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

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

What To Do With a Business Loss

Hi June,

I saw today the following quote about tax cuts in the new stimulus bill: "Money-losing small businesses could use their losses to offset profits made in the previous five years, instead of two, making them eligible for tax refunds. The provision is limited to businesses with annual revenues under $15 million..."

Naturally, given the economic downturn, many of us "indies" are experiencing business losses for the first time. Does this new provision apply to sole proprietors? i.e. Can losses in 2009 offset taxes due for 2008?

If this is a dumb question, answer me privately. If you think it might be useful to others, maybe it's good for your blog.

Thanks.
Jolene



Hi Jolene,

There is a procedure to handle losses. In tax jargon it's called an NOL -- an acronym for "net operating loss." It's complicated and depends on many elements of someone's tax return. But what it boils down to is: If your entire income [not just your indie business] with lots of adjustments and modifications results in a loss you may carryback that loss to previous years or carry it forward to future years.

You must make the backward/forward choice by looking at your past and future income as well as into your crystal ball -- with the help of your accountant, of course -- and determine which direction would save you the most tax money.

This procedure has been around for a very long time. The amount of time to go back and forward has changed over the years. This is a complicated exercise and must be done by a knowledgeable tax pro.

Thanks for asking a good question.

Best,
June

Cash vs Accrual Recordkeeping

Hello, June:

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

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

Thank you.
Laser
Minot, ND


Laser --

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

There are two methods of recordkeeping: Cash or Accrual

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

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

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

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

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

-- June

Home office but no income ...

June --

I am an inventor, an indie 2 years, not inc'd yet.

I am just starting out, i.e. haven't actually made any money yet, but I've spent many hours designing, researching and developing my ideas (one of which I applied for a full patent). If I did not receive income can I deduct home office expenses?

Thanks,
Matthew
Golden, Colorado


Matthew,

As long as you are trying to make money in a business-like way you are a business and you may deduct business expenses. There are restrictions on home office expense. Theoretically you may take it as a deduction, however if you have a loss [more expenses than income] then you may currently deduct only the home office portion of mortgage interest and taxes. All other home office expenses must be carried forward, ready to be deducted when your inventions make you some money.

I assume inc'd means that your are thinking about incorporating. Don't do it until you've read my posts here business entity -- incorporation and here business entity -- LLC .

-- June

Indies & Mortgages and proof of self-employment

Hi June:

I'm refinancing with a stated income loan. I work in a facet of mortgage lending for 17 years. For 12 of those years I was self-employed. What I do for a living is well known to the lender and my income was not questioned.

The last closing condition requires me to prove that I am self-employed by providing a letter from a CPA. I have always done my own taxes. I don't even know a CPA. How do I prove my status? Can I hire a CPA for the sole purpose of writing this letter?

Thank You!
Kathy Honolulu, HI


Hi Kathy,

Yes, you may hire any tax professional with letterhead stationary. Show the tax pro your tax returns and she may write the letter for you. The fee for this should be small.

Best,
June

Starting Out With a Loss

Hi June,

I just moved to Jacksonville, Florida coming from all over the country working as a PGA professional at private golf clubs. I worked as a club pro up into mid August and then I got engaged and became sales representative for golf apparel working from home.

I collected unemployment from mid august until late November.

I invested in a new vehicle, new clothing, new office equipment, work supplies etc.

I have received $100.00 dollars in commissions as of 12/18/2007. I have future commissions coming but I have no idea what I should do for tax purposes. Can I write off some of these expenses without really earning anything yet? Can I write them off in 2008? Can you help?

Thank you.
Dan in Jacksonville, FL


Hello Dan,

The quick answer: As long as you are in business trying to make money you may deduct business expenses even if you make no money.

The long answer: You need a lot of info. I see you requested a copy of my business expenses list. On the email that accompanied the list was a suggestion to read Is it a deductible business expense? on my website .

On this blog there is a lot of info about all kinds of expenses. Check out the category list on the left. You mention purchasing new clothes, so maybe a good place to start is the category expenses -- workclothes-uniforms-costumes .

And, congratulations on your engagement.

Happy Holidays!
June