One business deduction is the same as another -- almost.

June --

Re federal schedule c: business profit or loss

i find it so tricky to sort expenses in some of those categories!
materials?
supplies?
misc?

Lisa
Branding consultant specializing in marketing and promotion for cultural creatives and small business
Portland, OR


Hello Lisa,

As long as a a deduction category has the same deductibility as another category it doesn't really matter if you choose the wrong category.

By that I mean if something is an immediate deduction, for instance, printer toner, it doesn't matter if you put it in office expense or supplies.

However, if something must be treated in a different way, let's say a printer costing $500, then that must be treated as equipment and could not be characterized as an office supply to be written off immediately.

A meals & entertainment expense is only 50% deductible. An advertising expense is 100% deductible. You must understand expenses well enough to know not to categorize a dinner with a local bigwig as an advertising expense.

Visit here to get my complimentary list of 100+ business expenses. It will help you categorize business deductions.

-- 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

Houseboat Home Office

June --

I am an Ad Agency New Business Consultant. I've been consulting for 3 months.

My wife and I own a home in Birmingham, AL. I have a houseboat in Nashville, TN.

When I was an employee at an ad agency in Nashville I lived on a houseboat through the week and was back in Birmingham on the weekends.

Since starting my own consultancy, I have two clients in Birmingham and Atlanta. I have another client in Nashville so I’m in Nashville servicing that account two days a week. I have a houseboat there that I use as office space where I spend one to two nights.

I’m registered to vote and my drivers license is in Alabama. I do have space designated on the houseboat for office usage.

Two questions: Can I deduct a portion of the boat as office space? Can I claim residency in Tennessee which has no state income tax?

Your site has been the most helpful resource I've found in working from home. I forwarded your article Designers Dozen: Tax Saving Tips to about two dozen graphic artist that I know along with a link to your blog and website.

Thanks,
Michael

Business Runs Better on a Full Tank

michael gass consulting
Advertising Agency New Business Consultant
(877) 695-7466
michael@michaelgass.com
www.agencynewbiz.blogspot.com
To learn more, please visit www.michaelgass.com


Hello Michael,

Please keep telling colleagues and friends about my blog. Thanks, I appreciate it.

Yes, you may take a deduction for the costs for a home office on your houseboat. Rules apply same as they do to any other type residence.

You may have as many home offices as your indie business needs and you may take the home office deduction for all of them.

Also keep in mind that the cost of getting from one work location to another is a business transportation expense.

And sorry, no, you cannot claim Tennessee as your state of residence. Good try.

Best,
June

Check out my book Self-employed Tax Solutions. It will simplify your tax and financial life, and save you money!

Per Diem Often Advantageous for Business Travel

Hi June,

I have been a marketing consultant for three years. I have an obscure question on business expenses.

When I travel to Washington DC to visit a client and prospects I stay with my sister because it is nicer and less expensive than staying in a hotel. As a thank you, I take her and my brother-in-law out to dinner one night. Total bill has ranged from $100-$150. (I typically stay two or three nights). Should I classify this as deductible meals and entertainment which is limited to 50% of the expense or as a gift which is limited to only $25? Or something else or nothing?

Best regards,
Suzanne ... from Dutchess County, NY


Dear Suzanne,

It is clearly a thank-you gift and so is limited to a $25 deduction. For it to be a business meals & entertainment expense you must discuss business before, during or after the meal or the entertainment.

However, are you aware that when traveling you may deduct a per diem amount for meals and incidentals rather than use actual expenses? I explain it this way in my book, Self-employed Tax Solutions:

Alternative Travel Records
For most of your travel expenses you will have receipts of some sort – cancelled checks, credit cards slips, or cash receipts. Well, after its own fashion the IRS has tried to make recordkeeping for travel easier. Yet, as is ever the case with IRS regulations, it is not self-employeds for whom easier recordkeeping was set up but for employers and employees; the self-employed just happen to benefit from the crumbs that fall from the table.

The IRS has issued per diem (per day) charts. These charts list the maximum amounts allowed to be deducted without receipts for “LODGING” and for “MEALS + INCIDENTALS.” Self-employeds may use the amounts listed for MEALS + INCIDENTALS only.

So, if you do not have receipts for all of your travel meals, then be sure to ask your tax pro about using the alternative per diem method. In your case, a two day/two night stay in Washington DC would get you a $71 X 2 = $142 M&E deduction [2009 rate] as well as your gift to your sister.

Here is the link for the IRS domestic per diem chart .

Best regards,
June

Auto Algebra & the 2008 Mileage Rates

June,

Awesome site and info! I am definitely looking forward to purchasing the book, Self-employed Tax Solutions.

I am in negotiations with my first client to become their marketing consultant. I will be leading all of the marketing, PR, communication and fundraising activities for a non-profit organization.

I will be leasing a new vehicle soon after the new year. The client has proposed to pay mileage reimbursement for any duties related to their business. I will be driving both the new leased car and my current, much older, high mileage vehicle. Would the tax benefits of driving both cars normally outweigh a monthly mileage reimbursement check from a client? We're probably talking over 200 miles per month for this particular client because I don't they will include mileage from my home office to this office.

If not, can I still hold off auto expenses for other clients and still receive reimbursement from this particular client?

I'm anxious for your reply. This is probably the final negotiating term before I get started.

Thanks a million!

Jason from Charlotte, NC


Congratulations on your new indie work, Jason. And thank you for your generous comment about my site.

I will try to simplify your situation and thereby make it applicable to a lot of indies. First I am going to assume you have read, or I suggest you read if you haven't, How to Calculate Auto Expense and How to Keep a Record of Business Miles on my website. Then you should know that the mileage rate allowed by the IRS for 2008 is 50.5 cents per mile.

As an indie, all the payment you receive ,whether fees or reimbursement for expenses, is part of your gross income. All expenses, whether they were reimbursed or not, are deductible expenses.

For example, if XYZ pays you a fee of $5,000 + reimbursement for 200 miles at 50.5 cents per mile [that's $101] your gross income = $5,101.

Were you to use the standard mileage deduction for your car you would deduct the $101 as a business expense to get to an income of $5,000.

Were you to use actual expenses, it would depend on the costs of running your specific automobiles. Could be more than 50.5 cents per mile. Could be less. So your income could be more or less than $5,000.

To say which is better, reimbursement or not you need to compare two things. Your actual cost of running your car and how much your fee would increase were you to accept a higher fee and no reimbursement.

You may have several clients and some may reimburse you, some may not. You may still deduct all auto miles, for all clients, using either method, as long as you claim the reimbursement in your income.

There are several posts on this blog about reimbursed expenses that you might want to check out.

There is a full explanation of transportation and auto expenses in my book, Self-employed Tax Solutions.

Best,
June

Sole Proprietor as an LLC

June --

I am a signage broker: I design, subcontract construction and installation of business advertising and identification signs.

Without operating my business as a corporation, or llc, my insurance agent has informed me he has no insurance product that will protect my personnel assets in the event of a company liability claim. Since you advise against forming a corporation, how then should a sole proprietor provide for this financial risk?

Jerry


Hello Jerry,

An LLC, limited liability company, is not a corporation. You may form an LLC as a disregarded entity. That means that you can be an LLC sole proprietorship. In this way you get ease of formation and recordkeeping along with asset protection. If you need even greater protection than afforded by an LLC and liability insurance then a corporation may be the way to go. But, before you do that, discuss it with a business attorney in your state -- not your insurance agent -- and make sure that you understand all the alternatives.

Be sure to read my post LLC? Incorporate?

I also recommend a book by Anthony Mancuso -- LLC or Corporation? How to choose the right form for your business. It's simply written and gives you a lot of basic information.

Best,
June