Capital Gains Consequences of Home Office Deduction

June --

My companies HQ are in CA. Software support engineer. I've been fortunate enough to work from a home office since my daughter was 4 weeks old. She used to stand on the back of my chair with her arms wrapped around my neck while I would talk with customers. It doesn't get any better than that.

I've read your information about a home office but what are the consequences of claiming a home office? I heard that the nightmare actually occurs when I go to sell my home.

Can you provide some insight into that?

Thank you.
Paul
Hendersonville, NC


Yes, Paul. I remember those work-at-home-with-small-children days. They were great. I still work from my home.

Before I answer your question I'd like to request of you and other indies: When you say you heard or read something somewhere I would really like to know where you read or heard it. It helps me guide indies if I know whether they got wrong info from Aunt Tillie or a CPA or the yoga teacher's husband who happens to be an attorney.

As I say in my book Self-employed Tax Solutions : "Deducting OFFICE-IN-THE-HOME expense for a residence that you own may have an impact on your the amount of taxes you pay when you sell your home. The impact has been minimized by new regulations regarding depreciation of a home office, and almost always the home office deduction outweighs any capital gains tax it may trigger when the home is sold. Even so, be sure your tax pro takes the sale consequences into consideration when preparing your return."

Since I wrote that the tax regs regarding home office sale have been liberalized even more. Of course, the regs may again change in the other direction. I can say that in all my years of practice every indie client had a tax advantage by deducting home office that was not outweighed by capital gains tax at sale.

Best,
June

Don't incorporate just because the big boys tell you to.

Hi June -

GREAT info, i could spend hours reading your fantastic advice!

A couple questions please: 1. I just completed a 3 week freelance job - they want me to incorporate to be paid (they have Department of Labor issues) - I think this is crazy and makes little sense, which I told them.

They then asked me to do an EIN with a DBA, I'm slightly more open to that, although I still think it's a lot to ask (and potential cans of worms for me) for just 3 weeks of pay.

They claim they can't do 1099 because of their upcoming audit, can't take chances. Any ideas?

2. Once this job is over, I will file for unemployment (I was laid off prior to this 3 week gig) from a major corporation. Will any of the above scenarios prevent me from collecting? Because I don't want to jeopardize unemployment (I'll need it to fill gaps between freelance assignments) by filing a sole proprietorship EIN, etc - that would be truly unfortunate.

Thanks for your help!
Kelly
PRODUCER, JUST BEGINNING!
BROOKLYN, NY


Wow, Kelly! What an endorsement. Hours reading tax stuff. Thanks.

Many corporations attempted to skirt around the regs dealing with employee versus self-employed so that they could save about 25% to 30% in payroll taxes and employee benefits. They cheated. Some got caught. What often happens is that they devise ways that "look good" but really aren't so good.

By that I mean, the corporation will hire someone who should be classified as an employee but instead hires that person as an indie. The corp then insists that the indie incorporate in order to cover its own rear-end should there be an audit.

Don't incorporate unless the three weeks of income is really, really a lot of money.

An EIN and a DBA is no problem for you. Just a little extra work. Check these posts on EIN-employer identification # and these on DBA - Doing Business As . If your bank won't accept payments to your DBA name then you'll need to open another bank account.

Each state's unemployment regs are different. Check New York's requirements before you take any action. Might want to read these posts first unemployment compensation .

Best,
June

No Mix or Mingle for an LLC

Hello June,

Purchasing The Confident Indie: Five Easy Steps has been a great investment and I appreciate how much it is teaching me about running my LLC.

I have an opportunity to bring in additional income, supporting new moms, by working part time as a W4 employee with a company.

My question is should I have my employer direct deposit my earnings into my personal checking account or in the account for my LLC?

Thank you so much for your reply.
Peggy


Dear Peggy,

Pleased to know that Five Easy Steps has helped you.

I gather that you are an LLC structured as a sole proprietorship. I assume you formed an LLC for liability protection not just for the panache of having "LLC" as part of your business name.

That being so, you must keep your LLC records separate from any income or expenses not related to the LLC.

Your paycheck should be deposited into your own account.

Here are more posts on LLCs -- business entity -- LLC -- if you want more info.

Best,
June

Quicken Records & Business Meetings

I exchanged a series of emails with Marianne, a writer/photographer, that I have abridged and am passing along to you.


Hello, June.

I just finished reading your The Confident Indie: Five Easy Steps pub. At the end, you refer to a pub you are writing about tweaking Quicken to use for business records. Is this available?

Pub was great, BTW.

Marianne


Hi Marianne,

Glad you liked Five Easy Steps. Thanks for letting me know.

No, the new petite pub is not yet ready. I previously published a how-to guide to computerized recordkeeping. It was a companion piece to my book Self-employed Tax Solutions . It explained how to adapt Solutions' manual recordkeeping method to Quicken. But it’s out-of-date and needs revision.

Do you currently use Quicken? Are you PC or MAC?

Oh. I went to your site. Doesn’t work???

Best,
June


Hi, June.

I use Mac and PC, but prefer my Mac (newer, faster, more memory and just cooler). If you have any suggestions, this struggling taxpayer will promote you to goddess level.

Yes, that was my old site. My current site does work. ‘Tis a sad tale of down payments wasted, deadlines ignored, false starts and real disasters. Do you know any good firm who can make a website for video folks???? Lots of it will link up to videos already posted on Vimeo, YouTube, etc.

Thanks for all your help, June. I will be buying other books!
Marianne


Hi Marianne,

I like goddess. I'll work on it. For your website check out Mike Hartley web designer at http://bigflannel.com. Here's a site Mike did that includes video http://www.leftright.tv.

Best,
June


Good morning, June. Thanks so much for the referral. Wow, Mike's stuff is great and he clearly works at the TopTop of the tree. My partner (and husband) and I were just looking over both sites. Again: Wow.

OK, transition:
As one small business owner to another, what is your opinion re the value of joining the Chamber of Commerce for marketing purposes?

Thank you for all your help and your ab fab site and materials. I think every small business owner/indie should read your site if only for the shot-in-the arm reminder that you ARE a business. Your message empowers -- I know that term is overused and trite now, but it is the best one this wordsmith can use.

Cheers,
Marianne


OK, Marianne, first things first.

I agree on Mike’s work.

Since I am in the process of writing how to adapt Solutions' and the Five Easy Steps' manual recordkeeping method to Quicken, could you tell me what you find are your difficulties in setting up & using Quicken for your indie business?

[If any of you are having problems with making Quicken work for your unique indie venture please leave your comments or email directly to me at june@junewalkeronline.com.]

On the Chamber of Commerce, or any other organization, you need to first determine what you are looking for. What are your needs? Does that organization fulfill that need? Who are the other members? What are the demographics of your potential market? Are the Chamber members your potential market? Is it worth 1/3 of your day to attend a meeting?

I think of my day as split in thirds – morning, afternoon, evening. And I think of a couple hour meeting plus getting out of my jeans and dressing for the meeting and getting there and back as using up 1/3 of my day.

Call the organization and see what its guest policy is so that you may attend at least one meeting before plopping down a big membership fee.

Please, do get back to me on using Quicken for your indie business.

Best,
June

Work/Live In More Than One State

Hello,

I am a 26 year old male just moved to California from NYC to live with my girlfriend.

I am not on the lease and I am technically a NY state resident. I have started freelancing here in Santa Monica and was wondering if I can put the CA address on the w9 or must I put the NY address since I am not on the lease in CA.

If I put the NY address, must I pay state taxes in NY or CA for this gig if the company is located in CA?

This is quite confusing and I need to find a solution ASAP!

Thanks so much!
Francis


Dear Francis,

This is not as confusing as you think.

Either:
-- You lived and worked in NY.
-- Now you live and work in California.
-- In which case you are a part-year resident in each state.

Or:
-- You lived and worked in NY.
-- You are now in California, working in California, but have not moved all your stuff to California because you are testing the waters of living with your girlfriend.
-- In which case you are a NY resident with earnings in CA as a non-resident.

So:
-- Put your mailing address on your W-9.
-- You do not have to have your name on the lease. Your girlfriend may even pay all the rent.
-- If you have moved to CA then you no longer have a place in NY except perhaps a friend's place where you crash if need be.
-- Do not attempt a two-state indie tax return on your own. Hire a pro.

Here are other posts on multi-states taxes -- state / nonresident state .

Best,
June

Audit potential?

June --

Been tracking (officially) my income/expenses from writing for just about a year now. I've actually been teaching creative writing and submitting fiction pieces to literary journals for several years (more than a decade). I have done my taxes through a software program, but I am paranoid that I have done something wrong, mostly because I haven't made any money on my authorship.

Additionally, my husband, for whom I prepare his taxes, is self-employed but hasn't made any money in a couple of years. He is a management consultant.

Will all of this trigger an audit? I would be more than willing to pay for advice!

Many thanks,
Kristine
Walnut Creek, CA


Dear Kristine,

An indie who is legitimately pursuing his or her profession should never fear an audit.

As long as you can prove the legitimacy of your business -- how to do this is explained in my book Self-employed Tax Solutions -- and as long as your records are accurate you would smoothly fly though an audit.

Audits can be random or for specific reasons. Even indies with profits year after year can be audited. They, too, must keep just as accurate records as do indies with losses year after year. Here are lots of posts on recordkeeping . And you might want to check out my petite publication on recordkeeping, The Confident Indie: Five Easy Steps.

-- June

Food Write-offs

June --

I have been a freelance graphic designer for more than 2 years. I live in Boulder, Colorado.

I belong to several networking groups. I joined the groups to meet others in my field, help find potential clients, and to learn about running my business from other business people. Some groups have members in businesses related to mine (ie people who might refer clients to me or that I might subcontract work to). Some groups have members in a variety of businesses (ie potential clients).

Most of the groups do not require dues, but we meet at restaurants and each person pays for their own meal and drinks.

At the meetings, we may or may not discuss business beyond exchanging business cards and talking a bit about what each person does.

Is the cost of my meal deductible?

What about potluck networking events? Some of the groups meet at members' homes, and everyone is expected to bring a dish to share. Can I deduct the cost of the dish?

Does it make a difference if the majority of the time is spent on business related topics? I learn a lot and meet great people at these events, but I would be eating more cheaply if I stayed at home!

Betty


Dear Betty,

Good food questions.

First know that business meals and/or entertainment [M&E] are deductible if you discuss business before, during or after the meal or event. The amount of time spent on business does not matter as long as the purpose of the meal or event was business not personal.

However, you may deduct the cost of the meal or event only if you pay the cost for your business associate as well as for yourself. So it you attend a networking luncheon and pay for your lunch only, no M&E deduction. You may deduct the cost of getting to and from the luncheon if you came and went between another business activity.

A potluck? Well, if you are like most people who bring something to a potluck you bring more than enough for one person. So in that case I would deduct the cost of the potluck meal.

Here are more posts on expenses -- meals and entertainment .

-- June

Missed estimated payment: Not a big deal

June --

I'm self employed. I just got my taxes back from my accountant (I was only FT self-employed for about 1/4 of 2009, so I still had a reasonable tax refund last year (don't ask, minimum wage with child credits, etc).

Anyhow, my accountant applied my refund towards my estimated taxes for 2010 (which is a good thing). My next estimated tax payment is now due, and I won't have it for a little while.

So right now, it looks like this.

Original fed refund: 2000
Original estimated payment due 4/15: 3000
I don't have the $1000 right now to pay Fed (or the $800 for state).

Can I make those payments on the *next* quarterly payment? Or am I going to get penalized by the IRS if I pay my estimated taxes later than the quarterly due date?

Either way, it's going to be late... but I need to know if it can wait until the next quarter, or if I need to pay it ASAP, and then pay the *regular* estimated payments next quarter.


Eric
Technology Consultant


Dear Eric,

You may wait until the next quarter payment and add the difference to that.

If yours and your tax pro's estimate of 2010 income is correct and you should have paid exactly $3000 as an estimated, then when you pay the missed $1000 in June instead of April it will cost you only a little bit of interest.

You will have owed the IRS $1000 for 2 months. At 5% a year that's $8.33 interest. Which is calculated later, when you file your 2010 tax return.

Read this post: A Primer on Estimated Taxes .

-- June

Net profit is subject to tax.

June --

I have a question. I teach Metal Clay classes (making fine silver jewelry from silver in clay form). I charge $85 fee which includes $35 for supplies. What portion of this do I have to pay tax on as income. I am assuming I would just claim $50 as income but I wanted to be sure.

Edith


Edith --

An indie claims all income she receives. That's gross income.

Then she deducts all expenses.

What remains is net income or profit or loss. It is that amount on which you are subject to tax.

Here are more posts on income .

-- June

Meals & Entertainment Deduction @ 100%

June – Not quite sure how to both post a comment and ask a question in the same fell swoop on your blog page, so I’ll try here in e-mail instead. [Ron, click "comments" at the end of the post.]

I found you because I was looking for information on business checking online today. The fees, beginning at $12 monthly (for the least expensive option) seem unnecessary, and as I have been keeping solid records since beginning my consultancy last year, think I’m going to stick with the personal account for now. Nice to see someone provide a good rationale for what seems a rational choice. [Ron refers to this post: You Do Not Need A Business Checking Account .]

But now I have a question. You wrote as an example to deducting a business expense: "A carpenter deducts not only the tools that she buys, but also the expense of dining out. Why? Because during the meal with her husband she talks about her new business, gets his advice on questions of scheduling, picks his brain about various proposals, and tests his reaction to her brochure. She could not have had this business discussion at the family dinner table with her three children in attendance and so the gift given to her brother as thanks for baby-sitting while she was at this dinner is also a business expense."

Is this deductible at 50% for meals and entertainment, or is there another, full deduction category to be considering?

Thank you – Ron
Long Beach, Calif


Ron --

It's great to learn that my business-checking-post will save you $144 a year.

The carpenter's business meal is a 50% deduction as are just about all meals and entertainment.

The only M&E deductible at 100% are those that are offered to the general public. For instance: If you have an open house to display your artwork and you provide wine and snacks to visitors, that food and beverage is a 100% deduction.

Meals & Entertainment expenses are further explained in my book Self-employed Tax Solutions.

-- June

Refunds & Extensions.

June,

If you file an extension and know you don't owe taxes to IRS, but are due for a refund, do you just file the extension?

Thanks.

Rita

That's correct, Rita.

-- June

Talk with an indie-savvy tax pro. Use the loss.

June:

To file or not to file. H&R Block tells me I had no taxable income for 2009, and that I don't have to file. My VA check is not taxable.

I spent last year researching a novel and working on a manuscript. This year will be different. I am working with an editor and a publisher. I have never been in this position.

Don't I have to send the IRS some kind of form?

Donna
Lakewood, NM


Dear Donna,

You may not be required to file a tax return but it is to your tax advantage to file a tax return.

I assume that as a writer you had expenses, such as: research; office; travel; phone; ISP; etc. With no income those expenses result in a business loss.

I will not get into heavy tax jargon but know that there is something called a "net operating loss." The regs on that have recently been expanded. What it means is that if you have a loss, that loss may be deducted from income in a previous year or in a future year. Yes! That loss can get you back some tax money on previously-filed tax returns. Or tax returns not yet filed.

File an extension. Here's a link with info -- #23 Be Smart: File An Extension. And then get yourself an indie-savvy tax pro.

-- June

Deducting Education Expenses

June --

Massage Therapy 1 year as an indie.

I was wondering if I can deduct the cost of my massage therapy school on my tax return. I went to school in 2007 and 2008 but did not start working until 2009. I was told by some colleagues that I can deduct the cost of school the first year I start working. I want to make sure this is true before I file my taxes.

Thank you for your help.
Mary
Lyons, IL


Hello Mary,

I doubt you'd take advice from me on massage procedure and method. So it's good that you are checking out the tax advice given you by your fellow massage therapists.

They are wrong.

The costs of education to learn a new profession is not a business deduction. It doesn't matter when the expense occurred.

You may deduct the costs of education to maintain or augment skills in your current profession.

There are non-business tax benefits for the costs of education -- both credits and deductions. They could have been taken in 2007 and 2008. Discuss with your tax pro whether you took advantage of them and whether or not it is worthwhile to amend your back returns if you did not.

-- June

Lorenzo Landscaper's Business

June --

I'm from Woodbridge, VA. I am a full time fireman who does side work cutting lawns. I've been doing lawns for 3 years. My brother and I who is also a fireman cut lawns together and split things 50/50. We don't have a business license or TAX EIN because we have never made enough money to claim until this year.

This year we will receive our first 1099MISC form ever and will be claiming our side income as well. When we get paid the check comes to me in my name as will the 1099 for the full amount we were paid. Is there anyway for me to claim half that total on my income taxes as other income and somehow let the IRS know my brother is claiming the other half?

I tried calling the IRS and got no where, but was told I could send my brother a 1099 from myself to make it happen is that true?

If so what are the logistics? Would we be better off filing for a tax# and doing a completely separate business return although we don't have records for any deductions?

Thanks for you time.
Herb The Fireman


Hello Herb,

First, let's go over a few things.

You said "we have never made enough money to claim." Know that no matter how much you make, you must claim it all.

The feds do not require you to have a business license nor a tax ID #. Although your town or county might.

The income that you and you brother earn is not "other income" it is self-employed income.

You each must claim the income on Schedule C: Profit or Loss From Business which is part of your personal/individual tax return.

Since the income comes to you then you should send your brother a 1099MISC for his 1/2 of the income. If you don't send him a 1099 it is not a big deal. You could be fined $50 for not filing that form. In 30 years I've yet to see that happen. You should give him his 1/2 via a check from you so that you have a record of payment. Since this is after the fact -- i.e. after 12.31.09 -- at least have some paperwork, such as an invoice from your brother marked paid, attesting to the transaction.

I do not give specific, line-by-line tax return instruction so I can't give you more "logistics."

One of the characters in my book Self-employed Tax Solutions is Lorenzo Landscaper. You might want to check out the book to see if Lorenzo's deductions give you any ideas on what yours might be.

Best,
June