Indies: Stand up for yourselves

Hi again, June,

Well, today is a big indie day, isn't it? The President signed the Small Business Jobs Act.

But I, for one, am confused about capital expenditures vs "bonus depreciation".

I am a consulting psychologist in private practice [for 25 years], and was going to buy a new computer. I seem to remember that the IRS has had a maximum amount of business expense you can write off all at once, as opposed to having to depreciate it. I have always depreciated my computers/printers, etc. How does the new law affect us indies?

Can I now write off the whole thing in one tax year?

Thanks,
Mark
Fairfax Station, VA


Hi Mark,

I gather you are the same Mark who sent me this Q&A Software Cannot Replace Experience a while ago. And, I gather you did not take my advice -- still doing your own tax return. Right? Big mistake unless you absolutely cannot afford a pro or there is not one available to you.

You can write off the cost of your entire computer as long as the cost was $250,000 or less. You get a better deduction if ,instead, you take advantage of the bonus depreciation feature. However, the deduction must be spread out over time. Which method is better for you depends on your entire financial picture at the moment and predicted for the future. Which is why you need a pro.

Go back and read that experience post of mine. Please. I think it might save you some money.

And while you're reading I suggest this one too, What's a small business? Yes, it is an important day for small business. Could have been a lot more important had we had some more congress people willing to help the likes of you rather than the likes of those who make a lot more money than you.

I don't know yet how the new Small Business Act will impact indies. Once it's signed it then must be interpreted. Then the interpretation must be understood and agreed upon.

Indies, please pay attention to who votes for what and who advocates for which kind of tax change. That you can now deduct 100% of your health care costs and may deduct for a home office as well as have another work location are tax changes that came about because of the work and attention of your fellow indies.

You are 40 million strong. You have the power and the clout.

-- June

What's a small business?

Indies, you know that I frequently tell you that you are a business. That you must think like a business. That you must have an indie-business mindset. You also know that your business is small. Your business may be you and only you. You may call yourself a "small business" because you are.

There’s lots being said right now about tax credits, tax hikes, what’s good and what’s bad for small business.

Well, what exactly is a small business?

I think it will come as no surprise, that there is no "exactly." Let me give you some examples from our ever-present source: The IRS.

If Caitlin Caterer, who has three women working for her, or Lorenzo Landscaper, who has a couple guys help him out, were looking to take advantage of the "health care credit for small business," they’d qualify because, for this tax credit, small business is defined as any business having 25 or fewer employees.

If graphic designer Victor Visual wanted to carry-back the business loss he had this year in order to recoup some of the taxes he paid in previous years he’d be allowed to do that as long as his small business had gross income of not more than $5,000,000 per year over the last three years (yup, that’s five million dollars). Doesn’t matter how many employees Victor has as long as he didn't gross five million dollars.

If Sid System wanted to set up a medical savings account for the two techies who are his employees he’d be allowed to do that. Why? Because for the Archer medical savings plan the definition of small business is 50 employees or less.

And then there’s a whole lot of other “definitions” of small business. And this is where size really counts.

Based on the North American Industry Classification System (NAICS) the following are considered small businesses if their income is equal to or less than:
agricultural industries ---------------- $750,000.
heavy construction industries ----- $33,500,000.
trade contractors -------------------- $14,000,000.
retail and service industries -------- $7,000,000.

Or their number of employees is equal to or less than:
for most manufacturing and mining industries -- 500. employees
for all wholesale trade industries ----------------- 100. employees

(For complete list of size standards, see the Small Business Administration's Table of Small Business Size Standards.)

So indies, please be careful when people with an agenda throw around terms that have different meanings.

According to the IRS, in 2007 [most recent statistics available] 94% of businesses were S-corporations, partnerships, and sole proprietorships. I don’t want to boggle your mind but all those business entities pay taxes at the individual tax rates. Yes, that is so.

I’m a sole proprietor. I pay tax at an individual rate. If I hook up with another accountant and we form a partnership and split the profit, then we each pay tax at an individual rate. The same would be true if we formed an S-corp.

Randy Neugebauer, a Republican who represents the 19th District of Texas, as a guest blogger of Townhall.com, wrote on July 29, 2010, that "Ninety-four percent of small businesses will face higher taxes under the Democrats' plan."

Randy is using 94% to confuse us. You and I are part of the 94% of small businesses out there. So is just about everyone who visits my site. And! Most of us do not have at least $250,000 in taxable income.

I see Randy as intentionally muddying the water. Some may say it’s a lie. The Democratic plan is to keep individual tax rates as low as they currently are, except for those individuals with taxable income over $250,000.

Unless Mr. Neugebauer refers to small businesses such as retail manufactures with gross receipts of $7-million or trade contractors with a gross of $14-million he is deliberately misleading indies.

Indies send me lots of questions about the fear-instilling emails they receive that threaten tax hikes that will wipe them out. Don’t listen to that propaganda. Tell your indie colleagues not to be terrorized by this intentional misrepresentation. Get more information.

June Walker

You are what you speak.

Dear Indies,

I think you all know that I don't applaud tax pros who speak a specialized tax jargon that leaves the indie puzzled and frustrated. Or as a Russian friend used to say: "Lost in a dark forest."

Well, it's not just tax pros who are guilty of using goobledygook that is meaningless and incomprehensible to the layman. What follows is my response to an email I received from Rackspace. Rackspace is what I use to get my email smoothly moving in and out. It's my host but what else it does exactly I am not sure.

It is obvious from Rackspace's emailed announcement that it wants to tell the world about its new accomplishment. The problem is that I, and my guess most other non-IT indies, don't even know what that accomplishment is or what it means to me.

Here's what I wrote to Rackspace. The original email from Rackspace is below my response. Please let me know if you'd like to see Rackspace's reply.


Hello Rackspace,
I am a layman. Well, a layman re web-tech stuff, however I am a tax expert. Am I, as a layman, supposed to understand the meaning of the announcement emailed to me from the Rackspace CEO?

Here are some examples:
-- open source cloud platform
-- cloud interoperability
-- drive a deployable totally open cloud solution through this project
-- proprietary or closed platforms that create lock-in and make migration difficult

You posit: What does this mean for our customers?

"Customer" that would be me, a Rackspace user, right? Well, I don't have a clue what the following bullet points mean.
** No fear of lock-in.
** Flexibility in deployment for a highly elastic commodity cloud.
** A bigger, more robust ecosystem for more tools, better capabilities and a stronger platform.
** Freedom to decide how you want your cloud. (Freedom. Oh, wow! I can't wait.)

I write about taxes. My job is to make complex tax regulation understandable to self-employed IT people, for example.

Did any of you guys ever write for the general public? I use different jargon when speaking with fellow tax pros than I do when talking taxes with my clients. Careful I'll throw some tax terminology at you and you won't have a clue. Then you'll understand what I'm talking about.

I am copying this to some tech people who work for me. One of whom recommended Rackspace. Pass the word that it's important to be able to speak the language of your customers.

Best regards,
June Walker

Dear June,
Today is a big day for Rackspace® Hosting. We announced a new project that we believe will change the way the cloud is developed and it's called OpenStack™ – an open source cloud platform designed to foster the emergence of technology standards and cloud interoperability. In short, we will be opening code on our cloud infrastructure for public use.

The initial components being released through this project include the code that powers our Cloud Files (available today) and Cloud Servers (expected available late 2010). This project will also incorporate technology provided by other open-source projects. We expect to be joined by leaders in the technology industry and others to drive a deployable totally open cloud solution through this project.

Why are we doing this? Historically, most cloud offerings have been built on proprietary or closed platforms that create lock-in and make migration difficult. With OpenStack, any interested party – including our peers, Solution Partners and customers – will be able to collaborate with us to author, improve and expand OpenStack technologies.
What does this mean for our customers and Solution Partners?

No fear of lock-in
Flexibility in deployment for a highly elastic commodity cloud
A bigger, more robust ecosystem for more tools, better capabilities and a stronger platform
Freedom to decide how you want your cloud

OpenStack is an innovative, open-source cloud computing solution for creating, managing and deploying scalable elastic cloud services. Through the ongoing development of this project, we will be able to drive greater industry standards and help increase the speed of cloud innovation. As the leading specialist in the hosting industry, it is simply our responsibility.

In addition, we look forward to bringing enhancements made to the OpenStack project to our own product offerings in the future.

We are excited about this new chapter in Rackspace history and even more thrilled that you are able to share it with us. If you have any questions, please contact us here.

Sometimes it takes a while to get it.

Alana from Oakland, CA in commenting on Tax Savvy Indie Saves $850 Because Of Reimbursed Expenses On Her 1099 said:
Nice! Thanks again for the helpful posts that led me to that. I dropped my amended return in the mail last week, so I think I'm all set. Hopefully my story in turn helps a few others. Sometimes you have to hit people over the head with 10 examples of the same principle before they get it. :)
thanks June!


You're welcome, Alana, and thanks for getting back to me. You'll see from my blog that my schedule has been wicked so apologies for my late response.

I think that when something comes at you from an alien field -- maybe, financial jargon to an artist or tech talk to a plumber or explanation of a painting's composition to a realtor -- it takes a while to grasp. Reimbursed expenses are a good example. Of all the questions I get it's that topic that currently heads the list of most frequently queried.

Often something must be explained several times in different ways in order to be really understood. That's the job of the teacher -- to be understood. The student must keep on asking questions until he or she understands. Doesn't matter if the teacher is the one you had in third grade, or your physician or your tax pro.

Thanks again for the update.

Best,
June

Oh, the hype ... lies ... and edited video tapes

June --

I am a writer that is still having a time finding a tax person with your indie point of view. But the good bookkeeping I have learned from you has been a plus. Can I get your updated version of biz expenses?

Also, I am hearing that massive tax increases are coming in January 2011. Can you please post what these tax increases are on your blog as you can? This would really help in my monthly bookkeeping.

Thank you, Donna
Lakewood, NM


Hello Donna,

Thanks for letting me know that my advice is a help. Expense list sent a while ago so on to your question.

So many indies write me and say that they heard such-and-such but they don't tell me where they heard such-and-such. Aunt Tillie? A CPA? The yoga teacher's husband?

And I must tell you that just about all the such-and-such is hogwash. As is what you heard.

Anecdotally, I have seen taxes go down for my clients. The refundable and non-refundable credits available have increased. The reading I must do to keep up on the new tax breaks is daunting.

And, it's not just my experience. The Center on Budget and Policy Priorities says that: "This is the second-lowest percentage in the past 50 years."

I am so pleased that you asked before acting. And, as my husband the former reporter always says: Check your sources then check them again.

Best,
June

It's only words ...

june

thank you for taking the time to get back to me , how ever the vocabulary and life lessons were a bit much..i am quite clear on what the word rape means, and i am very, very clear that aanxiety, anger and depression are not going to reduce my taxes.
this is just the way i choose to speak and write, and it is certainly no bodies business but my own. i did not want a mother or a teacher, i simply wanted some tax advise and Nothing more.


Above is Sara’s response to the post below: Learn more. Reduce stress and reduce taxes.

I want to take a bit of your time to comment because when you dig down, these afterthoughts are related to taxes and to being a professional indie with an indie-business mindset.

#1. I am a teacher. That is my goal: To teach indies how to handle the business side of their taxes, recordkeeping and finances more accurately, more simply, using less time and possibly saving more tax.

#2. I have four children and am not looking for any more. That mothering takes enough of my time and love.

#3. And this is the most important: Words have meaning. In #1 above I say “possibly” save you on taxes. I can’t assure you that you will pay less. I can’t omit “possibly” just to get your attention. I can’t use “always” because that is not so.

BTW – watch out for those guys promoting self-employment and promising you’ll “pay no taxes.”

Using words like “rape” or “Nazi” to indicate something unpleasant or someone you don’t like or someone with who you disagree is not only inaccurate but does an unimaginable disservice to those who have been raped or someone whose family has suffered at the hands of the Nazis.

Words are important in taxes and in life.

Indies, you're my favorite people!
June

Learn more. Reduce stress and reduce taxes.

Dearest June ,hello my name is sara, i am a mixed media artist living and working in new york but selling my work all over the world and getting taxed like crazy in new york.. I'm getting taxed like 30% ..and i feel like i don't know my rights and am getting raped as a result...

i wrote basic things off like; travel , supplies, shipping and so on..but it doesn't seem to make much of a difference.. do artists have a different set of rules that apply to them, or do we just get taxed like everybody else depending on what tax bracket we fall into.

are there important loop holes that i am missing and don't know about and should know about that could save me a lot of money ..?

i would appreciate any advise or guidance that you could give me, as every time i pay my taxes i have an anxiety attack right after, and am angry and depressed..and i know that there has to be another way..:(

with kind regards
Sara

Dear Sara,

First, you are not really being raped. I wouldn't throw around that word. It has a very different meaning.

Artists must abide by the same rules as any other self-employeds. That means they get the same kinds of deductions and pay the same taxes as plumbers and psychologists and IT people and anyone else who works for him- or herself.

You said you are paying 30% on your income but you don't say whether that's 30% of your gross income or your net income.

Gross income is what you are paid for your work.
Subtract from that all business expenses.
You are left with net income.

It is on net income that you pay tax.

You pay approximately 15% self-employment tax + federal income tax + state income tax. And in New York City depending on your income there could also be New York City Unincorporated Business Tax and Commuter tax. All that can easily add up to more than 30%.

My guess is that your problem lies in not taking advantage of all business expenses. You must deduct every possible business expense in order to reduce your net income.

Start here by requesting a complimentary List of 100+ Indie Business Expenses . Also read Is it a deductible business expense?

That will be your starting point to educating yourself as an artist in business. Anxiety, anger and depression are not going to reduce your taxes. Learning about the business side of your art will.

For a complete understanding of the basics of income, expenses, taxes and recordkeeping for an artist, check out my book Self-employed Tax Solutions. If you can't spend $13 it should be at your library.

Knowledge will give you the confidence to come to grips with your indie business.

I wish you a less stressful indie life!

June

Songwriters: Please take a look at this.

The Authors Guild and The Songwriters Guild of America (SGA) told the U.S. Copyright Office on Friday that there is an urgent need to eliminate a potential “gap” in termination rights granted under the Copyright Act. The joint filing, announced today by Authors Guild executive director Paul Aiken and SGA president Rick Carnes, was in response to a request for comments by the Office on the issue. The “gap,” if not addressed, might prevent as many as 100,000 creators from being able to exercise termination rights they – and Members of Congress – thought had effectively been granted to them under the law.

In establishing termination rights for creators – allowing them to end transfers of their copyrights to publishers after a set number of years – Congress established rules for terminations for both pre- and post-1978 works. However, because of a quirk in the drafting of the law, there may be an inadvertent gap for works governed by pre-1978 contracts that were not published or registered for copyright until 1978 or later.

“The legislative drafting error dates back to a major revision of copyright law in 1976,” said Aiken. “The potential problem is serious and pressing – the time to file thirty-five year termination notices for post-1978 works commences in 2011 – but it’s a technical problem that can be resolved with a straightforward legislative clarification.” Carnes added, “We simply need to make sure that, as a matter fairness, certain categories of works that may have fallen through the cracks in drafting the 1976 Act are now clearly included in the law.”

There are various scenarios in which confusion may arise under the law as currently written. Songwriters often sign exclusive agreements with music publishers covering the transfer of all songs written prospectively over a period of several years. For example, Charlie Daniels’ classic “The Devil Went Down to Georgia,” released on his band’s 1979 album, almost certainly was subject to a pre-1978 contract and might fall into the statutory “gap.” Moreover, nearly all books published in 1978 and most books published in 1979 were subject to pre-1978 contracts and therefore could fall within the suspected gap as well. John Irving’s “The World According to Garp,” published in 1978, and Beverly Cleary’s “Ramona and Her Mother” and Tom Wolfe’s “The Right Stuff,” both published in 1979, are all likely to be in this category.

“Authors, particularly those early in their careers, frequently have little or no bargaining power with publishers,” said Aiken. “The termination right effectively recognizes that imbalance, giving authors the power to renegotiate their contracts in the rare cases where a book has a commercial life far longer than expected.”

The legislative record of the 1976 Copyright Act is clear in expressing Congress’ intent that termination rights be granted to all authors. According to the House and Senate Reports accompanying the legislation, “[a] provision of this sort is needed because of the unequal bargaining position of authors, resulting in part from the impossibility of determining a work's value until it has been exploited.” Both SGA and the Authors Guild were instrumental in fighting successfully for the inclusion of termination rights in the 1976 law.

“Our shared interests in the representation of the creative communities in our respective fields have prompted us to act together on this initiative, as we will in the future on other legislative matters of mutual concern” said Carnes. “Our organizations worked hard together in gaining termination rights for creators under the Copyright Act, and we continue to work together to ensure that all creators benefit from these hard-won gains.”

The Authors Guild (www.authorsguild.org ) is the oldest and largest society of published authors in the U.S., representing more than 8,500 book authors and freelance writers. Its members represent the broad sweep of American authorship, including authors of literary and genre fiction, nonfiction, and academic works, as well as children’s book authors, textbook authors, freelance journalists and poets. It advocates for fair contracts, effective copyright protection, and free expression.

The Songwriters Guild of America (www.songwritersguild.com) is the nation’s oldest and largest organization run exclusively by and for songwriters, with more than five thousand members nationwide and over seventy-five years of experience in advocacy for songwriters’ rights. It is a voluntary association comprised of songwriters, composers and the estates of deceased members. SGA’s efforts on behalf of all U.S. songwriters include advocacy before regulatory agencies and the U.S. Congress, and participating in litigation of significance to the creators of American music.

Feel free to foward, post, or tweet. Here is a short URL for linking: http://tiny.cc/43mez

Sent to June from
The Authors Guild 31 E 32nd St Fl 7 New York, NY 10016 US

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

Reimbursements/Reimbursements/Reimbursements/Reimbursements ....

OK Indies, you must be a little resourceful. And I don't mean to pick on the indie who sent the following email it's just that V from Katy, TX happened to hit at the right moment.

I get the same question about reimbursed expenses over and over and over. I usually skip the emails and go on to the next one hoping that the creative, intelligent, resourceful indie who asked the question will either come back to the blog and go down the list of Topics/Categories/Labels on the left and find expenses -- reimbursed . Voila! there's the answer. Or, even try one of two search tools on the blog: One at the top left -- note the magnifying glass; the other middle left, cleverly worded, "Search This Blog." Just try variations of what you are looking for -- reimburse, reimbursement, reimbursed expenses. You get the picture. Right.

Indies you must think on your own. Remember my urging you to have an indie-business mindset. Unlike employees, you have no big daddy taking care of you. And as much as I'd like to answer every one of your questions it's just not possible. You need to do a little of the legwork. V made some of the right moves by going to the IRS publication.

So here's V's question:


Hi June,

I enjoy reading your tax solutions, mail and newsletter for Indies. I had a couple of questions. I am an Indie and this is my first year as a self employed. I get reimbursed for my travel and meals expenses from my clients. I provide accurate accounting to my client for all the expenses. I have read Publication 463, page 32 regarding this. It clearly states that if you do not account to your client for the expenses you have to include it in income.

Now my question is: First, if you account to your client for the reimbursements, do you still have to include it in the income? Will it be on Sch C? If I have to include it in income, can I claim the expenses on Sch C as 100% deductible?

Second, for the month of December, I relocated to the city where my client is located and the client is reimbursing my rent. Is this reimbursement taxable?

Thanks,
V
Katy, TX


V --

Do take a look here for the answer to your 1st question -- expenses -- reimbursed .

The reimbursement for rent is income. It is an expense only if it qualifies as a home office deduction and then only part of it will be deductible. Check out my posts on home office here home office or studio .

Thanks for being my "example."

Best,
June

When & Whether To Hire A Pro

Indies, let’s get a jump on the New Year by looking at how you look at your business.

This post was sparked by an email I received from an indie copywriter in Illinois which concluded that my seminar, website and blog provided a “vast array of resources” for the self-employed. Then she added, “but to be honest I would just like to hand over my materials to someone that I trust to do the job right.” She asked if I could I be that someone?

She didn’t ask for someone who could “help” or “assist” her but someone to whom she could hand over her material and whom she could trust.

Oh my goodness! I have a number of clients who are musicians, a career that has a long history of performers who didn’t want to have anything to do with business and were stripped clean of their money through the musician’s inattention, blind trust, or through the guile or incompetence of their managers. Haven’t you all heard one or two of those stories? The most recent: Leonard Cohen. It happens to talented, intelligent indies who don’t want to deal with the business side of their endeavors. They get ripped off. Somebody else ends up owning their copyrights. They owe Uncle Sam. Royalties are lost. I’m sure there’s no need to go on.

Indie: You are a business! Your business is you. You must develop what I call an indie-business mindset. I’ve talked about it before.

Self-employment requires that you take complete charge of all aspects of your business. It isn’t like writing copy as an employee of Callous Corp where your taxes are withheld every payday, you get paid for sick days, and if you have questions about pensions you go up to the 14th floor and ask the pension guy about it.

By taking charge I don’t mean that you can’t delegate tasks to someone else -- if you have the right person and the funds to pay that person. But you can never just hand it over. You have to be sure that the person doing whatever it is you hired him or her for is trustworthy and competent, well-informed, follows through, uses good judgment, knows when to take the initiative and when to come back to you for guidance. You can’t do that unless you understand the elements of what you have assigned to someone else.

You don’t have to be an expert on websites to hire a web designer but you’d better have a basic knowledge of how they work and what one will do for your business. Do you do it yourself? Spend $500? Spend $15,000? You don’t want to put three hours a day into FaceBook or Twitter or Google without some understanding of whether 15 to 20 hours a week will give you that much valuable business visibility and promotion.

Whether setting up your fee schedule, engaging a tech guy, or hiring a bookkeeper or a tax pro to do your taxes you must make the decisions. You have to assess whether your choice is clear-headed, sure-footed, and reality-based. Are you deciding based on the facts, on price only, on what’s convenient, on what Aunt Tillie told you? Without some understanding of and some familiarity with the aspect of your business that you're turning over to someone else, you can't make competent decisions and intelligent choices.

It’s only the employee who can just do the work and let the company make all the decisions. You are an indie. And whether you’re self-employed by choice or by circumstance due to these difficult times, you don’t have big daddy taking care of you.

You need information. You must educate yourself. As the copywriter from Illinois said: I offer a “vast array of resources.” You are in the right place to access them. Start educating yourself. Start reading.

And a new resource will be available shortly, The Confident Indie. Please be on the watch.

I wish you a creative and successful 2010!
June

You are a business. Treat what you do as a business.

June --

I live overseas and I have been working as an independent consultant for three years. in May of 2009, I accepted a job as a subcontractor to a subcontractor (a research wing of a foreign university in Eastern Europe). The project was a disaster and the lead contractor has essentially hogged every cent and has not paid the subcontractor--very shady!

I am not getting paid. I have fought and continue to fight but without taking drastic more expensive actions, I think I'm just screwed. It is ill advised and expensive to go to court here and I don't want to make this battle so public in such a small place. I am owed 10,000 dollars, which is no small money for me, as the job ended early (I was originally expecting to earn 20,000 from it). Now I am getting 0 AND it cost me some money to actually do my work as an environmental consultant.

I don't want to go to court to resolve this, as it will cost me more money and time and this is a foreign court that is unpredictable.

My question is, can I deduct my losses (the $10,000 I was supposed to get paid) against the taxes owed on the $8000 in earned income for 2009.

I have a signed contract and stop work order I issued when it became clear I was going to be paid squat. What would I need for documentation to prove I'm not getting paid? . Also, now that everything has gone so sour, no one will issue anything in writing anymore so if I need a piece of paper that says, there's no way in heck you are getting paid, that might be difficult to obtain.

Secondly, how would I claim these losses--is there a particular US gov form for losses. Thirdly, how much more likely get audited will I be by deducting big losses against my measly 2009 earnings.

Lets say I finally and surprisingly get paid next year at some point--what would I do if i had already deducted in from my 2009 taxes.

Is this common for independent contractors to find themselves in such a position, where it is too expensive and hard to go to court and the Indie just comes to terms with not getting paid.

Dejected and Taken Advantage of Indie, Jennifer


Dear Jennifer, A Dejected and Taken Advantage of Indie,

I apologize for cutting so much from your email. I wanted to make it accessible to my readers because yours is not an uncommon situation. Many indies get stuck for the bill. I am sorry this happened to you and to so many others.

What you don't want to hear is that you allowed yourself to be taken advantage of. If it were a $1000 job I could understand your doing the work before getting paid. But $20,000!! And doing $10,000 worth of work with no payment. In all that paperwork that you have you should have included a payment schedule. Something like: 1/4 of the work done, get paid 1/4 of the money. No more work until you get paid.

So, it happened to you once. Don't let it happen again. You are a business. Treat what you do as a business.

And the other thing you don't want to hear. You are a cash basis taxpayer -- explained in these posts -- so you can do nothing with the loss. You cannot deduct it. You may deduct any expenses that you incurred.

Best,
June

Selling on Ebay? Fear be gone!

Ms. Walker,

Thanks so much for the business expenses list!

I started selling on eBay in December, trying to make some extra money to pay off some bills. I still have a full-time (45-50 hr/wk) "W-2" job.

Since I began to consider selling on eBay, the IRS has never been far from my thoughts! My Dad (now retired) had his own business for as long as I can remember, and my Mom handled the bookkeeping. Everything went well for many years, then in about 1969 some of the paperwork was done incorrectly, and we were audited. This was in the time before the "kinder, gentler IRS", and it didn't end well for us. I was only about 10 years old at the time, but I can still clearly remember what a horrible time this was! I remember that my Dad had bought a brand new 1968 VW Beatle for my Mom for her birthday in December, and shortly after that came the audit. Needless to say, the Beatle was lost. A very difficult time for my family!

I follow several personal finance blogs and sent in a question to one blog (Moolanomy) concerning eBay and taxes, and they recommended your book. I immediately went to the library and found the book. It is excellent!

Thanks so much! It has really put my mind at ease. I had been saving all my receipts, but really didn't know what else to do. And now I know!

Ruth
Texas


Dear Ruth,

Thank you so much for giving me a peek into your indie world. I find that the real experiences of real indies help other self-employed get a better perspective on their solo ventures.

40 years is a long time to have the black-cloud fear of the IRS hanging over you! Time to clear the sky. That is what I hope my writing and seminars accomplish: Give clear and simple explanation of complex tax rules and regs. By giving indies a basic understanding of taxes and money they will have the confidence to push away fear of audits and the IRS.

All the best,
June Walker

Pianist's Dad

Isn't it interesting how certain events happen at just the right time? I have many, many questions from my readers sitting in my DO bin. I answer as quickly as time allows and pretty much in the order received. But this one from Carlos I received this morning and it fits so well with yesterday's post Writer's Mom that I wanted to juxtapose in order to further my point to parents of indies.

A while back I received a request for my business expense list from Carlos, a Pianist/Organist/Cantor. He mentioned in the request that he was blind. When I sent him the expense list I asked if he were blind or were he using that to mean blind to understanding taxes. Here's his response.

Good Morning June,
Thank you for sending me the expenses list for musicians. Actually, my father always help me prepare my tax and he was the one who recommended me to send you an email because your website helped him to discover what are the expenses that could be legally deduct on my income tax as a self-employed musician. He didn't know this before because we only have a tax preparer not a tax adviser or advocate like you do. Even I don't prepare my own income tax, it is nice to learn things about taxes and the legal things around it. Sorry to mention my being blind in one of your questionaire, it really has no relation on your advice. I have read some of your advice to the indies like me, I could compare you to my spiritual director who only advise me for the good of my soul. No cutting corners. God bless you, you are one of a kind.

carlos
Fairfax, VA


Hi Carlos,

Thanks for getting back to me. You have a good -- and smart -- father. I am glad he had you contact me. So many parents think that the way to help their children -- even kids in their 20s and 30s -- is to do for them instead of teaching them how to do. Check out this most recent blog post "Writer's Mom" at http://junewalkeronline.blogspot.com/2009/02/writers-mom.html .

I am mailing you -- and your dad -- a gift. Listen and learn.

Thank you for your blessing. I very much appreciate it.

Best regards,
June Walker

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

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

Really confusing questions. A really confused indie!

This question is such a mishmash that I am going to embed my answers and also give you a taste of indie-style forensic accounting. This kind of email from an indie is not unique. Most times I disregard and don't post them. However, I hope that reading this will help you see a better way of approaching your indie business.


June,

I am in Richland, WA and have an engineering degree. I have registered an LLC as an sole proprieter to develop some software that will soon be bought out.

In the meantime, I am trying to decide how to become independent and pick up technical consulting work. Translated: How do I get clients? Maybe that's what that means. I prefer to do a 1099 with other companies, as I understand that it means I work under their insurance guidelines What kind of insurance? Professional liability insurance? Health insurance? Generally, indies are not covered by their clients' insurance whether the client is an individual or company. What does "guidelines" mean? ? Did an engineering firm offer you insurance coverage even though you'd be an independent?

And what does "understand" mean? Don't enter into an agreement with a client by taking something to be understood. Terms must be explicitly agreed upon. Be careful. Too many indies follow the advice of Aunt Tillie, who has a neighbor who is an engineer and knows for sure.

and I don't need to start my own business per se. You are an LLC structured as a sole proprietorship. You have already formed your own business. And under whose direction did you form your LLC?

I guess my question is... what do I need the LLC for. Why did you form an LLC? -- I am not exactly sure I understand how the 1099 and LLC work together. Shouldn't you have asked what you need the LLC for before you formed it? What were the reasons?

As an engineer and software developer logic, sequence and reason are all at the core of your discipline. I assume your analytical skills and decision-making processes have been developed throughout your schooling. You need to use those same skills on the business side of your indie venture.

I noticed your comment about how one is a tax structure and the other legal, and to fill out the 1099 with my name first, LLC name second, and my own SSN rather than the EIN. I am really confused on this. You're confused? I'm confused, because I can't find where I said exactly that.

Also, does self-employment mean I need to register as a business in my local area and may state and pay business taxes. -- I hope you did a better job of proofing your software than you did of your email. Your sentence has a typo but I'm not sure whether "may" is a typo for "pay" or a typo for "my." The answer to the kinds of taxes paid by an indie can be found on my July post here I am an LLC. How do I pay taxes? Call your local Small Business Association about local business registration requirements.

Please help!
Name Withheld

I hope I have.
June

Think Like an Indie Business

This is related to Watch out for bad tax advice! about the architect who received incorrect advice from AARP. I think it shows how a creative person [Susan is an interior designer] with perseverance can master the business side of an indie venture. It's the "indie-business mindset" at work.


June --

Thanks June for your answers!

Since the bulk of his [the gentleman architect] indie work and income occurred during the last quarter of '07, it was not a large $ amount. Also, when we reviewed all of his expenses, he did not have a lot, nor were they complicated to figure out. In light of the amounts, he decided to have them done now and not file an extension.

We lucked on to an accountant at HR Block who does a lot of indie taxes, and he echoed your response to the bad advise we were given. We did okay - when the HRB guy showed us how to estimate quarterly taxes for 2008, based on the income earned for the 2007 quarter, it was a little more than the amount less expenses he owed for 2007. The three of us reviewed all of the expense deductions carefully, and discussed the differences in how certain things can be deducted. The HRB guy's answers were in line with my recollection from your book. As I said, there were not a lot of expenses, nor were they complicated. We only differed on the issue of polo shirts with the company name/logo purchased to give to clients as gifts and one for him to wear. We ended up deducting (-$25.) the one given as a gift, but were advised that the remaining 3 did not qualify as promotional because they were considered "street wear". I had to concede on that point, since I was not clear as it is explained in your book.

We are learning a lot and grateful that our first lesson involved a smaller amount rather than a full year's worth. For 2008, I am hounding him to save every scrap of receipt for everything, no matter how insignificant he may think it is. My mantra is that it all adds up, and I am carrying your book every where I go till I can recite it in my sleep! It will be my role to do the simple system while he goes out and earns the bucks! I have plans to eventually go indie myself, and hope by then that the indie way of thinking will have become second-nature to me.

I appreciate your time and your book.
Regards,
~susan~
licensed interior designer



Dear Susan,

Apologies for the delayed response. Just at the time of our correspondence I did a complete technology switch in my office and things got messed up.

Decades ago I taught for HRB. There are many knowledgeable people there. Congratulations on finding a savvy guy who can also explain things.

I'd need to do some research on the "polo shirts with the company name/logo." Are they streetwear? Or are they considered advertising similar to paying for your child's high school band or softball uniforms that have your business name on them? Or are they under-$3-gifts used for advertising?

I wish you much success on your indie thinking.

Best,
June

ALERT! Real Estate Seminars

Hi June..

Stumbled into your site. Great info, but could not locate a question similar to the one I have. I had spent a fortune last year (2006) on real-estate training. I heard from those gurus the line that this is "tax-deductible check with your accountant."

I hear different approaches to deducting those expenses.

As a background, I work a w-2 job in the computer industry. I am developing myself into a real-estate consultant and investor to be done on a part time basis. My wife is also joining me and is preparing to get her real-estate agent license.

I have started an LLC this year. It is Nevada-based. I will be adding my wife to the LLC soon. I have one rental property in Alabama bought in 2007 and am a resident of California.

Back to the deduction of all those expenses -- the approaches that have been suggested are:

A. Use all those education (including travel etc) expenses and add it as a basis for acquiring the rental property and therefore use it as part of the depreciation calculation.

B. The other suggestion is to "loan" the said amount to the LLC I have, since I will be serving the LLC with all that expertise acquired through the education.

C. The other one I found was to take $5K in the 1st year as business start-up expenses and keep the rest for subsequent years.

What are your thoughts and suggestions?

Thanks - Ravi


Hello Ravi,

I am so glad that you stumbled onto my site. I hope it keeps you from some serious stumbles in the future!

Were those "different approaches to deducting ...expenses" that you list presented to you by the butcher, the baker, and the candlestick maker? Certainly not by your tax professional -- right?

You cannot get sound advice unless you

A. Seek out competent professionals.

B. Present your background fully.

C. Ask well thought-out questions.

I would not advise on which real estate to buy because I don't have the expertise. And I don't expect accurate tax advice from realtors or guys selling real estate seminars. My readers should not spend money on such seminars unless they check out the credentials and expertise of the presenters before taking the courses. Note I said, BEFORE.

Based on the info as you present it, it appears that all the advice you got is wrong.

You say you are an LLC but you didn't say which kind of tax entity. Check out my posts about LLCs linked here? If you are a sole proprietorship LLC you cannot loan money to yourself.

You say that you are developing yourself into a real-estate consultant and investor. There are different tax treatments depending on your business relationship to real estate, such as, are you a ...
... Real estate investor
... Rental property owner
... Rental property owner as a real estate professional
... Rental property owner providing services.

Read this post Real Estate Sales & Self-employment Tax to understand the differences.

You said you are "developing" a business, not that you are a business. And so, contrary to what the seminar presenters told you, you cannot deduct as a business expense any education costs that prepare you for a new profession. However, there are various educational tax credits available for all taxpayers.

Nor are the expenses considered start-up costs. I suggest you read More about START-UP COSTS: The expense of checking out a new business .

To any of you considering a business in real estate -- or any other indie venture -- I suggest you start by learning the basics about indie taxes in my book, Self-employed Tax Solutions. It's your first step toward developing an indie business mindset.

Indie Business Mindset: Learn the Basics

I get many questions from blog and website visitors. I choose to post the questions that provide information to a wide range of independent professionals. And I post others that offer guidance to all indies. To acquire an indie business mindset must be a goal of all self-employeds.

In my book and seminars I explain specific ways to take a business approach to your indie venture. In my posts I give you unique questions from my indie readers.Their questions are unique, but, alas, their situations are not. They all need to work on developing a stronger indie business mindset.

Greg, from Douglasville, Georgia, sent me the email below. I embedded my response to him. Greg's situation is another example of a self-employed person not thinking like a business -- not looking at what he does as a professional endeavor. See if you think the same as I do.


Hi June -

I filed an extension, so I have more time...brief background, I had $12,000 total income for 2006.
What kind of income? From employment, self-employment, investments, rental property?

If I go the 1040EZ route again I will have to pay $250 federal & $175 state.
You can't use a 1040-EZ if you are self-employed.

My question is, I had a $7,000 medical bill this year & I have about $3,300 in mortgage deductions. Medical and mortgage interest are not business expenses.

Is it worth the effort to file an extended 1040 with both Fed & state just to save the $425?
Whether you invest your time to save your money is a question only you can answer. The first question is: What is your time worth?

Also must mention if I do this, I will have to pay a tax preparer most likely.
I highly recommend that self-employeds not prepare their own tax returns. Do your homework and then use a tax preparer experienced with indies.

In addition to having such a bad year when I have unusually high deductions I hate to pay taxes.

I think in 1947 there was a case reported of a man named Homer Slade who said he enjoyed paying taxes. This is the only known case on record.

Your advice is appreciated. Thank you, GT
You are most welcome, Greg. Asking questions points you in the right direction. Know that whether you make $1,200, $12,000, $120,000, $1,200,000 a year, you are a business. A business is run by certain rules and my blog and website are a good place to start learning the basics. Here's some links on both:
I am a Business
Is it a deductible business expense?
Help! I am self-employed. NOW what do I do?