Friday, July 25, 2008

Partners Buying a Home

June --

I have a partner, and we are buying a house together. We are both going to be on the loan. I have been making in excess of $110,000 the last couple of years, and she is only making around $70,000. Can the mortgage interest deduction be split according to the amount that she or I pay?

I thought I had read that it could be split 50/50, but I make more than she, and she can take head-of-household/child credit deductions depending on the tax year as a settlement of her divorce. I know of "joint tenants with right of survivorship," but I am not sure how to go about this. Are there better alternatives? Should I be listed first on the mortgage since I make more and could potentially take the entire deduction?


Dear Dee,

A home purchase may be the biggest financial transaction of your life. There's a lot more to it than who gets to deduct the mortgage interest and real estate taxes. When purchasing jointly with someone who is not your spouse it is important to have everything spelled out in a legal document. What happens if one of you dies? If one is unable to work and not share expenses? If one chooses to leave the relationship? Should you have insurance to cover such situations?

You need to go over all of these possibilities with an attorney.

Here's a very quick wrap up on ownership. This info is not in lieu of your talking with an attorney. It's meant to give you a starting point.

Tenants-in-common ownership:
-- deduct taxes and interest by the percent of ownership
-- if one dies her % goes into her estate
-- the survivor keeps her %

Joint-tenants with right of survivorship:
-- deduct taxes and interest by whoever pays them
-- if one dies, all belongs to the other; there are tax consequences

Enjoy your new home!
-- June

Self-employed? Determined by facts, not choice.

June --

I am a software engineering consultant working as a W-2 hourly employee of a consulting company. I am on assignment at an insurance company. I report my hours to the consulting company, they bill the client, and give me a paycheck. I make currently make $54/hour. I receive medical benefits and 401(k) benefits (up to 3% match).

I am wondering if I can switch to a 1099, with the consulting firm contracting the work out to me as a subcontractor? I would bill the consulting firm, and they would bill the client. Is this allowed since I am already on assignment at the client. The billing relationships would change, but I would be doing the same work.


Alpha, Ohio

Hello Dee,

Whether you are self-employed or an employee is determined by the circumstances of your work relationship. It is not a matter of choice or changing the billing method.

You are an employee. Take a look at my post Employee vs. Self-employed .

-- June

Thursday, July 24, 2008

New wife a tax cheat?

June --

Private Investigator for 16 years. This question is actually in regard to my new wife.

She's a licensed PI in CA. She has mentioned on more than one occasion that she pays no taxes, that her "expenses" exceed her income.

This sounds highly fishy, ahem, improbable to me. She seems to make about 25-35K. We have separate accounts so... Am I incorrect to be worried that she might be committing tax fraud?

Sonoma, CA

Dear Carlos,

It is quite possible to have $25,000 to $35,000 in income and have more than that amount in expenses.

That said there is a bigger question here: How open is the relationship between you and your new wife? Don't be "worried" about tax fraud. Find out!

You say you have separate accounts. If you file a joint tax return you must both sign the return . Your signature attests to the accuracy of the return. That means that by signing you pretty much say that all the figures are accurate -- hers and yours. So it is time for you and your wife to talk money.

Ask you wife to explain her expenses to you and to show you her recordkeeping method. A client of a private investigator pays expenses as well as a fee. Perhaps your wife had one client with a $5,000 fee and $20,000 expenses. That would show as $25,000 income and immediate expenses of $20,000. Then there's all her non-reimbursable expenses.

It's not clear from your email whether you, too, are a PI. If you are, maybe you are missing a lot of expenses. You might learn some useful methods from your wife. Then again, you might about something that you will need to fix.

I'd like to hear back from you on how this goes. Your contact info will not be exposed.


Monday, July 21, 2008

More on Tax Prep Programs

Hi June,

I am a Validation Consultant new to the indie world and want to know if it's better to hire a tax pro to prep/file my taxes or is it just as good to do it with something like Turbo Tax?

Is the IRS suspicious of indies who do their own taxes, as opposed to having a certified pro prepare them? The Turbo tax software (Business version for consultants/contractors)so far is straightforward and thorough enough it seems for me to do on my own.

Thanks for all your great advice!

Alameda, CA

Hello Richard,

You sent this in a while ago so you may already have filed your return using a program rather than a pro.

In my post Tax Prep Software is Not a Substitute for Knowledge I say that Turbo Tax, like any other tool , is just that. It's a tool. No tool works if you don't have the knowledge. Photoshop doesn't give someone the talent and skill of an artist. Family Lawyer doesn't give someone the education of an attorney.

Just as there is more than one way to design a business card or write a contract there is also more than one way to prepare a tax return for an independent professional. What you put into the program is what you get on your return. If you are savvy enough about indie tax regs you will end up with a satisfactory tax return. Keep in mind that the program will not give you advice. That you'll need to get elsewhere.

I recommend an indie savvy pro over a tax preparation program.

The IRS isn't "suspicious." It looks for cheaters -- randomly and with a vision. Don't cheat the IRS. Don't cheat yourself. As you may have read on my site or in my book, if you keep records using my Most Simple System you never need fear an audit.


Tuesday, July 15, 2008

Husband-Wife Business: No cheating!

I have been sent many questions about husband and wife working together in a business. A good place to start for info on such joint ventures is my post The Many Advantages of Hiring Your Spouse then follow up with the posts in the category husband-wife business .

Below are some recent questions on the subject.

Dan, from Colorado, has paid the maximum social security limit through his salaried position. Dan’s wife has a home-based business that nets about $50,000 per year. Dan’s CPA , who reminds me of Sammy Segar, the clueless accountant in my book, Self-employed Tax Solutions , has suggested that Dan and his wife file a joint Schedule C: Profit and Loss from Business. This way they could split the profit 50/50.

As you know, you must pay self-employed (SE) tax on your profit. For Dan’s wife that would be about $7,500 [15% of $50,000]. If half that income were Dan’s and had he already met the SE tax maximum that would save them about $3,700. Good idea were it legit.

Dan said: “In the evenings and weekends I work with her on her business.” That doesn’t sound like 50% of the work to me. Maybe 5%. I think the beady-eyed IRS will see this as just a ruse to avoid SE tax. It’s a bad idea.

Sammy Segar came up with another idea for Dan. And I must tell you that this is another one of those let’s-not-treat-indies-like-real-business-people approaches that really make my indie blood boil. Dan reports: “Another comment he made is we might want to go the partnership route and file a partnership return for the business ... he mentioned this because of some statistic he read that says the IRS is greatly increasing their audits of returns filed with a schedule C, something like 1 in 7 are now getting audited.”

OK, let’s see, Sammy is telling Dan to lie about how much work he puts into his wife’s business and put that lie in writing into an expensive partnership return that will benefit the CPA’s bank account and give no honest tax advantage to Dan and his wife.

And a 1 in 7 audit rate! Oh, come on. And even if it were correct, which it is not, honest-to-goodness indies should never fear an audit.

By the way, Dan purchased my book, hoping that the pros and cons of a husband-wife business would be covered. Sorry to say, that topic is not addressed in the basics of Self-employed Tax Solutions. Maybe in the next book!

Mary, a personal trainer / Pilates instructor from San Rafael, CA, has been self-employed since October 2007. In June 2008, her husband reactivated his contractor's license for drywall construction.

Here is Mary’s question as sent to me:

“We are now both self-employed, operating our businesses from our home. We both have a designated room/office for our businesses. I was told that it is ‘better’ from a tax standpoint for one of us to be an employee and one to be self- employed."

Mary then asked something about Social Security tax that I don't quite understand and she also asks if there are any "other other advantages/disadvantages” to the husband-wife business.

Apparently it's not just indies who are confused about SE tax. Sammy Segar, CPA has it all messed up too. SE tax is a combo of Social Security and Medicare tax. In 2008 you pay Social Security tax on income up to $102,000. There is no limit on Medicare tax. You pay Medicare tax on whatever earned income you make.

If you have a job that pays $102,000 you will have met your Social Security tax maximum. If you then make another $100,000 as an indie you are not required to pay any Social Security tax on that income. You will still pay Medicare tax.

So in a husband-wife business SE tax is saved only if the employee-spouse has earned enough income elsewhere to reach the maximum Social Security limit (as in Dan’s situation above). To form a husband-wife business to avoid paying Social Security tax is a fraudulent practice.

I am legitimately creative but I have a hard time figuring out how to make one business of a drywall contractor and a Pilates instructor -- if indeed that’s what Mary is asking.

I didn't print Mary's entire question because it was unclear, which brings me to something I have stressed in all my writing and speaking: Think before you ask – whether speaking or in writing. Make your question as clear as possible. If you don’t, you will not get a clear answer.

-- June

Saturday, July 12, 2008

Home office use must be exclusive.

Hi June,

Thank you for your blog - it has been very helpful for small business owners like us. We have an S Corporation in New York, NY, under which we do a few different things - web design as well as making paper goods. We've had the business for a few years, but I only recently was able to begin working full time on the business.

I have a question about the home office deduction - I am working from home and by my square footage calculations, about 12.5% of our home is fully dedicated to office use.

However, on our tax return this year, our accountant deducted an amount that is equivalent to 25% of our home for the home office. I asked her about it, and she said that she included items other than just the home office (utilities, etc), and said that we are allowed to deduct a percentage of "common areas" for home office use as well (eg, we sometimes use the living room as a staging/drying area for the silk-screen prints that we make). Is this okay to do?

Thank you for your help!

Hello Anna,

Glad you find my blog useful. Thanks for letting me know.

I like your question. It is seldom that an indie questions her accountant taking too big a deduction.

You accountant is wrong. Your example of the living room is just like the example in my book, Self-employed Tax Solutions . There Lily Legal uses the dining room table to go through her legal briefs. No deduction.

To be eligible for a home office deduction the area must be used exclusively for business.

The only exception is for home day care business and inventory storage.

-- June

If you tax pro has an IRS reg showing something different for an S-corp, please ask her to pass it along.

Monday, July 7, 2008

Jeans as a "uniform." You are kidding!

Hi June,

First, I just want to say your blog is so helpful. Your advice is top notch.

I have a quick question, as a colleague of mine does this, and he has a personal accountant who says this okay to do. We both are freelancers who edit promos for television in New York City, and we basically wear whatever we please to our studio.

According to him (or his accountant), he writes off his outfits that he wears to the office as a business deduction - a uniform if you will. His "uniform" normally consists of jeans, sneakers, and a t- shirt.

So my question is, is this legit?

Can someone write this off considering this is clothing that is worn outside of our respective place of work, nor is it advertising his business?

Evan E.

No way!! Here's a lot of reasons why expenses -- workclothes-uniforms-costumes-hair/make-up .

-- June

Donating Your Product to Charity.

Hi June,

I am a mixed media artist, self employed part time for 3 years and this is the first year as a full time artist.

I am donating a piece of art to a non profit. I know I cannot take a "fair market price" deduction. Can I deduct the cost of my materials, direct and indirect costs?

I fill out a Schedule C. Because I'm doing this to also get my name out, do artists ever deduct their costs as advertising expense?

Thank you.
Des Moines, IA

Hello Rebecca,

Yes, when donating your work you may deduct your actual costs. Categorizing the costs as advertising expense is fine.

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

-- June

Cash vs Accrual Recordkeeping

Hello, June:

It is very nice to find this website to help us new self-employed guys. I am a full-time employee, and recently started to be a part-time contractor.

My problem is that I started working for that contract in Dec. 2007, but did not get my first payment until Jan. 2008. My question is: May I still be able to deductible some cost (like travel) for year 2007 (I do not think I will get a 1099 for year 2007)?

Thank you.

Minot, ND

Laser --

As long as you are in business to make money it doesn't matter whether you have yet received the money, you may deduct your business expenses.

There are two methods of recordkeeping: Cash or Accrual

As a self-employed in business you get to choose when to report your income and expenses. Don’t get too excited it’s not as liberal a choice as it sounds.

You may opt for a cash basis method of bookkeeping. This is one that claims income when it is received and deducts an expense when it is paid.

Or you may choose an accrual basis. This bookkeeping method claims income when the client is billed, regardless of when the client pays you. You deduct an expense when you become liable for it – which is usually when you get the bill.

You must use the same method for both income and expenses. The cash method is simpler and is used by most self-employeds.

There are examples of both methods in my book Self-employed Tax Solutions .

-- June

Wednesday, July 2, 2008

Home office? No deduction for Thighmaster.

Hello June!

Thank you so much for your blog! The pieces of information that you put together for us are always extremely helpful for us! Thank you, thank you, thank you!

I am a Graphic Designer -- 5 years -- from Huntington Beach, CA.

I was hoping to ask you a question today about setting up a home gym for my sole proprietorship.

This comes after I found this piece of information on the Internet: 3. Your Corporate Gym: Unfortunately, the IRS won’t let you directly deduct the cost of your gym membership. However, under section 132 (h) of the tax code, you can deduct the cost of the Gym equipment. So that Nautilus set, your Bow Flex machine, even the Gazelle Trainer that you’ve seen on television – not to mention free weights, a work out bench, etc – are all tax deductible through your company. Source:

Now, my question is this: I see that a corporation is able to take an expense for gym equipment that they purchase for its corporate gym for employees. Is the same deduction allowed for a sole proprietor setting up a home gym for its owners? I am not in the business of fitness, and the home gym is solely to maintain my physical fitness and well being. I also have a couple follow up questions assuming that the answer above is "not deductible." If I were to convert my sole proprietorship to a LLC, would I be able to take the home gym that I create as a deductible business expense?

Thank you again for your blog, and your considerations on this tax question.

Kind regards,

Hiro sent the above question to me quite a while ago. Researching for the correct answer took much time and reading and analysis. The answer may seem simple, seems simple to me, too, now. But, as with so much of the tax code, there is rarely an uncluttered path to a clear understanding.

Here's the scoop:

Whether you are a corporation or a sole proprietorship, the same rules apply regarding the deductibility of gym and exercise equipment or athletic facilities, such as pools and tennis courts, for the use of your employees, their spouses, and children. If the equipment or facility is in a building owned or leased by the employer and there are no residential facilities connected to the gym, then the costs are deductible business expenses.

Here's some examples:

Callous Corporation has a gym and pool for employees in the basement of corporate headquarters. Deductible.

Callous Corporation has a gym and pool for employees in a building a block away from corporate headquarters. Deductible.

Callous Corporation owns a resort where guests may stay overnight. On the premises is a gym and pool for the exclusive use of the employees back at corporate headquarters. No deduction because the gym is adjacent to residential facilities.

Let's use those same examples for an indie with a sole proprietorship.

Victor Visual owns or rents a building in town where he has his studio and a gym for employees. One of the employees is his wife. Deductible.

Victor Visual has a home studio. He owns a building down the block where he stores supplies and also has set up a room with gym equipment for his employees. Deductible.

Victor Visual has a home studio. He set up a gym in basement for his employees. No deduction because of the proximity of residential facilities.

Under no circumstances may Victor deduct the costs of gym equipment or facilities if he has no employees.

If the setup allows for Victor to take the deduction for the gym, then that is a non-taxable benefit to his employee(s).

There were 10 "Golden Tax Deduction Secrets" on the site Hiro refers to. There are problems with a number of them. Take note that one of the two ads on that site is for home athletic equipment.

Indies, be careful. So many tax tips, tax secrets, save thousands, make millions are just a lot of hogwash -- especially on the web. There is no quick fix to low taxes any more than there is a quick fix to fat thighs.


PS to Hiro: Read my posts on LLCs