It's tax time so ... beware of bad advice from the real-life Sammy Segar CPA

Does your tax professional know enough about self-employed taxes? Or is he another Sammy Segar CPA?

Readers of my book, SELF-EMPLOYED TAX SOLUTIONS, have met Sammy, who knows a lot about stock options and pensions, but nothing about the tax situations that face indies. Sammy is a fictional character but, as they say in the TV dramas, he is “based on a true story.” Sammy got his education back in the days when everybody worked for big companies and only the occasional wacko went into business for herself.

A tax time article shows once again, as if more proof were needed, that many accountants don’t understand the self-employed life, or as we call it in New Mexico, La Vida Autonoma.

The article, published early in 2006, was a New York Times YourMoney column called Depreciation Appreciation 101: The Ins and Outs of Deducting for a Home Office. You’ve learned by now to check the information on the Internet, because not all web columnists and bloggers know what they’re talking about, and some of them are subsidized. But this article was in the New York Times – which goes to show that even the big guys get it wrong.

What part of home office don’t they understand?
On the weekend it was published, a number of my clients and my website visitors forwarded the column to me. My clients and readers know very well my approach to self-employed taxes: Learn the rules and take every tax deduction that you have coming to you.

Some were concerned that they messed up in taking my advice to deduct home-office expenses. I told them to disregard the article and I explained the mistakes and misconceptions in it. However, as much as I would like it to be otherwise, the Times has a lot more readers than I do. So a lot of indies who read that column are now cheating themselves by not deducting home-office expense. I want you to help me get the word out.

The Times columnist, Damon Darlin, apparently looked up Traditional Out-of-Touch Accountants in the Yellow Pages and wrote down their views without asking them if they had ever met a self-employed person.

Darlin also lacks a grasp of his subject – whether the subject be home-office expenses or self-employed workers.

He confuses home-office expenses with other home business deductions such as telephone service and office equipment.

If you have a valid home-office as defined by the IRS, Darlin wrote, “you can write off… all the office equipment and furniture stuffed into it.” But the deduction of office equipment and furniture has nothing to do with a home-office deduction. If you use a computer only for business it qualifies as a business deduction, even if it sits on your kitchen counter. If you have a printer perched on your home-office desk it does not qualify as 100% business use if your kid borrows it to print his homework. An ergonomic desk chair used only when you’re working at your business computer qualifies for a business furniture equipment deduction even though it, too, sits in your kitchen. Darlin incorrectly tells his readers that where business equipment is located in the home is relevant to a deduction. It is not.

Darlin also confuses employees with the self-employed. For example, he writes:

“Given how complicated it is, many people might ask whether it is worth the bother to deduct a home-office on Schedule C … Would it be easier to just write off most of the expenses as nonreimbursable business expenses on Schedule A?”

This is wrong. Taxpayers can’t choose the form on which they deduct home-office expenses. If you are an employee the expense is deducted on Schedule A. For a self-employed sole proprietor the expenses must be deducted on Schedule C.

For those of you unfamiliar with the many pages of a tax return, it’s like saying, oh, I think I’ll deduct my medical expenses as alimony payments.

In addition to the errors there are bogus warnings used to alarm legitimate home workers.

In the words of one alleged tax expert, “the home office deduction might be best avoided.” The experts give a variety of reasons, including the persistent old husbands’ tale that it’s supposed to trigger a tax audit. Then there’s the “it’s too much work” reason capped by the warning about being “socked” with capital gains tax when you sell your home.

Darlin is correct to advise that if the house is sold, the homeowners who deducted office-in-the-home might have to pay a capital gains tax. But the amount of tax due depends on circumstances. The homeowner will almost always save more money in the home-office deduction than has to be paid in capital gains.

Darlin leaves out that important comparison. And, as readers of SELF-EMPLOYED TAX SOLUTIONS know, other substantial tax benefits accrue to taking office-in-the-home – which also go unmentioned in the Times column.

The IRS liberalized the rules on home-office deduction some years back because organizations of self-employed people lobbied and pressured for it – so that they could get a break in a tax system that is designed not for them but for employees and corporations. The Sammy Segar response, so well documented in the Times piece, is that indies who work extensively at home should turn their backs on this hard-won deduction. The real reason: The Sammy Segars don’t take indies seriously. Would they recommend that Intel forgo a warehouse or office building deduction because it might trigger an audit or because capital gains might have to be paid upon sale of the building? They’d be cashing in their Intel chips if they did.I'll give you another example of a Clueless Professional Accountant (CPA) next week. Until then and until the Sammy Segars get it together, stay on your toes. Check out advice you get. If you’re unsure email your question to me.

Deductibility Of A New Truck Or Car

June --
I bought a new truck for my construction business and I would like to know if I can deduct my monthly payment? Or can I only deduct the interest I paid and deduct the mileage I traveled.
-- Andy


There are two ways to calculate vehicle expenses:

Mileage Method: You get to deduct business mileage as cents per mile. In 2006 it's 44 1/2 cents per mile. You may also deduct the business portion of finance charges on your auto/truck loan. For instance, if you put 10,000 miles on your vehicle per year, and 2,500 are for business, you may deduct 25% of your vehicle loan interest.

Actual Expense: Tally all expenses for your vehicle for the year and deduct the business portion of those expenses. Expenses include gas, repairs, tires, insurance, etc., and loan interest but not the monthly payment. If you use your truck only for business, then you get to deduct all the expenses, but still cannot deduct the monthly payment.

Whether you bought your truck with cash or are paying for it with a loan, you deduct the cost of the vehicle over a period of time. That's called depreciation. There are different methods for depreciating your vehicle depending upon portion of business use, and class of vehicle.

And, as always, read the book that can simplify your tax and financial life, AND save you money!
SELF-EMPLOYED TAX SOLUTIONS .

How to pick a Tax Professional

HI June,

I recently listened to your seminar through the Early to Rise Wealth Building Bootcamp and found your insight to be great!I am located in the Jacksonville, FL area and would like to know if you have any accountants you would recommend in this area who are knowledgeable with self-employed tax law and returns. I'm not satisfied with my current accountant. Please help! Thanks.

BTW, my business partner and I run an import business, El Centro Imports, LLC www.elcentroimports.com where we travel to Central American markets and bring back artisan items to sell in the States. So far its been a good way to have tax-deductible travels!

Chris at www.elcentroimports.com


Hello Chris,

Yours is always the one tax question I get for which I have no specific answer. I have clients all over the country and I get questions from the States and beyond. I ask them all to pass on to me any tax pro they find who they feel is really good. Not too many responses yet, and none from Florida.

It's difficult to find a tax pro who understands the tax laws and regs as they apply to self-employeds. Your best defense is to learn as much as you can. You might want to start by reading, "Is it a deductible business expense?" on my site. Or about LLC vs incorporating below.

If you like what you read check out my book Self-employed Tax Solutions. The information in Solutions will give you a firm foundation on which to interview and seek out a tax preparer.

Start by asking other indies whom they use. Sometimes the Small Business Association can direct you to someone. But, always, no matter where the recommendation comes from, ask questions of the pro before you engage him or her. Especially ask questions you know the answer to -- that'll give you a good idea where the pro is coming from. Also, find out how many indies he or she has as clients. Ask for a reference.

Good hunting. And thank you so much for letting me know your thoughts on the ETR seminar.

Best regards,
June

PS Let me know if you find a pro. Also, feel free to send me a question if you get stuck!


June,
Thanks very much for the info. I'll be sure to check out your site and blog, as well as continuing to ask other self-employeds about references. And you're right, it seems the only real way to get the right information is to educate yourself. I'll keep you posted if I find a good pro in this area. I'm sure there are plenty of others in Florida (especially here in Saint Augustine where there are lots of small businesses) who could use the help.
Thanks again. Chris

Deducting Dunkin Donuts: Meals On The Road

Hi June,

My husband is a finish carpenter, he works for one company but is considered an independent contractor and gets a 1099 so we deduct for a lot of things at tax time. My question is this: Can he deduct for food expense while he is out on the road driving to and home from work? The reason I ask is I added up all his Dunkin Donuts receipts for coffee he buys while at work and it was $1,212.00 for the year of 2006. I'm hoping we can deduct this but I seem to remember the woman at H&R Block saying we couldn't. Please help us to know what we can and cannot deduct.

Thank You!!
Julie


Good Golly, Miss Julie! That's about $24 a week on donuts. Maybe it's time for celery sticks and carrots. A lot cheaper, too, because lunch on the job is not deductible. The only time regular meals are deductible is when your husband is traveling, and travel means overnight.

And, as always, read the book that can simplify your tax and financial life, AND save you money!
SELF-EMPLOYED TAX SOLUTIONS .Best,
June

Home Studio

I am an artist who has a studio which I rent. I live at home with my parents and have a dedicated 1 room studio. I pay no rent. Can I take the cost of travel off between these 2 locations?

Thank you very much.
Rebecca Two Studio


As long as both are your work studios, even though you pay no rent, then both are legitimate and you may deduct transportation between one work location and the other.
There's more info on home studio and transportation expense on my website at Money Minute #3: Work at home to increase business transportation deduction and You Asked ... Q&A #20: Office-in-the-Home & Outside of the Home .
And, as always, read the book that can simplify your tax and financial life, AND save you money!
SELF-EMPLOYED TAX SOLUTIONS .

-- June

Both Employee and Self-employed

June,

I am starting a consulting biz but have an opportunity to work 20 hrs./week for a large company that requires I go through Manpower. I would be an employee of Manpower . The Manpower gig would most likely only last 3-6 months. It would be worthwhile for me to take it.

My question is, how much of my annual income must be directly paid to me as a self-employed vs. how much through an employer like Manpower, in order for me to deduct expenses from my consulting biz income ? And what if I still don't have income from my consulting biz by the end of the year?

Thanks! -Ann, Los Gatos, CA


Ann, you are asking me if you can be both an employee and a self-employed at the same time. Yes, you can.

I think you are also asking me if you need to make a certain amount of money before you can consider yourself a self-employed or before you can deduct business expenses. No, there is no amount you must earn. There is no income minimum nor maximum required from either your Manpower or of your consulting.

Even if you make no money, if your goal is to make a profit, then you are self-employed.

You might want to read the post below, MID-YEAR SELF-EMPLOYMENT. It touches on the same question. I am sure that you will also find very helpful, Feature #8: I am a Business, on my site.

And, as always, read the book that can simplify your tax and financial life, AND save you money!
SELF-EMPLOYED TAX SOLUTIONS .

Good luck in you new venture!
June

Creative Auto Expenses

June --

I want to know, if I hire an independent contractor to put my magnetic signs on her car can she deduct the full mileage she drives with the sign on the car? She is an independent contractor and I am paying her to use the space on her car to promote my business. I know I can't deduct the full mileage for promoting myself, but can an independent contractor?

Florida Realtor


You may deduct your costs for the sign and whatever you pay for the service of the independent contractor. But, there is no business deduction for the person who owns the car and has the sign, or even permanent printing, on the car. There is a deduction for the costs of business miles only -- for instance, taking the car to the sign painter to have the work done.

Think about it: If you could deduct all your auto expenses just by placing a sign on your car, well, in this ever-increasing world of self-employeds we'd see a lot of moving billboards on the road.

And, as always, read the book that can simplify your tax and financial life, AND save you money!SELF-EMPLOYED TAX SOLUTIONS .

-- June

Expenses While Changing Work Locations

Hi June,

For the past several years, I have owned a portrait photography business in Florida as a sole proprietor. I've closed the business now in anticipation of a move to Tennessee, where I plan to re-open my business as a full-time venture. If I make business purchases like new equipment prior to the actual start-up in Tennessee, will they qualify as business deductions on my taxes? Someone once told me that if you purchased items prior to being "official" (licensed), then you couldn't write them off.

Thanks, Cheryl D


Hi Cheryl,

And I bet that someone was Aunt Tillie whose grocer's son once delivered food to an accountant. Right?

I assume you did not stop being a photographer during the move. You simply put things on hold while you packed up boxes and made the trip. You are not changing professions, simply changing locations. I'm sure that if you met someone on the trip who said he wanted to use your services, you'd take the information and contact him as soon as you were settled in your new place. You see you were open for business even though your studio was on the move.

Your business did not end its existence. And so because you were in business and willing to take clients all your expenses are the same as before and after the move.

Were you not already in business but had expenses preparing to go into business those costs would be start-up costs and would be treated differently on your tax return than regular business expenses.

And, as always, read the book that can simplify your tax and financial life, AND save you money!SELF-EMPLOYED TAX SOLUTIONS .

-- June

Travel Expenses

Hi June,

I hope you can answer this for me. I am a freelance writer who contributes regularly to our regional paper as well as a magazine we recently launched. I am what you would call a generalist (features) covering all kinds of topics -- design, food, interviews/profiles, travel, social issues etc... I get to write pretty much whatever I pitch.

My question is this: Because of my inherently lazy nature, I didn't hustle nearly as much as I could have and so didn't make more than $1500 this year.

The paper wants to run a travel story on a city in Switzerland I visited with my husband when he was on business. What can I deduct?

Are there limitations for deductions based on how much I get paid for an article? I will probably get $250 for this short piece.

Thanks so much! Your site has been a huge help so far! Thanks for your time

Robin -- Milroy Pennsylvania


Hi Robin,

First, know that, as long as you were pursuing freelance income for a profit you may deduct all your expenses related to pursuing that income. There are no limitations for deductions based on how much you get paid for an article.

The TRAVEL section in my book, SELF-EMPLOYED TAX SOLUTIONS, is the one section in which I tell readers that they'll never remember it all. They'll have to refer to it often, it's very complex. So I'll attempt a quick summary regarding your Switzerland trip. You didn't go there for business, so your general travel expenses are not deductible. You may deduct only costs of the trip that specifically relate to the piece you would write. For instance, if you paid admission to a cultural museum and that is the attraction you wrote about.

The best way to get the most business travel deductions is to know the rules and plan ahead.

Great! Glad my site is so helpful.

Cheers,
June

LLC? Incorporate?

This post will be updated and appear on my new blog. Please visit at http://junewalkeronline.com/category/blog/.

Cheers,
June