Happy Days Are Here Again!

Bet you didn’t realize that this economic train wreck holds great promise for a wonderful 2009.

Here are just a few of the benefits we can expect:
** Make new friends …… hitchhiking and ride sharing are in.
** Get healthy ……walking or bicycling are the new mode of transportation.
** Make less trash and waste …… fix and keep the old appliances.
** Have fewer traffic jams …… trains, buses, even trolley cars are the way to go.
** Have fresher vegetables ……from our own backyard gardens.
** Become an antiques collector …… the old furniture has such charm.
** Have a new source of revenue …… by renting the spare bedroom.
** Do our own investing …… drop spare change into a big jar or piggy bank .
** Spend more time with our kids …… after-school programs will be cut.
** Have more time to watch the sunsets ….. no job eating up all our time.

Did you know?

In the First Great Depression of the 1930s
Loaf of bread cost ………………8 ¢
First-class letter …………………3 ¢
Movie theater ticket …………...10 ¢
Average annual wage …..$1,600.00

In the 21st Century
Loaf of bread cost…………...... $ 3.25
First-class letter …….....………. 42 ¢
Movie theater ticket ……......… $10.00
Average annual wage … $40,200.00

So – in 2009, let’s use our imaginations to create new industries and services, to rebuild our crumbling roads and bridges, to turn America green, to help those who need help, and to rethink our priorities.

As our President-elect put it: We are the people we have been waiting for.

Wishing you a wonderful holiday and joyous new year,
June Walker

Donations: Cookies and websites are very different

June--

I was viewing Q&A #7 on your website -- No deduction for donated work or services .

I have been developing a website for a non-profit free of charge. While I understand that I cannot claim the time as 'service donated'... The website itself, or the files, are tangible real world items, as a pair of shoes or a bicycle would be. So, as I created and donated the website in its entirety, would that qualify for a deduction of some type. Normally I would charge a client $1500.00 for the ownership of such files.

Thanks in advance!!
CWS


Dear CWS,

Tangible is something that can be touched. I can pick up my shoes. Hold up the bike for the child to ride. But, no matter how good you are at web development my bet is I could not walk into your office and lift up that website and put it into an attache' case. Right? So we got tangible out of the way.

The first sentence of the Q&A that you refer to is: "You cannot claim a tax deduction for time or services donated to a charitable organization." It's your time and skill that made that website. No bricks or screws or bolts or anything else that you paid for went into that site. If you had phone charges or extra electricity fees because of the volunteer services, you could claim those expenses as a charitable deduction.

If you were not a web developer but, let's say, a plumber with IT skills, and you bought Dreamweaver solely to make the site for the charitable organization, then you would be able to deduct the cost of Dreamweaver as a charitable contribution. That would not be a business expense.

In the same way, had you developed a great chocolate cookie recipe that you gave to the charitable organization so that volunteers could bake cookies to sell -- no deduction for you. On the other hand, were you to bake the cookies and donate them to the charitable organization your deduction would be the cost of the flour, sugar, chocolate, gas use for your oven, etc.

Here's more to read on the topic expenses -- donated services or products .

Best,
June

Unemployment Benefits for the Self-employed

Hi,

I am graphic designer/cartographer in San Francisco, CA and have been self employed on and off for over 12 years, including the last 3 years (prior to that, was employed by my dad's marketing llc). I am currently just a sole proprietor, paid by 1099s, haven't even done a DBA since I am just using my own name.

I did search the site and read many of your posts, which are extremely informative and helpful--thanks! I didn't see a specific answer to this question, although there was some info in the posts about LLCs.

I am getting increasingly nervous about unemployment, as people are dropping all around me (aunt, uncle, cousin, best friend). I currently do most of my work with one company and they are starting to cut back. I do know that I should be getting at least $20,000 next year, based on work I have started but not billed for yet. So my question--Can I structure my business so that I can pay into, and therefore be eligible for, unemployment insurance?

Would the simplest way be to set up an LLC, and pay myself through payroll? Is there any other way?

thanks
jennie


Dear Jennie,

I just spoke with the IRS to confirm what I am about to tell you. It was surprisingly easy to get through to them. I suppose there's not a lot of people thinking about taxes on the day before Christmas.

Unemployment benefits are a combination of federal and state regulation. Were you to be an employee of your own S-corporation or C-corporation you would pay into the federal unemployment system. You would need to check with California to see if there were any state restrictions on receiving unemployment benefits as the only employee of your own corporation.

You might want to consider the cost and hassle of incorporation as well as corporate recordkeeping, and that as employer you will pay into the system versus the small amount of unemployment benefit you would receive after only a year of income of about $20,000.

Happy Holidays!
June

More About Expense Reimbursements

June,

I am a historic preservation consultant in Chicago, just beginning my practice as an LLC.

I understand from past work in the IT field that some service providers separate client payment for work done from reimbursements for travel and expenses. The contract would specify that the client reimburses directly for T&E. I'm assuming the result of this is to clearly limit income to dollars paid for actual work done (I would not count the reimbursement of travel expenses as income). To avoid submitting detailed expense reports to my clients for reimbursement, I would prefer to roll T&E into my total estimate, rather than keep it separate. What are the benefits / drawbacks to taking either approach? I anticipate perhaps half of my work (say six projects a year) requiring up to four separate overnight stays in order to complete each project.

Thanks!
Nick



Dear Nick,

First let's take a look at reimbursements in general. Whether or not the payer includes reimbursed expenses on your 1099-MISC your income is the same.

Here's an example:
$5,000 fee + $1,000 supplies bought for a client for which you are reimbursed by the client = $6,000 you receive from the client.

A 1099 stating $5,000 income means you claim the $5,000 as income and do not deduct the $1,000 expenses on your return.

If the client gives you a 1099 stating $6,000 income you claim the full $6,000 in income and you deduct the $1,000 supplies on your tax return which brings your fee income to $5,000.

In your situation, whether to choose reimbursement or a higher fee will take some calculation on your part. If the payer reimburses you dollar for dollar there is no tax difference in either method. If you pay $1,000 in travel expenses and are reimbursed $1,000, the only difference is in the amount of paperwork.

On the other hand, if you are reimbursed at 60 cents per mile for auto use and your calculations of actual auto expense come out higher than that then it would be better to raise your fee to include your higher cost rather than receive reimbursement at a per mileage rate.

If you are reimbursed for less than your cost you would pay less tax than if you were reimbursed for more than your cost.

I have two caveats to what I just said.

The first is about meals & entertainment expenses. If you spend $100 on a meal for which the payer reimburses you and included the papyment on your 1099 you may deduct the entire $100 as a deduction on your tax return. Read this post to understand how and why: Reimbursed Expenses Included on a 1099 .

However, if you choose to instead up your fee by $100 and deduct the meal on your tax return, the deduction for that meal on your tax return is only $50.

The second caveat relates to state gross receipts tax. In some states you must pay a tax on your gross income. Payment for reimbursed expenses that are included on 1099s complicates the state tax reporting procedures and also may increase the amount of gross receipts tax you must pay.

Be sure to read all the posts on reimbursed expenses here expenses -- reimbursed .

Best, June

Reimbursed expenses: Income or not?

Hi June,

I found your site very relieving to a current new gas reimbursement situation.

I'm a musician from Altamonte, Springs, FL. 13 years as an indie with a clean tax record using an accountant every year .

I'm in a band. My drummer drives his own van for me to the gigs with equipment and me inside, but I own the band. He's a good guy. Since the cost of gas has gone up, he has begun charging me gas mileage at approx. $.59 per mile plus tolls. I pay him that with no problem... he's doing me a great service and has done so for 13 years. Recently, my new accountant advised me to put the whole amount (reimbursements and gigs) on my 1099 to him at the end of the year.

I never have done this even when he sporadically charged me for gas w/wear and tear as according to the govt. approved numbers.

However, my drummer (who is not happy about what my new accountant advised) would prefer that I put only the amount of the gig on this year's 1099 (not the reimbursement) since only the gig is real income.

Things are a bit tense.

Usually, before this, I've deducted mileage expenses anyway in my categories at the end of the year should the IRS question it. It's all above board and honest. I'm a chapter "S" corp. and my friend is viewed a subcontractor to me not an employee.

My drummer is afraid/concerned about being red flagged if his 1099 looks different from years past this time around.

Please give me insight and or opinionated options (or hybrids acceptable to the IRS) to maintain my friendship with him should I put or not put both the mileage and the gig total as one at the end of the year. He would rather divide the two amounts himself. I see his point. What are your thoughts? I need some piece of mind between my friend and myself. I appreciate your time and look forward to hearing from you.


Dan

Well, Dan, the big questions may be how good a friend and how good a drummer?

Whatever you pay the drummer, whether for his drumming or driving is income to him. You can give him a statement with his 1099 showing how much is for drumming and how much is for driving.

The drummer then claims the entire income and deducts the cost or running his van using either the mileage method or the actual method. See a little more about auto expenses here More about Business Auto Expense .

You deduct as an expense the total amount that you pay the drummer for both.

In order for you to deduct the amount you pay the drummer for his driving, the drummer must claim what you pay him as income.

There are other ways of treating expense reimbursements -- see here expenses -- reimbursed (6) -- but the upshot is: In order for somebody to deduct the cost of reimbursements for expenses somebody else must include the reimbursement as income. If the drummer did not claim the driving reimbursements as income then he could not deduct the cost of using his van to drive you around.

Best,
June

No profit motive means no business.

June,

I am currently living in Brazil and working as a volunteer social worker. I'm not in it to make a profit. I'm in it to make a difference. My income consists of donations given from individuals. Some donors send their gifts to a non-profit organization which then deposits that donation into my bank account. In return the donors receive tax exemption for their gifts. The non-profit organization has sent me a 1099-MISC for those donations. Am I obligated to pay the self-employment tax on those gifts or can I just put it in box 21 on my 1040 and go on with my life?

Thank You, Brian


Dear Brian,


You goal is to make a difference not a profit. If your goal is not to make a profit then you are not a business. The IRS says you must pay self-employment tax on profit from a business.

So you must pay income tax on the income, but no self-employment tax. Include the payment as "Other Income" on your tax return.

Remember you may deduct any out-of-pocket volunteer expenses as an itemized deduction.


-- June

What % of my income for taxes?

June --

I work and live in San Diego CA, I am a mortgage loan processor and just started as an independent processor. I get paid per loan closed. No hourly pay. I get $400 for each loan I close and was promised at least 10 loans per month. So if I make about $2000 every other week, how much should I take from that check to put aside to pay for my Federal State Tax, Social Security taxes and possibly self employment tax?

I will have several deductions at the end of the year for working such as my transportation, office supplies, cell phone, use a room from home as my office etc.

I thought I should put aside at least 25%, am I thinking right?

Look forward to your answer.

Thank you, Rose
San Diego, CA



Hello Rose,

You need to put aside between 30% and 40%. Take a look at this column on my website for an explanation Taxes: Which ones and how much do I pay?.

-- June

House Trailer or Motel

June --

Regarding travel related expenses: cost to operate and maintain a house trailer, would that also include the purchase price of a trailer to use instead of lodging while on a temporary work assignment, or would it have to be depreciated?

Laura
Fort Pierce, FL


Dear Laura,

Assuming you have established that the house trailer -- or part of the house trailer -- is a legitimate business expense then you must depreciate the cost. The procedure is similar to depreciating a home office.

-- June

Inaccurate Mortgage Applications

Hi June,

I'm on my 4th year of owning a marketing firm as a sole proprietor & work from home when I'm not traveling for business.

I just bought my first home and had to make certain my adjusted income on my 2007 tax return was high enough to qualify for the mortgage. So in order to achieve this I did not write off thousands of business expenses on my return and owe A LOT. Someone suggested I send an addendum to the IRS on my return to lessen what I owe now that I have the new house. Should I do this or would this trigger an audit?

Help! I want to do the right thing for my hard earned money!

Thanks in advance - Ali (Texas)


Dear Ali,

You have probably heard the adage: You can't have your cake and eat it, too. Well, in the same way, you can't have high income for one purpose and then lower income for tax purposes.

When you applied for a mortgage you probably signed a form that allowed the lender to request copies of your tax returns from the IRS. In a bank audit, the auditors can get a copy of a borrower's return from the IRS and compare it to the return presented by the borrowed during the application process. You cannot file a return with one set of numbers to the IRS and another set of numbers to the lender. Well, you can but it can get you in big trouble.

-- June

Indies are responsible for their business decisions. No excuse.

June --

I live in the State of Virginia and have been an indie for 7 years. I am in an audit right now. My original tax preparer said for mileage my gas receipts that I accumulated were fine . However, now that we are in the audit, she said I have to have a log. I was very upset she didn't tell me this 4 years ago.

Anyway, I researched the auto IRS publication regarding logs. It appears that to reproduce a mileage log, I have to use chronological receipts that are dated such as going to the post office, going to Office Depot, etc. I dug up my client files and researched dates of closing that I attended and when I had to meet clients for loan apps, credit pulls, etc. I also mapquested every place from the office to these locations.

It took 2 months to complete all this. I have a very tough auditor. Do you think this will suffice? Am I missing anything?

Mary


Dear Mary,

This is not a tough auditor. This is an auditor who is not lenient. The records that the auditor is requesting are pretty much standard. The problem lies in your having to reconstruct from activities of four years ago. Just think how easy it would have been had you kept records in a timely fashion. I explain In my Most Simple System of recordkeeping how it takes almost no time to keep a record of mileage. If you make a run to Office Depot simply write "errands Off-Dep" in your calendar and if you didn't note the mileage at the time then at year-end you could do your mapquest and enter the round trip total in your calendar.

Now let's look at responsibility and developing an indie business mindset. You, as an independent professional -- you don't say what profession -- have a responsibility to assess information and instruction given to you. If you went to a doctor and were told that you could eat four brownies a day and still lose weight, as welcome a message as that might be, you would know that it were incorrect. Right?

So look at what your tax pro told you: Gas receipts were enough to prove business mileage. You don't have to delve too deeply to wonder how a gas receipt proves that you drove to Office Depot or to a client's office. It was your responsibility to ask, "How do the receipts prove business miles to the IRS?" rather than just accept her too-easy-to-be-true instructions.

In your reconstruction or records, assess the time you are putting into this against how much work time you are losing in the process. If the additional tax is, let's say $500, are you losing more than $500 of work time. If yes. Then forgo the deduction and take the financial hit.

You might want to read these posts indie business mindset .

Best,
June