you’re an Uber driver who’s hiring other people to work for you, you should probably check with a tax professional.

Now we’re into the Income portion of your return.  Gross receipts.  That’s easy – It’s right on the Uber statement.  Using the example from above, you’d put $9,622 on line 1. 

A note about 1099s and computer software:  If you get a separate 1099 from Uber like the taxpayer in the example, you’re going to need to enter that 1099NEC as a separate document.  In that case, you’d enter the Gross Trip Earnings of $8916 on the Schedule C in your tax software and the  software should also send the 1099 income to the Schedule C, so you still wind up with $9,622 on line 1.  The nice thing is, the Uber statement breaks it out for you.

Now in the expense portion of the Schedule C – probably the most important part is your car and truck expenses which is line 9, but I’m going to skip over that for a minute and get the easy part first, which is your other expenses.  They would go on line 27a. I like to list them out separately, but that’s just me. I also round to the nearest dollar, the IRS doesn’t want to look at pennies and most tax software won’t even acknowledge cents.

A note about Cost of Goods Sold:  As an Uber driver, you’re selling a service, not a product.  You’ll leave the whole of Part III Cost of Goods Sold section blank.

So now you’ve got your main expenses in.  It’s time to add in your mileage. Mileage goes on page 2 of your Schedule C in Part IV. Let’s go over those questions one at a time.

Line 43: When did you place your vehicle in service for business purposes?  It means, when did you start driving for Uber that’s all that means. 

Line 44:  Of the total number of miles your drove your vehicle during 2021, enter the number of miles you used your vehicle for:

a.  Business

b. Commuting

c. Other

You have the easy answer to a Business miles – because Uber gives it to you right on the statement.  In this example, it was 6,992 miles.

Line B – you leave blank because really for Uber you’re not commuting.

Line C other – this seems to be the hardest one for most people.  How many non-business miles did you put on the car this year?  People often ignore this, but it’s important.  And if you ever get audited, the IRS will want to know.  In this example, the person only put 8,632 miles on their car for the entire year.  So we’d put 1640 down for other.  (8,632 miles for the year minus the 6,992 miles driven for Uber.)

And then you’ve got the Four Questions.

45. Was your vehicle available for personal use during off-duty hours?  Yes or No. 

46. Do you (or your spouse) have another vehicle available for personal use?  Yes or No

47a.  Do you have evidence to support your deduction?  Yes – because Uber gave you evidence.

47b.  If yes, is the evidence written?  Yes – because it’s written right in that Uber document. 

Now if you’re using tax software, it will compute the auto expense for you and automatically put it on line 9.  But if you’re doing this by hand, you’d take the 2021 mileage rate, which is 56 cents per mile, and multiply it by the 6,992 business miles and you get $3,915.52 – which you’re going to round up to 3916.

So, in this example, after you’ve taken out your expenses you’ve only got $2,684 of taxable income. 

(Gross income of $9,622 minus auto expenses of $3,916 minus other expenses of $3,022 equals net profit of $2,684.)

That number will flow onto line 3 of the Schedule 1 which flows onto line 8 of your regular 1040.  (Don’t be intimidated by these line numbers and schedules.  Use a tax software and it should all be automatic.)

The part that gets a little hinky is the Self-Employment tax.  Once again, the software should compute it for you.  I’m just telling you so that you know to look for it.  Self-employment tax is computed on Schedule SE.  If you’re doing this by hand, your net profit goes on line 2, then literally you’re following the instructions line by line until you get to the bottom of the page. 

The quick and dirty check to make sure the math is right is you take your net income and multiply it by .9235, then multiply that by .153.  That’s going to be your self-employment tax. That goes on line 12 of Schedule SE and on line 4 of your Schedule 2 and that flow onto line 23 of your 1040.  In this case, the self-employment tax is $379.  (2684 times .9235 times .153 = $379.)

And there’s one more thing.  I promise, this isn’t too bad.  You get a deduction for ½ of the self-employment tax that you have to pay.  We don’t want to miss any deductions right?  So if the self-employment tax is $379, half of that is $190 (because we rounded up).  It’s going to go on line 15 of Schedule 1 which will flow to line 10 of your 1040. 

I’m talking about a lot of forms and Schedules here and that sounds intimidating, but don’t let it scare you.  Your tax software should generate everything.  I’m mentioning the forms so that you know what to look for.  If you’re using to doing just a straight 1040 with no extra schedules, it might seem weird to have all these other pages print out.  But a lot of the forms only have one or two items on them. 

If you’re filing a return with Uber income on it, in addition to your 1040 tax form you should also have:

Schedule 1-Additional income and adjustments to income

Schedule 2-Additional taxes

Schedule C – Profit or loss from business  (This is the heart and sole of your business taxes.)

Schedule SE – Self-employment tax

Here’s a link so that you can see how they’d look using the numbers in the example. https://robergtaxsolutions.com/wp-content/uploads/2021/12/2021-Fake-Uber-Driver-1.pdf

I always recommend talking to a professional to do your taxes.  But I also recognize that not everyone can afford it.  Hopefully, this can help you with your Uber Tax Return. 

FAQs

I won’t have time to answer your individual questions on this, but I do have some questions that people ask me all the time so I thought I’d address them here.

Q: I drove more than the mileage it says on my Uber statement. Can I claim that mileage as well?

A: Yes. You’ll just need to document it with some type of a mileage log. I like the MileIQ app, but you can use whatever works best for you. (I don’t get paid by Mile IQ, I just like their app.)

Q: I paid a lot of money for my gas and car repairs. I want to claim those expenses. Can I add those to my mileage?

A: The mileage expense includes your gas and repairs. It’s an either/or type of deduction. If you prefer to claim your actual expenses, that’s fine. Just make sure you document them with receipts. Remember, the amount of your actual expenses you can claim is limited by the percentage you used the car for business. It’s also important to remember that if you claim your actual expenses the first year that you use a vehicle – then you can NEVER claim your mileage in a future year.

Q: I bought a new Lexus for $40,000 and I want to write it off as a business expense. Can I do that?

A: That’s outside the scope of this blog post. (There’s a whole lot of issues there.) Generally, I’m not in favor of it, but this is one of those times where if you want to write of the purchase of a new vehicle, it’s worth the money to get professional tax help.

Q: I have other expenses besides my miles and what’s on my Uber statement. Can I claim those?

A: Yes. Some extra expenses might be bottled water or snacks for your passengers or your cell phone usage. Normal car maintenance would be included in your mileage, but one driver I know had to pay to have her car cleaned after a drunk passenger threw up all over her back seat. I wouldn’t consider that to be a “normal” auto expense so I included that as an additional business expense on her return.

Q: I didn’t just drive for Uber, I also drove for Lyft and Door Dash. Do I need a separate Schedule C for each job?

A: No. You can combine your Uber, Lyft and other driving jobs onto one Schedule C because they’re all in the same category. Now, if you drove for Uber and moonlighted as a DJ or some other completely unrelated job, then you’d want to prepare a separate Schedule C for that business.

Posted on by Jan Roberg

Claiming the Adoption Tax Credit

If you've adopted a child, you may be able to claim the adoption tax credit on your federal income tax return.

If you adopt a child, you may be eligible to claim an adoption tax credit. A tax credit is much better than a tax deduction because it’s a dollar for dollar reduction in the amount of tax liability. For 2021 the maximum adoption tax credit per child is $14,440 – that’s a pretty significant amount!

What expenses qualify for the adoption tax credit?

Generally, the adoption tax credit is a reimbursement for reasonable and necessary expenses for an adoption. For example:

  • Court costs
  • Attorney fees
  • Agency fees
  • Travel expenses (which includes meals and lodging while away from home)
  • Other expenses directly related to, and for the principal purpose of, the legal adoption of an eligible child

And there may be other expenses that are required by the state as a condition of the adoption, those would count as well. An example used on one of the adoption websites was putting a fence around a swimming pool before a child could be placed in the home, that would be a qualified adoption expense because there would be no adoption without the fence.

What expenses do not qualify for the adoption tax credit?

  • Any expenses paid for the adoption of a spouse’s child
  • Surrogacy expenses
  • Any adoption expenses that are reimbursed by your employer

When can I claim the tax credit?

Like many of tax questions I see, the answer is: it depends. You see, the answer is different for U.S. and foreign adoptions.

With a U.S. adoption, qualified expenses that are paid are deducted in the next tax year, even if the adoption is never finalized. For example: let’s say you paid $2,000 to an attorney for an adoption in 2020. In 2021, it all falls through and you never get to claim the child. You still get to claim the $2,000 for the adoption tax credit.

With a foreign adoption, qualified expenses that are paid in the years before and during the year the adoption is finalized are all claimed in the year the adoption is final. If a foreign adoption is never finalized, the adoption tax credit is never claimed.

If you have additional adoption expenses that are paid after an adoption is final, they are claimed in the year they are paid.

What about special needs adoptions?

If the state determines that an adoption is “special needs,” then generally you’re eligible to claim the maximum tax credit in the year the adoption is finalized, even if you did not spend that amount. What we normally think of when you say “special needs” is a child with a disability, but that’s not necessarily the case when dealing with the adoption tax credit. For purposes of the adoption tax credit, special needs is:

  • the child must be a US citizen or US resident when the adoption process begins
  • the state determines that a child cannot or should not be returned to his or her parent’s home
  • the state determines that the child probably won’t be adoptable without assistance provided to the adoptive family

So this is a little tricky. Even though we’re talking about a federal tax credit, it’s the state that determines if an adoption is a special needs adoption or not. Make sure that if you’re claiming a special needs adoption that you’ve got the state documentation to back it up.

What if the adoption tax credit is more than my tax liability?

The adoption tax credit is non-refundable. That means that if your tax credit is $14,440 but your tax liability is only $10,000, you’re not going to get the extra $4,440 back as a refund. But the good news is, you do get to carry the extra forward to offset your taxes for up to 5 years.

Are there any other limits to the adoption tax credit?

There are a few. Probably the most important is the income limitation. In 2021, the adoption tax credit starts to phase out at $216,660. By the time your income reaches $256,660, you’ll receive no credit at all.

Married couples who file separately can’t claim the adoption tax credit either. This can be especially tricky for couples who had expenses in earlier years but filed separately, then file jointly to claim the adoption tax credit.

There’s no double dipping. If your employer pays you $5,000 for adoption expenses, you have to exclude that from the qualified adoption expenses that you actually claim.

How do I claim the credit?

The form you need is form 8839. In the old days, you needed to submit written documentation when claiming an adoption tax credit and mail it in with your tax return. But now, the IRS requests that you e-file your tax return instead. You may be asked to provide written documentation later, so do hang onto your adoption paperwork just in case you need it.

The IRS has a great little tool on it’s website to help you determine if you can claim the adoption tax credit. It takes about 15 minutes to run through completely, but if you have any doubts about whether you can claim the credit this year or not, it’s going to tell you. Here’s the link: Can I claim the adoption tax credit?

Posted on by Jan Roberg

Deducting Di Minimus Fringe Benefits

Di minimus fringe benefits can be a better business deduction than gifts.

“Di minimus” sounds so fancy. It’s a Latin term meaning about minimal things. According to the IRS, a di minimus benefit is

one for which, considering it’s value and the frequency with which it is provided, is so small as to make accounting for it unreasonable or impractical.

According to the IRS website, an item over $100 could not be considered to be di minimus, but they haven’t actually given us an exact number of what is considered to be di minimus which makes things a little foggy. Is it $99? That’s probably pushing it. There’s an article by the Bradford Tax Institute that suggests $50-$70. I feel like that’s a pretty decent guideline.

I really like the di minimus fringe benefits rules because it gives me a little more room to work. If I’m buying a business gift, I’m limited to spending $25 per family for the entire year. Check out my post about What Business Gifts Can I Deduct on My Tax Return here. But if I’m buying something for one of my employees, I can use the di minimus rules and spend a little more.

What counts as di minimus fringe benefits?

  • Occasional snacks, coffee, donuts
  • Holiday gifts
  • Occasional tickets for entertainment events
  • Flowers, fruit, books etc. provided under special circumstances
  • Occasional parties or picnics
  • Occasional meal money or travel expenses for working overtime
  • Group term life insurance with a face value of not more than $2,000
  • Personal use of a cell phone provided by the employer primarily for business

What can never be di minimus?

Gift cards, gift certificates and cash – no matter how small the amount is. If you give a “gift” to an employee of cash, a gift certificate or a gift card, it must get included in her wages as W2 income. Not only will your employee pay income tax on the gift, but there will also be social security and medicare taxes as well.

What makes the di minimus fringe benefits so cool?

Well for one thing, they are tax deductible to the employer. As an employer, that always makes me happy. And, they are tax free to my employees, and that makes them happy. It’s a win-win for us all. And I’m not limited to the $25 a year gift rule. I can buy my employees birthday gifts, holiday gifts, and just “Hey, you’re awesome!” gifts, as long as it’s occasional and not being used to replace their income. Let’s get real here, flowers and candy will never replace a decent wage, you’ve got to do that first. But an occasional gift to tell them that they’re awesome on top of a decent wage? That’s a winner!

And those flowers, fruit baskets and books? The di minimus rules aren’t just for your employees, you can also give them to your corporate directors, independent contractors, partners in a partnership and even yourself!

The other really cool thing is that you can give your employees tickets to an entertainment event. Under the new tax law, entertainment isn’t deductible any more – but as a di minimus fringe benefit it is. You can’t give away season tickets, but you can give away tickets to a single show.

The IRS doesn’t give us a whole lot of guidance on these di minimus fringe benefits. They use the term “occasional” a whole lot without ever defining how often occasional is. The IRS uses the term “facts and circumstances” so I would think flowers for a funeral or a hospital gift for an illness would pass muster. And IRS Pub. 15-B specifically mentions birthday and holiday gifts so that should be okay too.

You may have heard the old saying, “Pigs get fed, hogs get slaughtered.” Do take advantage of the di minimus fringe benefit rules, just don’t abuse them.

Posted on by Jan Roberg

W4 for Dummies

W4 forms can be confusing. Get help here.

The single most popular blog post I ever wrote was about how to fill out your W4 form. Unfortunately, it’s all garbage now with the new tax rules. It’s time to take a new look at how to fill out that W4 form.

First thing to know is that the form is kind of funky. If you look at the 2019 form, well here, take a look: 2019 W4 Form



Being realistic, you might not want your employer to know all that stuff about you. Seriously, is it any of your boss’ business how much income you have outside of work? Or how much you donate to charity? The IRS is already aware that this form is a problem and they’re working on a new one. So far, it’s only a draft and it looks like this: 2020 W4 Form

What I’d like to see on these forms is an option to just withhold a straight percentage. I think that would be the easiest thing to do, but the IRS doesn’t listen to me so we’ll have to work with what we’ve got. Let’s start with the easy ones.

Students

If you are a high school or a college student, and you expect to earn less than $12,000 for the year, you’ll want to claim “exempt”. All you do is write “Exempt” on line 7 of the W4. Leave line 5 blank. Leave line 6 blank. You don’t fill out any of those other pages. Give your employer the first page and you’re done. Easy peasy!

Single People With Only One Job

Whether you’re paid a salary or by the hour, if you are single and working full time, you’re going to check the box that says single and claim one allowance on line 5. That one is also easy.

Married People Where Only One Person Works

If you’re married, and your spouse does not work, you will check the box that says you’re married, and you will claim 2 allowances on line 5. That’s it.

And that’s the end of the easy answers. Let’s look at the harder stuff.

Unmarried People with Children who Always Qualify for EIC

If you have children and in the past you’ve always qualifed for the Earned Income Tax Credit, unless you just got a big raise, you’ll probably still qualify for EIC. In that case, you don’t need a whole lot of withholding. You’re going to check the single box and claim 2 allowances for yourself, plus 4 more for every child you have under the age of 17. You might not have any federal withholding taken out of your check, but in the event that your income is high enough to require some withholding, you should be covered. It’s safer than claiming “exempt” in case you do have some federal tax liability.

Married People with Children who Always Qualify for EIC

It’s harder to qualify for EIC when you’re married because if both spouses work, the second income often kicks you over the limit. If only one spouse is working, check the married box and claim 2 allowances for you and your spouse together, plus 4 more for every child under the age of 17. Same as above.

If you both work, it’s a little trickier. Have the higher income spouse “married but withhold at the higher single rate” with one allowance, plus 4 allowances for each child under the age of 17. Have the lower income spouse claim “married, but withhold at the higher single rate” with 1 allowance. This should protect you in the event that the second income kicks you out of the EIC tax credit range.

Multiple Jobs, High Income Earners, and Working Spouses

The absolute best thing to do in this situation is to use the IRS withholding calculator. Here’s the link: IRS Withholding Calculator

Once you get to that page, you’re going to want to click on the blue box that says “Withholding Calculator”. You’re going to want to have your most recent tax return and most recent pay stubs with you when you do this. The IRS withholding calculator asks a lot of questions, (full disclosure, it’s kind of annoying) but it’s going to give you the most accurate results.

Good Grief, I Can’t Stand it! Is There Any Other Way?

Okay, this is my cheater trick. Did you owe last year? If not, you probably don’t need to change what you’re doing. If you did owe, don’t change your allowances, just add additional withholding to make up the difference in tax that you owed.

For example: let’s say that you claimed single with 2 allowances last year but you wound up owing an additional $1,000 in taxes for whatever reason. If you get paid every other week, that means you get 26 paychecks a year. You’d take $1,000 divided by 26, so you’d have an extra $38.46 taken out of each check.

Of course, if you’ve only got 14 pay periods left in the year, you might want to withhold more now and change it in January. Or you could set the rate now and just make an estimated tax payment to cover the difference. Do what works best for you.

I Still Need Help

I get it, this is confusing. Literally hundreds of people asked questions on the old blog post. I had to quit answering them. I just could’t keep up. I have my regular clients to attend to and it was overwhelming. If you still need help, contact your tax advisor. If you’re already paying someone to do your taxes, they should be able to help you with your W4, and they’re going to know so much more about you than I will.

If you don’t have a tax advisor, you can call my office and I can help you with this, but I’m going to charge you $200 to prepare your W4. I would need your most recent pay stubs and your latest tax return.

Posted on by Jan Roberg

Women and Retirement: What You Need to Know

Whether you’ve been working for several years, or just starting on your career, it’s never to soon to start planning for your retirement.

There are three cold, hard facts you need to know:

  1. Women usually live longer than men.
  2. Women generally have lower lifetime earnings than men.
  3. Women usually reach retirement with smaller pensions and assets than men.

So, the question becomes, what are you going to do about it?

On average, Social Security only replaces about 40% of your pre-retirement earnings. If you want to have a comfortable retirement, you’re going to need other income.

What do I mean by other income in retirement?

In retirement, other income would include pensions, 401(k) money, IRAs, investments like stocks, bonds, CDs, or even real estate. It could even be income from a part-time job. Just remember, the older you get, the less you’re going to want to work. Retirement funds are for the long term. It’s not your Mad Money.

What’s Mad Money?

When I was a teenager, my mother always made me carry “mad money”. It was so that if I was out on a date and things weren’t going well, I could always grab a cab and go home. Back in my time, mad money was $20.

And while “mad money” sounds like a pretty old fashioned concept, women having their own money is a pretty sound strategy for all ages. What’s crazy is that we’re in the 21st century and I’m still writing about women having their own money.

As we talk about building your assets, the first account you need is your savings – or mad money. You should have enough to cover 6 months worth of expenses in case of emergency. This isn’t your Disney World or Hawaii fund, Mad Money is your “when the sh*t hits the fan” fund.

How Do I Save for Retirement?

While the Mad Money account is probably the most important thing you need, you don’t want to not save for retirement because you didn’t reach your Mad Money goal. Some people never seem to fully fund their Mad Money accounts so I suggest that you work on both at the same time.

First, you need to set a savings goal – whether it’s 10% of your income (always a good bench mark) or whether you need to be more modest, set a goal and stick to it. Put half of your savings into your Mad Money account and the other half into a Roth IRA. A Roth IRA grows tax free, and if you have an emergency, you can take out what you put into it without penalties or taxes.

Once you’ve fully funded your Mad Money account, you can be more aggressive with your retirement funds. I don’t like to see people only put money into their 401(k)s or traditional IRAs if they don’t have any other savings. If you get hit with an emergency and need the cash, not only do you have to pay tax on that money when you take it out of your 401(k), but there’s a 10% penalty for taking it out early (before age 59 and 1/2) so you don’t want to get burned.

Mad Money is Funded, What’s Next?

First, if you’ve fully funded your Mad Money account, pat yourself on the back, that’s pretty awesome! Next, is my list of how you should save for retirement. This list is my “opinion”. If you have access to a financial advisor, it’s a good idea to talk with her (or him) for more personalized advice.

The Savings Priority List

  1. If your employer has matching funds, you want to put at least as much into your work retirement plan as your employer matches. Think about it. An employer match is a 100% return on your investment. 100%! If you put money into a savings account at your bank and get a 2% interest rate that’s considered really good. So what’s a 100%? Phantasmagorical! (That must be a real word, my spell check didn’t blink.) An additional bonus here is that 401(k) contributions aren’t taxed until you withdraw them and the earnings grow tax free. I like the employer match if you can get it.
  2. Roth IRA/Roth 401(k). If you’ve maxed out on your employer match, then my next step is to put money into a Roth IRA or Roth 401(k) if that’s an option for you. Roths don’t give you any tax advantage up front like a traditonal IRA or 401(k), but the money you invest grows tax free and when you take the money out at retirement you pay no tax on it. Tax free retirement income is really nice to have. And Roth money is a good back up to your Mad Money when life throws you a curve ball.
  3. Traditional 401(k). If you’ve maxed out your Roth contributions and still have money left for retirement savings, it’s time to go back and fill up your 401(k).

If you have a job where you’re able to fully fund your 401(k) and still have funds to invest towards retirement, then it’s seriously time to get a financial advisor. There are all sorts of awesome investment opportunities available and clearly that’s way beyond the scope of this blog post.

Here’s the thing. If you’re in your 20’s or 30’s, retirement seems really far away, and saving for retirement seems almost impossible when you’re trying to buy a house, raise a family, or pay your student loans. But remember, the earlier you start, the better off you are. And – for those of you who are much closer to retirement age – it’s never too late to start!

Posted on by Jan Roberg

Retirement Tax Planning

Tax planning for your retirement is smart.

Planning ahead can save you money on your taxes, leaving you with more cash to spend on the things that matter to you.

 

If you’re getting near retirement, it’s time to have a good sit down with your financial planner and your tax advisor and plot out the next 10 years.  I was at a presentation with a financial planner friend of mine, and she had given out a list of questions for her clients to ask their tax advisors.  I decided to take her questions and answer them, or at least try to explain what they mean.  My thanks go out to Michele Clark, at Clark Hourly Financial Planning for asking the questions.

 

What does it mean to fill up your tax bracket now, in order to reduce RMDs later?

Let’s say you’ve saved up a nice retirement nest egg in your 401K.   Once you turn age 70 and ½, you are required by law to start taking the money out at a certain rate and you will pay tax on those funds.  Those are called required minimum distributions (RMDs).  For some people, the RMDs could actually kick them into a higher tax bracket than they had planned on being in for their retirement.

For some people, it makes sense to pull money out of your taxable accounts now, while the tax rates are lower, than to wait until they are 70 and ½.  Everyone’s situation is different, which is why you want to plan for it, and not just start making withdrawals.

 

Should you make Post Retirement Roth Conversions?

If you do decide that it’s right to take money from your 401K or taxable IRA, does it make sense to roll it over into a Roth?   The nice thing about converting those funds to a Roth is that those accounts will continue to grow tax free, and there’s no required minimum distribution on those funds.    So if you aren’t planning to use the money right away, a Roth conversion may be for you.

 

Can you realize capital gains at the zero percent capital gains rate?

First, let’s take a look at the capital gains brackets.

Zero percent gains brackets

  • Single: income up to $38,600
  • Married filing jointly: income up to $77,200
  • Head of Household: income up to $51,700
  • Married filing separately: income up to $38,600

If you income is higher, then you’ll be in either the 15 or 20% capital gains bracket.  So, if your income has you in the zero percent gains bracket, this might be a good time to sell some of your stocks and claim the gains.  You can buy the stocks right back, you’re just claiming the gains while you’re in the zero tax bracket.

 

What about wash sales?  This is different.  You may have heard that if you sell stocks at a loss and buy them back within 30 days that you can’t take the loss.  That’s called a wash sale.  But it’s perfectly fine to sell your stock to claim a gain.

 

But why do this at all?  It’s just a strategy to reducing potential future gains.  For example – if you might be subject to high RMDs in the future, taking advantage of the zero percent gains rate while your income is still low enough would be a good idea.

 

 

Are you subject to Medicare means testing?

Only 5% of Medicare recipients have to deal with this, but if you’re in a higher tax bracket, you could also be subject to paying more for your Medicare.  Social Security uses your most recent tax return to determine your premiums for your next year’s Part B and prescription drug coverage.   Meaning that your income at age 63 will determine your social security premium at age 65.  If you file as married filing jointly and your income is Adjusted Gross Income is over $170,000 you’ll pay higher premiums.  If you use another filing status, you’ll pay more if your income is over $85,000.

 

So let’s say that you’re 65 and your spouse is 58.  If you file jointly, let’s say your income is $185,000 – this would put you in the higher payment bracket for your social security premiums.  But what if you were to file separately?  If your income was only $80,000 while your spouse earned $105,000 – you could still have the lower Medicare tax payment.

 

Now you’d want to run the numbers both ways.  It might be that your tax savings from filing jointly will outweigh the Medicare benefit from filing separately.  That’s why you want to talk to both your tax advisor and your financial planner.

 

 

Should we shift income to another year when possible? 

It depends upon your situation.  Many times you have no choice in the matter, but some things like non-RMD distributions or sales of stocks can be moved to better fit your tax needs.

 

Should we shift deductions to another year and alternate standard deduction years with itemized years?

Under the new tax law, many people who used to itemize their deductions will now be claiming the standard deduction.  For many people, moving around their deductions won’t make a difference.  But for others, it may make sense to “cram” their deductions together.  For example:  paying two years of your church tithe every other year.

 

Should you consider a Donor Advised Fund in your higher income years? 

A donor advised fund is like a charitable investment account.  As soon as you make the donation, you are eligible for an immediate tax deduction, but you don’t necessarily have to pay out the money to a charity immediately.  Let’s use that church tithe example – say you’ve got a high income year, you can set up a donor advised fund and pay a few years of your tithe into the fund so you claim the deduction all at once, then pay out your tithe to your church over the next few years.

 

Another advantage to the donor advised fund is that you may contribute stock that has appreciated without paying the capital gains tax.  It’s like getting a double benefit.  Let’s say for example that you bought 1,000 shares of  XYZ stock for $2 a share 20 years ago.  Now it’s trading at $20 a share!  Awesome.  But if you sold it, you’d have to pay capital gains tax on $18,000.  Yuck.

 

But, you could donate that stock to your donor advised fund.  You would get credit for donating $20,000 worth of stock, but you wouldn’t pay any capital gains tax on the gain.  As my kids used to say when they were little, “It’s a double good.”

 

Does utilizing Qualified Charitable Deductions (QCD) make sense for you?

A QCD is for someone who is required to take RMDs from their IRA.  You can designate some (or all) of the money to go directly to a charity and avoid including it in your income altogether.  This is better than claiming it as a deduction on your schedule A because it’s what we call an “above the line” deduction.  That means that it reduces your Adjusted Gross Income.  This helps with anything where your income determines whether you’re allowed certain deductions or not.  “Above the line” deductions are always better than “below the line deductions. Even if the QCD does not help your federal return, claiming an “above the line” deduction may still impact your state tax return.

 

Conclusion

The bottom line is – if you’re getting near retirement, it’s time to do some planning.  You can’t plot out 10 years of taxes with your tax person when you sit down to do your annual tax return.  This needs to be a separate appointment, it’s going to take some time.

 

Do your homework.  Sit down with your financial advisor too.  Figure out, how much will you get from Social Security?  How much is in your retirement accounts?  What type of pension can you expect to receive, if anytihng?  What type of non-taxable funds will you have at your disposal?  What are your budget needs for the future?

 

By planning ahead, you can made good decisions and enjoy your retirement even more.

 

Posted on by Jan Roberg

Tax Tips for Artists

Artists must pay tax on their sales.

If you’re selling your art, you need to think about taxes. Taxes are different for hobbies than for businesses.  It’s important to know what you have.

 

 

Are you a Hobby or a Business?

 

If you’re reading this post, you’ve probably made some money on your art.  Maybe you sold a few paintings.  At what point, does your hobby become a business?  Taxwise, you need to decide which is better for you.   Another consideration is:  What does the IRS think?

 

 

Hobby Income Taxes   Hobby income is taxed at your regular income tax rate.  It goes on line 21 of your 1040 tax return.  Now in the past, you might have been able to deduct some of your hobby expenses on your Schedule A of your tax return, but beginning this year (2018) that option is no longer available.   So if your federal income tax rate is 22%, then your tax on that $5,000 will be $1,100.  (5000 x .22 = 1100)

 

 

 

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 business income would be 37.3%.  That means that the $5,000 you made as hobby 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)

 

Artists often have a lot of business expenses, so being able to claim your art 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 the Qualified usiness Income Deduction “QBI” further on though because there’s more to business taxes than just this.)

 

1099MISC   If you receive a 1099 MISC that shows income in box 7, the IRS will automatically count you as being self-employed – even if you have another job somewhere else.  If you teach an art class or win a prize you may receive a 1099.

The 1099 also proves you have income if you need proof of income to obtain an earned income tax credit.  You don’t have to mail your 1099s in with your tax return, but you’ll want to hold on to them.  They can come in very handy.

 

 

 

What will be different about your tax return now that you’re a professional artist instead of a hobbyist?

 

You won’t need to incorporate or file a special business return.  Most people will just include their art business information on Schedule C 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.  You will need to file the long form when filing the Schedule C – no more 1040 EZ.

 

 

Common Tax Deductions for most Small Businesses

 

Advertising

Home Office expense

Mileage

Supplies, etc.

 

Common Tax Deductions for Artists

 

Art supplies

Membership Dues

Classes and Workshops

Show Fees

Software fees

Studio

 

A word about making Estimated Tax Payments

 

If your art 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

 

Your two best Tax Deductions

 

Mileage and Home Office (Studio).  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.

 

 

Home Office (Studio)

 

You don’t need a desk and a computer for your home office.  It could be a storage space for your art, the place where you paint or the room you throw pots 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 shows.  The important issue is “regular and exclusive”.  Maybe you paint 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 the space exclusively for your art business in order to deduct it.  So, if you paint in your kitchen, you need another space to maybe store your art that you can claim as your “exclusive” working space.

 

 

Issues of selling Art in multiple states/cities

 

When you do a show in the City of St. Louis, the City expects you to pay city sales tax.  If you sell in Illinois, then you’re expected to pay Illinois sales tax as well.  Generally, if you’re selling all over the country, you’re expected to file state returns in those states.  Often, if you’re at an art show, the event coordinator will instruct you about collecting sales tax for that event.  If you sell art online – if you sell out of state, you generally do not have to collect sales tax.  If you sell in state you do.  But be careful!  The Supreme Court recently ruled in South Dakota v. Wayfair that you don’t have to actually have a physical presence in a state to be required to collect sales tax.   This court case will have a far reaching effect of sales taxes across the country so you’re going to want to keep your eyes open and be aware of changes in sales tax laws in any states you sell in.

 

You will need a retail sales license in order to collect sales tax in Missouri. It costs $25 for the bond and is returnable after a few years. You can apply for the license at https://dors.mo.gov/tax/coreg/index.jsp

 

This is really important.  If you collect sales tax – you must remit it to the taxing agency.  You can’t keep it.  That sounds like a no-brainer, but people have been audited for that.  You don’t want that!

 

 

Should you become an LLC?   Generally, artists tend to be “individuals”.  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.
  4. 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.

 

 

Identity Theft    Unfortunately, identity theft is the number one tax crime these days.  As a sole proprietor of your art business, you may be asked to complete paperwork requiring your tax ID number.  That’s usually your social security number.  You can protect your social security number by getting an Employer Identification Number for yourself from the IRS.  It’s free and it’s easy.  Just go to www.irs.gov.  It takes about 5 minutes to do.

 

 

DBA Doing Business As   You might have a business name that you want people to use, like “Wanda’s Watercolors”.  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 and deposit checks under your business name.

 

 

Helpful Links:

 

Starting an LLC or filing a fictitous name registration – Secretary of State office: http://www.sos.mo.gov/business/corporations/startBusiness.asp

 

 

Registering your business for a sales tax ID number with the MO Department of Revenue:  https://dors.mo.gov/tax/coreg/index.jsp

 

 

Apply for an employer identification number with the IRS:

https://www.irs.gov/businesses/small-businesses-self-employed/apply-for-an-employer-identification-number-ein-online

 

Volunteer Lawyers Accountants Association – VLAA provides free services/assistancewww.vlaa.org

 

 

 

 

 

 

QBI – What you need to know about your business income for 2018 – 2025

 

As a small business owner, for 2018 there is something called the Qualified Business Income Deduction.  QBI for short.  QBI is a 20% deduction off of 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 your art business 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 $157,500.  A married personal would need to be below $315,000.

 

You might be thinking – I’m just starting in the business, I’m not Jasper Johns.  I don’t make anywhere near those numbers with my art.  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.

 

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.

 

 

With the new Tax Law, should I Incorporate?

 

For most people, I would say there’s no reason to.  Unlike an LLC – which still allows you to file your tax on your personal return, a corporation is a completely separate entity with a separate tax return, a separate tax rate, and separate and very strict rules.  There was a lot of buzz on the internet about forming corporations with the new tax rate, but the final bill, especially with the QBI deduction, pretty much evened the playing field for the business taxes.  If you’re thinking about incorporating, be sure to sit down with your accountant and run all the numbers side by side before making any drastic decisions.