Wednesday, April 30, 2008

Really confusing questions. A really confused indie!

This question is such a mishmash that I am going to embed my answers and also give you a taste of indie-style forensic accounting. This kind of email from an indie is not unique. Most times I disregard and don't post them. However, I hope that reading this will help you see a better way of approaching your indie business.


I am in Richland, WA and have an engineering degree. I have registered an LLC as an sole proprieter to develop some software that will soon be bought out.

In the meantime, I am trying to decide how to become independent and pick up technical consulting work. Translated: How do I get clients? Maybe that's what that means. I prefer to do a 1099 with other companies, as I understand that it means I work under their insurance guidelines What kind of insurance? Professional liability insurance? Health insurance? Generally, indies are not covered by their clients' insurance whether the client is an individual or company. What does "guidelines" mean? ? Did an engineering firm offer you insurance coverage even though you'd be an independent?

And what does "understand" mean? Don't enter into an agreement with a client by taking something to be understood. Terms must be explicitly agreed upon.
Be careful. Too many indies follow the advice of Aunt Tillie, who has a neighbor who is an engineer and knows for sure.

and I don't need to start my own business per se. You are an LLC structured as a sole proprietorship. You have already formed your own business. And under whose direction did you form your LLC?

I guess my question is... what do I need the LLC for. Why did you form an LLC? -- I am not exactly sure I understand how the 1099 and LLC work together. Shouldn't you have asked what you need the LLC for before you formed it? What were the reasons?

As an engineer and software developer logic, sequence and reason are all at the core of your discipline. I assume your analytical skills and decision-making processes have been developed throughout your schooling. You need to use those same skills on the business side of your indie venture.

I noticed your comment about how one is a tax structure and the other legal, and to fill out the 1099 with my name first, LLC name second, and my own SSN rather than the EIN. I am really confused on this. You're confused? I'm confused, because I can't find where I said exactly that.

Also, does self-employment mean I need to register as a business in my local area and may state and pay business taxes. -- I hope you did a better job of proofing your software than you did of your email. Your sentence has a typo but I'm not sure whether "may" is a typo for "pay" or a typo for "my." The answer to the kinds of taxes paid by an indie can be found on my July post here I am an LLC. How do I pay taxes? Call your local Small Business Association about local business registration requirements.

Please help!
Name Withheld

I hope I have.

Think Like an Indie Business

This is related to Watch out for bad tax advice! about the architect who received incorrect advice from AARP. I think it shows how a creative person [Susan is an interior designer] with perseverance can master the business side of an indie venture. It's the "indie-business mindset" at work.

June --

Thanks June for your answers!

Since the bulk of his [the gentleman architect] indie work and income occurred during the last quarter of '07, it was not a large $ amount. Also, when we reviewed all of his expenses, he did not have a lot, nor were they complicated to figure out. In light of the amounts, he decided to have them done now and not file an extension.

We lucked on to an accountant at HR Block who does a lot of indie taxes, and he echoed your response to the bad advise we were given. We did okay - when the HRB guy showed us how to estimate quarterly taxes for 2008, based on the income earned for the 2007 quarter, it was a little more than the amount less expenses he owed for 2007. The three of us reviewed all of the expense deductions carefully, and discussed the differences in how certain things can be deducted. The HRB guy's answers were in line with my recollection from your book. As I said, there were not a lot of expenses, nor were they complicated. We only differed on the issue of polo shirts with the company name/logo purchased to give to clients as gifts and one for him to wear. We ended up deducting (-$25.) the one given as a gift, but were advised that the remaining 3 did not qualify as promotional because they were considered "street wear". I had to concede on that point, since I was not clear as it is explained in your book.

We are learning a lot and grateful that our first lesson involved a smaller amount rather than a full year's worth. For 2008, I am hounding him to save every scrap of receipt for everything, no matter how insignificant he may think it is. My mantra is that it all adds up, and I am carrying your book every where I go till I can recite it in my sleep! It will be my role to do the simple system while he goes out and earns the bucks! I have plans to eventually go indie myself, and hope by then that the indie way of thinking will have become second-nature to me.

I appreciate your time and your book.
licensed interior designer

Dear Susan,

Apologies for the delayed response. Just at the time of our correspondence I did a complete technology switch in my office and things got messed up.

Decades ago I taught for HRB. There are many knowledgeable people there. Congratulations on finding a savvy guy who can also explain things.

I'd need to do some research on the "polo shirts with the company name/logo." Are they streetwear? Or are they considered advertising similar to paying for your child's high school band or softball uniforms that have your business name on them? Or are they under-$3-gifts used for advertising?

I wish you much success on your indie thinking.


Tuesday, April 15, 2008

Hair and Make-up Expenses

Hi June,

I live in Oregon and teach Aerobics and have a question on make-up. I am required to wear makeup for my class and then after class, I promptly shower and re-apply. Often I teach more than one class and do this routine twice. I am blazing through my makeup because of teaching and it's irks me every time I have to buy more.

Can I argue a makeup expense of 50%? I teach 5-6 days a week, sometimes twice a day.

Thanks for your help! I love your website and have referred several friends.
Sincerely Carol from Oregon

Hi Carol,

Here's a similar situation that I addressed in a post about a year ago. The indie had a weekly live television segment and she needed to buy clothing and stay well groomed ( waxing, hair, etc..) and buy special makeup.

I wish I had a more preferable answer. Street clothes -- pretty much meaning you could wear them through town and not attract weird looks -- are not deductible.

On make-up and hair I look at what is typically spent for non-professionals and then take a deduction for the additional costs. For instance, typically women get their hair cut and colored every six weeks, so more often that that would be a business expense.

The same with makeup. If you're doing full camera make-up each day or you're buying theatre/professional make-up you're going to spend a lot more than someone who makes up everyday for the office. Other tax pros may treat this deduction in a different way. In cases where there is no yes/no answer, I choose a position that I would be able to argue comfortably.

So in your case, if a woman in a work situation typically applies make-up once a day and you must do it twice a day then 50% seems reasonable.

There is more info on indie business expenses in my book Self-employed Tax Solutions .

-- June

What do an options trader and a stay-at-home mom have in common?

Hi June,

I ran into a problem while making a high end purchase that I hope you can help me with.

I am unemployed and living off the option trading I do each month in the stock market. If I am right, living off investment income does not mean I am self-employed even though it is my only source of income. If that is the case, and I hope it is, what do I list on a credit application for employer?

Do I still say self-employed since I am making more money than when I worked at a full time job or do I list “none” and get rejected?

I appreciate the help and enjoy your web site even if I am not officially self-employed.


Whitehall, PA

Hello Bob,

Correct. Living off investment income is not the same as being self-employed. It's as different as a jazz musician and a trust fund baby. Take a look at Trading stock options is not self-employment on this blog.

Unemployed is not the same as self-employed, although there may be a few similarities. Let's see ... you determine your work or non work-hours, nobody pays you for sick days, income is never definite.You are not self-employed. You are not employed. You don't have an employer. You have no earned income. Your situation is similar to that of a stay-at-home mom when she tries to get a charge card or other forms of credit in her own name.

You say you make more investing that you did at a regular job. You don't say what is your "high end purchase." If you're trying for a mortgage you may need to request a non-income verification loan. Then the bank will look at your assets rather than your earned income. Or, depending on your asset value, there's always a margin loan.


Undergarments as a business expense?

June --

I'm from Minneapolis, MN, and I am both a writer and a yoga/writing instructor. I've been an indie for 12 years. My husband is a dancer/actor/performer.

We have a two questions about business expenses. As a yoga instructor, I have specific yoga clothes and undergarments that I purchase for teaching. Deductible, right?

And, my husband has a closet of clothes that he keeps for modeling that he doesn't wear any other time, except for auditions and shoots. Deductible?

And, he has regular chiropractic and bodywork for body maintenance.

Deductible? He isn't being treated for a specific injury, he is treated for his posture, and to keep his "instrument" in good working order.

Thanks! Josie

Hi Josie,

The rule on clothes: If you can wear them as normal streetwear they are not deductible. Women wear tights as everyday clothes, so there goes that deduction. A sports bra, yes. Regular undergarments, no.

Your husband cannot deduct the clothes he buys for modeling.

Here's another way to look at it. A housewife and mom sends her third child off to school, becomes a realtor and buys an entire business wardrobe because the ripped jeans and tank tops won't do. No deduction.

The freelance writer gets a writing gig for an uppity insurance company and must buy a suit. No deduction. [That actually happened to my husband many years ago when he did a freelance project for Chubb insurance.]

A tuxedo or an evening dress for an awards ceremony are deductible.

Chiropractic and bodywork to keep your guy fit are not deductible. Same would be true for the construction worker who has to stay in shape so he doesn't fall off the scaffold or the waitress who gets a foot massage once a month to enable her to stay on her feet 10 hours a day.

Good try!
-- June

Saturday, April 12, 2008

DBA is not a business entitiy.


I read your website column, How does a self-employed pay himself? and need to know if the answer to that question applies for DBA businesses as well.

I opened a business checking account under the name NY Techquest, and I have deposited all payments to the business into this account. My question is: Is it legal for me to withdraw these funds to use for personal purposes?

Everything is under my personal SSN, and I have not applied for a business license in the state of NY.

Please advise.

Thank you,
New York City, NY

Dear Janet,

Before you do another thing regarding your business you need to get a lot more information. DBA is not a kind of business structure. DBA stands for "doing business as" and simply means that you are not using your own name as your business name.

Go here DBA - Doing Business As to view several posts on this blog about DBAs.

After you know what business structure you are -- for instance, sole proprietorship, partnership, S-corp -- then you can determine whether you can just take money out of the account or whether you need to be n payroll.


Language Classes as an Education Expense


I have had a Clinical Psychology private practice for about 12 years. In the past I have had some French speaking patients who were bilingual ie we conversed in English. I speak some French and I would like to speak it better and ideally I would like to offer my services to French-speaking patients.

Can I deduct as a business expense French classes, French language books, membership in French organizations....?

Thanks so much for any help.
Highland Park, NJ

Hello Jay,

Yours is not a clear cut situation. Were I your tax pro, before I would deduct your costs of learning French I would need to know that you were doing it for a legitimate reason such as expanding your practice, not simply looking for a way to deduct French lessons in the spring in Paris. I would also need you to ascertain the French speaking population in the Highland Park area. For example, if your practice were in Edison, NJ, where there's a very large Indian population, and you said you needed to study Hindi or Punjabi, I wouldn't hesitate to take the deduction.

The IRS will not allow you to deduct as business education any study that prepares you for a new profession. So you will need to show how your study will make you better at what you do or will help expand your business. Statistics on local needs and demographics of the French-speaking population -- such as the number of adult school ESL classes for the French -- would be useful to back up your deduction.


Friday, April 11, 2008

Watch out for bad tax advice!

June --

My gentleman is an architect who went independent in 2007.

He has had a few small projects, plus one client who paid him for the 2 weeks-worth of work, but deducted the taxes like they would for an employee. Now he wants to have his taxes done, and has income from both indie jobs and the one tax deduct situation.

Can he still file as an indie?

He went to an AARP tax advisor who told him that he could not claim expenses over $5,000. max. I do not remember reading anything in your book about maximums - did I miss something?

He has a dedicated room in his house as a home office - there is nothing personal in it at all. He was told that he cannot make any of the % deductions without a certificate from his city (Altamonte Springs FL) showing that the sq ft of the office is his business...?

Thank you for helping us -

Orlando, FL

Dear Susan,

You have received a lot of wrong info. Get away from your AARP tax advisor, but please don't just walk away, write to AARP, perhaps with a copy of this email, to inform them that they have people with inadequate knowledge advising indies.

Now to your questions:

-- In order for the architect to be paid as an employee he would have to have filled out a W4 rather than a W9 for the client. If he did, then it's his error. Something got lost in translation.

-- Yes, someone can be an employee and an indie. That is often the case with self-employed people who have a "day job."

-- I have no idea where AARP got the $5,000 amount. No such thing!!!!

-- Regarding home office: Local zoning laws such as permits to work out of your home, have no bearing on deducting home office on your tax return. [There is an exception on this for daycare.]

Please let me know what happens with AARP.

-- June

8 Easily Avoidable Causes of Business Debt

Helen Anderson sent me a link to 8 Easily Avoidable Causes of Business Debt.

There is some good, clearly stated advice in this column. You might want to take a look at it.

-- June

Independent Creative Services

Dear June,

I am a graphic artist, writer and musician - sometimes separately, sometimes in combination. Currently, I make revenue from all three endeavors, but only profit from two. Do you think these three activities make sense as a single business?

I was thinking "independent creative services" might be the ticket. Am I on the right track or way off base?

Thank you for your help!

Los Angeles, CA

Hello Jamie,

Yes, you are not only on the right track you're on the right train. And independent creative services is a perfect business description.

So many people in the arts combine many creative endeavors. Their thinking, supplies, equipment, business acquaintances, clients, books, and more cannot be separated into different businesses.

Don't get too creative though by trying to combine dog walking with graphic design.

This post Jack or Jane of All Trades: How does an indie define a business? will give you more info.


Monday, April 7, 2008

Hubby in the Office: Not Good

Hi June,

I have been self-employed as a writer and editor since 1991. About half of my income is from travel writing...I'm coauthor of guidebooks to Oregon, Montana, and Utah. In the past, I've always deducted my meals and entertainment when I'm traveling to research these books (which require regular updating) at the 50% level.

But since reading your book, it occurs to me that I could classify them as research and thus claim 100%. What do you think?

Also, about that home office...mine is a small portion of a room that I use all day long for work. Sometimes, after dinner my husband will space out in front of You Tube or check sports scores on the computer in my office space. Does this disqualify me for the home office deduction?

Thanks so much,
Portland, OR

Hello Judy,

Meals and entertainment while traveling for business are considered meals & entertainment expense and so are deductible at 50%.

If you take a client to a jazz club and discuss business before, during or after the show that's an entertainment expense. What I think you may be confused on is this: If a jazz musician goes to a jazz club to hear a certain saxophonist, that's research or education for the jazz musician, not an entertainment expense. In the same way that your going to a writers' workshop would be a research or study expense.

If your husband spaces out in the portion of the room that you use an an office, then absolutely no home office deduction allowed.

-- June

Pensions for Indies


I'm a bookkeeper off Long Island, NY. Work 1099 several jobs and also on the books for 2 other companies.

I have come into some money. I know I can pay into an IRA and I have up until tax due date 4/15 to put money in from the previous year. My question is: Does the IRA have to be set up in the year you are claiming?

Thanks for any help.

Hello Dana,

Of all the retirement plans available to indies -- and there's many!! -- the only two that may be opened for the previous year are IRAs and SEPs. All other must be opened by December 31 or earlier.

You may open and contribute to a 2007 IRA -- traditional or ROTH -- until April 15, 2008.

You may open and contribute to a 2007 SEP up to the filing deadline for your 2007 tax return. That could be as late as October 15, 2008. SEP stands for "simplified employee pension." Don't let the name confuse you. It's for the self-employed and you may contribute up to 20% of your net self-employed income.

-- June

Business expense purchases made via bank credit card are deductible even tho' unpaid.

Hi June,

I live in Holland, PA, about 15 miles north of Philadelphia. I'm doing the taxes for my boyfriend who started a carpentry business this year in August.

He has put a few expenses and purchased materials on a business credit card. He has not paid off the credit card bill in full, it carries a balance. Can I add up these items and include them as itemized deductions, even if they haven't technically been paid for yet?

Also what do I do with the payments made to the credit card during the year?

Thanks so much, your site is very useful, and I enjoy your writing style.

Best regards,

Dear Karen,

Any charge made on or before December 31 via a bank credit card is an expense for that year regardless of when the credit card balance is paid. You ignore the amount of payments made on the credit card.

For a store credit card it is a deductible expense in the year it is paid. Your deduction each year is the amount paid on the credit card.

Use your Citibank Mastercard to buy your indie business a computer as a Christmas gift? It's totally deductible in the year you bought it.

Were you to buy that same computer with a BestBuy credit card it is not deductible until you've paid off BestBuy.

Want to know why? Let's say in the first scenario you bought the computer at BestBuy. BestBuy is paid for the computer by Citibank. You owe Citibank the money.

In the second scenario, Best Buy sold you the computer and still owns it until you pay BestBuy the balance.

It's similar to purchasing a home from Harry and Hortense using mortgage financing. Harry and Hortense receive payment for their house from the bank. You get the house but owe the bank the money. If you don't pay the mortgage the bank can take your house. That's what's happening to thousands of people right now who cannot make their mortgage payments.

-- June

Sunday, April 6, 2008

You must have a profit in 3 out of 5 years: Hogwash!!

June --

How many years are you allowed list a negative and still deduct expenses like CS3, or art materials and marketing as you get started...It's tough to get "on the ticket" and get to be someone art directors call on for work and then give you the job.


Hello Elizabeth,

There's an urban myth been circulating for a long time that an indie must make a profit in three out of five years in order to be considered a business. Hogwash! Sloppy thinking. A logical fallacy.

The IRS reg says that you are a business if you make a profit in three out of five years. It does not say that you are not a business if you don't make a profit in three out of five years.

Here's some excerpts from my blog posts to help explain:

The goal of a business is to make money. As long as making a profit is your goal you don't have to actually make money. You may also enjoy yourself, help others, or master skills or develop a nascent talent. You may deduct all legitimate business expenses regardless the amount of income. From
Exotic Dancer and more ...

There is no rule about a time limit on losing money. Never was a rule, an old husbands' tale, maybe. For a better understanding, think of it in reverse: If your business makes a profit in three out of five years you're home free. You are a business. Notice that says that if you make a profit not that you must make a profit. As long as your goal is to make money, you're OK.

The IRS says that in order for you to be engaged in a business rather than a hobby, the goal must be to make a profit. The IRS doesn't insist that you actually make a profit, but there must be a reasonable expectation of one.How do you prove you're in it to make money if you're not making any money? That's too long to go into here but the full explanation is in my book, Self-employed Tax Solutions -- with Cheech and Chong as the solo entrepreneur example.

And read this in its entirety HOBBY OR BUSINESS: Are you a professional artist?

-- June

Indies & Mortgages and proof of self-employment

Hi June:

I'm refinancing with a stated income loan. I work in a facet of mortgage lending for 17 years. For 12 of those years I was self-employed. What I do for a living is well known to the lender and my income was not questioned.

The last closing condition requires me to prove that I am self-employed by providing a letter from a CPA. I have always done my own taxes. I don't even know a CPA. How do I prove my status? Can I hire a CPA for the sole purpose of writing this letter?

Thank You!
Kathy Honolulu, HI

Hi Kathy,

Yes, you may hire any tax professional with letterhead stationary. Show the tax pro your tax returns and she may write the letter for you. The fee for this should be small.


Wednesday, April 2, 2008

Exotic Dancer and more ...

I choose questions from indies that I think will be most helpful to the most people. I stay away from questions about unique situations that won't be informative to a lot of you. The situation below, from Michelle, although unique has a number of situations that apply to a lot of indies.

I've noted the distinct points or questions in red.

Hello June!

I have a very complicated question...or so I think! I am confused about pro vs hobby and what deductions I can take for this year.

My main job for the last 15 years has been as an exotic dancer. I am an independent contractor and have always filed a schedule C. I deduct traveling expenses (when working out of town) and supplies (costumes, shoes)

I am also a fine art photojournalist who is currently working on a photo documentary project to be published as a book. I plan on traveling often this year to shoot various photo projects and complete my book. I have also purchased plenty of supplies and equipment in this tax year as well and I have a home office dedicated as my studio. Since this is a ongoing project but I have received no income from it as of yet...can I still deduct travel expenses, equipment costs, home office, etc without profit?

Also, I have third business! I attended a yoga teacher training this year and will start teaching classes out of my studio (separate from the art studio) as of April 1st in my home. I have had to pay for paint, carpet, supplies to ready the studio for classes. I have been working on the studio since January and paying the extra rent myself. I do have a registered business name and business account. I will have very little profit by April 15. So am I entitled to deduct the home studio and start-up costs for the business this year? How about the teacher training and yoga classes as an education expense?

Since I have 3 separate businesses I am afraid of an audit due to all these deductions! What is proper protocol for multiple small businesses? Should I be worried about claiming too many deductions?

I would really like to do my taxes myself to avoid extra costs due to the fact I have paid a lot out of pocket to start up the yoga teaching and for photography equipment.

Your help will be greatly appreciated!

Thanks in advance!

Portland, OR

Here's my response to Michelle:

The goal of a hobby is not to make money. The goal may be to have fun, help others, perfect a skill. A hobby may make money. You may deduct expenses only up to the amount of hobby income.

The goal of a business is to make money. As long as making a profit is your goal you don't have to actually make money. You may also enjoy yourself, help others, or master skills or develop a nascent talent. You may deduct all legitimate business expenses regardless the amount of income.

If the business is not yet "open for business" meaning you are not yet ready for clients or customers, then you are still in the start-up stage. Expenses may be deducted when the business opens. You may not deduct education costs to learn a new skill.

You say: I will have very little profit by April 15. April 15 is the first deadline for filing a tax return. It is, however, immaterial to income or profit. Calendar year taxpayers -- that's just about all of you -- group income and expenses from January 1 through December 31.

It would be unwise, time- and money-wasting to try to do your own tax return in order to save accounting fees. You have a complex three-indie-business tax situation; you lack knowledge of basic indie tax treatment; you have not had the time, or the rigor, to review my site and blog where you could have found all the answers to your questions. Would you teach yoga without first studying it? I wouldn't .

Put your time and energy into your businesses -- yoga classes, dancing, photos -- you'll earn more money, achieve success, and have the money to pay a tax pro.