Time is not a business expense.

Hello June,

I heard about your business from The National Psychologist. I am a psychologist in private practice.

Here's my question:

How do I calculate maximum deductions for Continuing Education expenses? Someone told me that for each hour spent in a CE pursuit it is allowable to deduct my hourly fee. This would be in addition to the actual cost of the CE course offering.

Also, can I deduct my hourly fee for each hour I spend in reading or pursuing informal, and therefore undocumented, Continuing Education knowledge?

Thank you for your materials and information and your focus on us indies.

Patricia, PhD
Dear Patricia,

I bet that "someone" was a psychologist, not an accountant. Or else someone who just does a lot of wishful thinking.

Your time is not a business expense. Whether you use your time to learn, to treat a patient who has no money, to volunteer at that battered women's center, or to cut the grass at the church.

Generally, you may deduct as a business expense the cost of the education, the supplies for the course, the transportation to and from the course. There are many regs regarding the deduction of education costs. And there are many ways to take advnatage of education expenses, for instance, as a tax credit rather than as a business expense. Which works best for you depends on your total tax picture.

Here are some posts you might want to read:
expenses -- donated services or products
and also some on
expenses -- education-study-research

Please send this post to someone.

Cheers,
June

A well-crafted question gets a better answer.

An article that I wrote recently for

http://nationalpsychologist.com/ brought me many requests from psychologists for my expense list. Some also sent questions. The most frequently-asked question was this one, as expressed here by Dr. David from Santa Clara, CA.

How do I know if I'm paying too much year after year? Thank you.


Hello David,

Your question is similar to my asking you, how do I know if I handle personal relationships well? You wouldn't have enough information to give me an answer.

Am I referring to my relationship with my mother, my kids, my husband, my friends? Do we fight a lot? Have other people noticed and commented? What specific things are on my mind about this? Do I just feel that things aren't right? How long have I felt this way?

With taxes, as in any situation, you need to know the particulars in order to make the right choices, or give correct answers.

I would start by looking at David's last three tax returns. If they were not available, I'd ask what his gross income was last year and what was his net income for that year. Based on his answer I'd ask the next question and then the next.

Dr. David's question is often asked by indies in all professions. You might want to check out this on my website -- How To Ask A Question.

June

Where To Get Health Insurance

June --

Psychotherapist since 2000. I welcome your comment

After COBRA, where do I find the best health insurance for the Indie???

Kathryn
Rolling Hills Estates, CA

Dear Kathryn,

Taxes are easy. Insurance is difficult! Start by asking for a recommendation from the insurance agent who handles your auto or home insurance. He or she will know the recent changes in your state and which coverage is the best for you.

I do not recommend NASE -- the National Association for the Self-employed.

-- June

Wasted Time = Donated Time = No Expense Deduction

Hi again June,

You were nice enough to answer my question on your blog a year or 2 ago, so I'm back with another that I hope you can help with.

I have a small consulting psychologist practice in Virginia; I help the State determine whether or not disability claimants are medically eligible for SSI benefits. The biggest occupational hazard I face is people who don't keep their appointments. I work in 2-hour blocks, and when they don't show, the state government, with whom I contract, pays me next to nothing for my trouble.

Question: can I write off the difference between the little the State pays me for those "no-shows", and what I WOULD have been paid if the patient HAD shown up, as a loss? If so, I have 25 years of amended tax returns to work on.

I realize that this may be a tax attorney question, but I thought the answer might benefit your readers.

Thanks,
Mark
Fairfax Station, VA


Dear Mark,

No tax attorney needed. This is one of those really-easy-to-answer questions with a you're-not-going-to-really-like answer.

Your time is not an expense and so it is not deductible. For tax purposes wasted time is treated the same as donated time. Check out my posts on the topic right here expenses -- donated services or products .

Suggestions: Find out why they miss appointments. Do they need transportation? Have an arrangement with someone to drive them to the appointment. Maybe that could be an indie business for a friend of yours.

Do they simply forget? Hire someone looking to work from home to call each client the week before, the day or evening before, and even the morning of to remind of the appointment. What you pay the person making the calls for you is a deduction for you. If you're married and your wife can do the calling as your employee, even better. Or if you have a child old enough for the responsibility, that would work too.

Another suggestion: Have work ready to do to fill the time of the no-shows. Things like research reading, recordkeeping, learning French.

Best,
June

Business Phone Deduction

June --

Psychotherapist, licensed & self-employed for 3 1/2 years from Sacramento, CA.

I use a cell phone as my one and only business phone for my therapy practice.

I pay a flat monthly rate for my cell phone service. If I sometimes make or receive personal calls on this cell phone, does this mean I cannot deduct 100% of the cost of my cell phone plan?

And if I cannot deduct 100%, how on earth do people manage to keep a log of every single phone call made and received and whether business or personal, in order to determine what percent of calls were business? Even looking at my monthly statements I cannot identify who all the phone numbers belong to unless I have been writing down each and every phone call and phone number and person to whom every phone number belongs.

Thank you for your help,
Jacqueline


Dear Jacqueline,

I assume you have a phone at home for personal use. Were I your accountant I would deduct a small percent of your cell phone for personal use. If there's only a non-phone-using cat at home I'd take a smaller % than I would were you to have three kids you had to check on or an aging mother in a nursing home whom you had to call twice a day. Or if you had chosen a plan that allowed for more minutes to include personal calls you could exclude the additional cost. In other words I'd find some logic for the small % or cost reduction.

As a psychotherapist you cannot list the patient calls even if you were to keep a record. However, were you able to show that in one week you used 500 minutes and 50 were to mom then you could use that as a typical week and extrapolate for your entire usage.

Of course, all those phones in The Callous Corporation offices are used for personal calls to home and the corp gets a 100% deduction. So be as generous to yourself as you comfortably can. If you feel that the personal calls are really incidental -- for instance a late work night -- then deduct 100% as a business expense.

-- June

Recordkeeping and Receipts for Items Paid by Check

Hi,

I've been reading your book Self-employed Tax Solutions and I get your email. Thank you for what you do.

I'm wondering if the growth of online banking movement has changed your thoughts about having a checking account that returns your cancelled checks to you. I pay some of my bills directly out of my account and don't even write checks. I don't have any cancelled checks from last year and should I change banks to find one that will send me my checks back for this year? I'm thinking the IRS might have adjusted in the past 5 years. What is the current thinking on this?

I am a psychotherapist in private practice. Not a lot of transactions in a month, maybe 25 outflows at the most and about 3,000.00 inflow per month.

Thanks,
Kim


Dear Kim,

You are welcome. And, thank you for letting me know you appreciate the output. Indies do need as much clear, accurate info as they can get.

You must have proof of just about all business expense deductions. The most simple way is through cancelled check and credit card receipts. And if you follow my Most Simple System you must have backup for every dollar you spend.

Even though few banks return cancelled checks anymore most banks do provide photocopies of all checks written. You may cut them out, or copy and then cut them out. Treat them just as you would a cancelled check. A psychologist client in NJ urged her bank to provide a second, larger photocopy of her checks each moth. The bank wanted to keep her as a client so they obliged.

If your checking account is through your brokerage house you probably get a list not copies of checks. In that case I would suggest you use a local bank for your regular check writing.

If you pay bills directly you must still have something that tells you how much to pay. Print it out. For instance, if ATT emails your monthly bill print out the first page and note the date and from which account it was paid. That is your proof. And not only is it proof for taxes, it's proof if ATT says you didn't pay the bill.

Whenever possible get a paper invoice or bill for whatever you are paying by check. If you pay by check for an item purchased online, printout the purchase info. Note the check # and date paid on the printout. [BTW -- I suggest putting those kind of orders in a "waiting" bin. Pull them from the waiting bin when you actually receive the item. We are all so busy it's easy to forget about a one in the morning online purchase.]

Whenever you pay a bill by check, write the check number and the date paid on the invoice. For example, if you paid your cable bill on March 14 with check number 607, you would write √ #607 3/14/11 $234.56

File the receipts consecutively, by check number, in a folder labeled: 2011 CHECK BACKUP.

This and a complete method of manual recordkeeping is explained in my new petite publication, The Confident Indie: Five Easy Steps. It also includes worksheets for your 2010 tax return.

Best,
June

revised 1/30/11

A Primer on Estimated Taxes

Hi,

Ive been working as a therapist since the beginning of this year. I know that I will miss today's quarterly taxes filing deadline because Im not sure how to estimate what I will need to pay and afraid I will not have the funds to pay it until my next paycheck. I dont get taxes taken out of my checks because I am an independent contractor but know that/figure that I need to make quarterly tax payments.

Please let me know if you can provide any assistance in helping me file at some point this week or at the least help me figure out how much I owe.

Keida
Bowie, MD


Keida --

Your answer is in this post: Estimated Taxes . It starts out this way ...

I am getting lots of questions on estimated taxes, so I thought an overview necessary.
Here 'tis.Federal income tax, Social Security tax and Medicare tax are pay-as-you-go taxes; that is, the tax must be paid as income is earned. Dennis Dubya-two, shipping clerk for Toys 'n' Things, receives a paycheck every week. Each week Toys 'n' Things withholds all applicable taxes from Dennis’ pay and forwards them to various government agencies. At the end of the year Dennis receives a W-2 which shows income earned and taxes paid.

Self-employeds must follow the same pay-as-you-go method as do wage earners like Dennis. As an entrepreneur brings in income he withholds taxes from himself -- that is, he puts money aside -- and then sends his taxes to the government via estimated tax payments.

Not every self-employed has to make estimated tax payments.
It’s the overall tax liability of a self-employed that determines whether estimated tax payments are required. An indie’s total tax liability is made up of ... continue here

Software Cannot Replace Experience

Hi June,

I am a clinical and consulting psychologist who has been a sole proprietor for over 20 years.

I've started working on my taxes and have a question.

Earlier this year I spent $1,062 to purchase the latest version of a psychological test that I use regularly in my practice. I had thought that it would be considered an "office supply" and that I could write off the entire amount as a supply expense. But in using TurboTax, it asked me about a depreciable asset. It seems that by definition (something that has a life of more than a year but will become obsolete eventually) this test is not an office supply, it's a depreciable asset. In the end, TurboTax told me that it was a "special" depreciable asset that I could take a one-time deduction for, of only $561! How do I legally handle this - asset or supply?

Thanks,
Dr. Mark
Fairfax Station, VA


Dear Dr. Mark,

You see, I've been feeling really depressed. Suicidal actually. I bought this software program Mind-Mend. Says it has taken 20+years of psychiatric experience and rolled it up into this software program. There are 10 steps to avoiding stress. One step says do 15 minutes of meditation each day. Another step has me stand on my head for 10 minutes so that my circulation increases. My gym instructor says I should not stand on my head because of an old army injury. I am confused, what should I do?

As a doctor you might tell me that stress and suicidal tendencies call for different levels of treatment as well as different levels of urgency and that I should speak with a professional. You might also say that there is no way that 20 years personal experience could be put into a software program and have the same success rate as weekly visits with a therapist when treating something as complex as suicide.

This is my round-about of saying what I have said on this blog many times before: A software program written for the simple world of employees cannot replace a tax pro experienced with indie tax situations. Search "turbo tax" on my blog or go here for more info tax pros - tax prep fees - tax returns (21) .

Software is a supplies expense in almost all circumstances.

Best,
June

Less Tax vs Higher Pension Contribution

June,

I am employed full-time but have been a part-time indie for the last 20 years (consulting psychologist).

My question is about my SEP IRA. One of the problems, as I see it, with a SEP IRA is that the more you deduct from your gross self-employment income, the LESS you can contribute because the allowable contribution is a percentage (20 or 25%?) of your self-employment income AFTER expense deductions.

It would seem that the less you deduct for expenses, the more you can save!

How does one crunch the numbers to see what the best way to go is?

By the way, how would you rate the SEP IRA vs the new Roth 401(k)?

Mark
Fairfax Station, VA


Dear Mark,

Good questions. You are into the "indie business mindset" way of thinking.

Let me overview here for some of my readers. The allowed contribution to any pension plan for a self-employed is limited by the net self-employed income. Therefore the more business expenses you have the less your net income and so the less you may contribute to your indie pension.

Here are some actual numbers to look at: Let's assume a 15% federal income tax and 15% SE tax. That means that deducting a $1,000 expense saves you $300 -- 30% X $1000.

In a SEP, because your self-employed income was reduced by $1000, you may contribute $200 less to your pension.

You are looking at a tax savings of $300 versus putting $200 less into your pension.

It makes more sense to take the tax savings and do one of two things:
1. Put the $300 into another kind of non-pension savings. Talk to your investment broker about what would be best.
OR
2. Change to a different kind of indie pension. There are many to choose from, and at my earliest opportunity I will write about the choices you have. Fort the interim, ask your personal tax advisor to explain your choices.

You can have ROTHs of any kind, e.g. SEP, 401-K. The younger you are and the less concerned you are about paying less tax NOW the more advantageous a ROTH.

Best,
June

Language Classes as an Education Expense

June--

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.
Jay
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.

Best,
June

No deduction for billed but unpaid fees.

June --

I am a therapist. I notice that many doctors and dentists bill patients for an amount greater than the amount requested from the patient, then show the difference on the statement of account as a "write-off." Is this a write-off for their federal tax return?

I frequently "slide" my fee downwards to accommodate less fortunate persons and wonder if I can deduct this "lost revenue" as some sort of a write off.

Thanks, John


Hello John,

There is no deduction for billed but unpaid fees.

These posts on my blog cover similar situations and will help you understand why there is no deduction.
Deducting an Attorney's Time
and
No deduction for donated work or services

Don't let the lack of a deduction stop you from giving the less fortunate a break. You're my kind of guy!

Best,

June