Recent Grads Need Help With Taxes and Recordkeeping

This is from Jess and came as a comment to my post Designers Dozen: Tax Saving Tips for the Graphic Artist . Since it is typical of questions I receive from recent graduates I decided to give it more attention.

Graphic design students head out upon graduation, most of them toward freelancing, without a clue about how to handle income and expenses.

From Jess ... Thanks for this great article. I graduated from a graphic design school 3 weeks ago and have just started working full time as a graphic designer.

I have the receipts from the expenses during school, my mac, books, the course itself and going along to design based events. Can I claim any of these items? I use the same mac bought at school in my current position and I look at the books I have? I was also wondering if you knew about phones and phone bills if used for business?

THANKS HEAPS for your time! It is wonderful being able to access this information.
Jess


Congratulations, Jess, on both graduation and the work you got.

If you were not working or actively seeking work while in school you cannot deduct as business expenses any of the costs you incurred.

You can, however, deduct assets. In your case, assets are things -- computer, books, any kind of equipment. Your cost-basis for deducting these things -- in other words, the amount considered your business expense -- is not what you paid for them but their fair-market-value on the day you started your business. That means the day you started looking for work.

For instance, the fair-market-value of your Mac would be what some other graphic designer would pay you for it on that day.

The same with your books. Think of it as: On the day you tossed your cap in the air and said you were ready for clients, what would an incoming freshman pay you for your books? That amount is the fair-market-value of the books and your basis for deduction.

Hope that helps.

And thanks. Happy that my is helpful.

-- June

Exotic Dancer and more ...

I choose questions from indies that I think will be most helpful to the most people. I stay away from questions about unique situations that won't be informative to a lot of you. The situation below, from Michelle, although unique has a number of situations that apply to a lot of indies.

I've noted the distinct points or questions in red.


Hello June!

I have a very complicated question...or so I think! I am confused about pro vs hobby and what deductions I can take for this year.

My main job for the last 15 years has been as an exotic dancer. I am an independent contractor and have always filed a schedule C. I deduct traveling expenses (when working out of town) and supplies (costumes, shoes)

I am also a fine art photojournalist who is currently working on a photo documentary project to be published as a book. I plan on traveling often this year to shoot various photo projects and complete my book. I have also purchased plenty of supplies and equipment in this tax year as well and I have a home office dedicated as my studio. Since this is a ongoing project but I have received no income from it as of yet...can I still deduct travel expenses, equipment costs, home office, etc without profit?

Also, I have third business! I attended a yoga teacher training this year and will start teaching classes out of my studio (separate from the art studio) as of April 1st in my home. I have had to pay for paint, carpet, supplies to ready the studio for classes. I have been working on the studio since January and paying the extra rent myself. I do have a registered business name and business account. I will have very little profit by April 15. So am I entitled to deduct the home studio and start-up costs for the business this year? How about the teacher training and yoga classes as an education expense?

Since I have 3 separate businesses I am afraid of an audit due to all these deductions! What is proper protocol for multiple small businesses? Should I be worried about claiming too many deductions?

I would really like to do my taxes myself to avoid extra costs due to the fact I have paid a lot out of pocket to start up the yoga teaching and for photography equipment.

Your help will be greatly appreciated!

Thanks in advance!

Michelle
Portland, OR


Here's my response to Michelle:

The goal of a hobby is not to make money. The goal may be to have fun, help others, perfect a skill. A hobby may make money. You may deduct expenses only up to the amount of hobby income.

The goal of a business is to make money. As long as making a profit is your goal you don't have to actually make money. You may also enjoy yourself, help others, or master skills or develop a nascent talent. You may deduct all legitimate business expenses regardless the amount of income.

If the business is not yet "open for business" meaning you are not yet ready for clients or customers, then you are still in the start-up stage. Expenses may be deducted when the business opens. You may not deduct education costs to learn a new skill.

You say: I will have very little profit by April 15. April 15 is the first deadline for filing a tax return. It is, however, immaterial to income or profit. Calendar year taxpayers -- that's just about all of you -- group income and expenses from January 1 through December 31.

It would be unwise, time- and money-wasting to try to do your own tax return in order to save accounting fees. You have a complex three-indie-business tax situation; you lack knowledge of basic indie tax treatment; you have not had the time, or the rigor, to review my site and blog where you could have found all the answers to your questions. Would you teach yoga without first studying it? I wouldn't .

Put your time and energy into your businesses -- yoga classes, dancing, photos -- you'll earn more money, achieve success, and have the money to pay a tax pro.

Converting from Personal Use to Business Use

Maureen, from Las Vegas, Nevada asked:
First, I love your Self-Employed Tax Solution book! ... Can I take a deduction for the furniture and office equipment in my home office? I bought the furniture about 14 months before becoming an Indie and I do have the receipt for it. My fax machine, printer and laptop are quite a bit older. I don't have receipts for them or know what I originally paid so I don't their estimated current value.

The short answer is yes you may deduct them at whatever you could sell them for at a thrift or second hand shop as long as that amount is less than what you paid for the item. If the current value is more than you paid, then you can deduct your cost.

Caitlin Caterer and Eddie Electronic are new to self-employment. Here's a more detailed explanation of their equipment and supplies conversion, on my website at How to convert equipment and supplies from personal use to business use. The column is
excerpted from my book, Self-employed Tax Solutions .

A Photographer's Tax Return

I normally don't go into this much detail answering a question that comes in from my blog, but the complexity of this photographer's situation and her plea for help pushed me to do so.

Here's the question from Gwyneth in North Carolina:


Oh man. I lived in 2 states last year, and I think I have about 4 or 5 W-2s. Additionally, I did independent contractor photography work for another photographer. I was paid in both check and once in equipment. She has not given me a 1099 form. I have definitely spent far more on equipment and start-up costs than I made.

*** Do I file two different forms to the IRS?
*** My camera was purchased before I ever used it to earn money with...can I still deduct that?
*** Can I spread out my start-up costs? (website, cameras, computer equipment, etc, etc.) Or would they all be deducted for the year the money was actually spent?
*** What about cell phones? My cell phone is my only phone, so of course I use it for business AND personal calls. (this goes for my computer, clothing I bought expressly to wear while working, but that I also wear other times, etc.)

In the end, I definitely didn't make any money w/ my freelance work. I know I still need to file, and I want to do it right, but I certainly cannot pay a well-qualified tax preparer...I don't even have any of the money I made anymore. I poured it all back into equipment...and then some.

I apologize for asking so many questions. I'm sure you've answered a lot of them in various articles. I've read tons of your posts, and I find them so helpful.

Thank you!
Gwyn



Hello Gwyn,

Good Golly! You cannot file your own return. Because of the complexity of your situation I can tell by your questions that you don't know enough to do it on your own and do it correctly.

This is what I think you need to do. There are two major parts to the whole tax preparation event. The first part is the task of putting everything together properly, aka, recordkeeping. The other part is the tax preparation itself. Your part will be to get it the information together in an orderly fashion. That will take a bunch of your time and effort and patience.

Then take your records to a tax preparation franchise. Someone there will do a much better job than you can, and although they are not cheap the fee won't be in the thousands of dollars.

Here's two reasons to relax and just look at this as a chore that must be done:
Since you have more expenses than income you'll likely owe no tax.
And, you have a lot of time to do this. You need to file an extension. Read Extensions: Relax ... there's no need to file by April 15th on my website at http://www.junewalkeronline.com/index.asp?sPG=43 . An extension will give you until October 15, 2007 to file your return

To answer your specific questions:
1. You file one IRS 1040 tax return but there are many forms that are part of it.
2. You must separate both income and expenses into two areas: W-2 and self-employed.
[The equipment you were paid with is both income and expense.]
3. Your camera can be business expense. Its cost is its value on your first day of business.
4, Depending on the cost and kind of start-up costs they may be deducted all at once or over a period of time.
[The tax preparer will know how to handle that.]
5. You may deduct a business portion of cell phone and computer.
6. Street clothes are not deductible.
7. All the above will need to be divided by the number of days you lived in each state.

I cannot explain a recordkeeping system in an email or post. In the Most Simple System section of my book, Self-employed Tax Solutions, you can learn how to put your records together, simply and easily. The book costs about $13 on Amazon. If you choose, you could certainly read it and put your records together in time for the October deadline. You'd learn a lot and save yourself a lot of stress and time and money!

All this should put you on the right track.

Best regards,
June Walker

More about START-UP COSTS: The expense of checking out a new business

Family and wedding photographer, Billy Bridesnapper, was getting itchy about his job at Phil's Photos. He traipsed all around the county, in his own van, hauling his own equipment, getting shots that wowed everyone, yet he was earning only a small hourly wage and a small percent of each photo shoot he did while Phil made the big bucks. Over the course of several years Billy had learned a lot, mostly through observation, about the management end of the business; and via word-of-mouth he’d become known for his untypical black and white photos of typical family occasions. Friends and colleagues encouraged him to strike out on his own but being a savvy businessperson (for a photographer, that is) he decided to first weigh the pros and cons by evaluating the market for his kind of photos and getting estimates of the cost to set up his business. Also, Billy didn’t feel right going into direct competition with Phil, yet all his contacts were in the same geographic location. He’d have to do a lot of planning before he started his own business.

Although only 27 years old he managed to save up enough money to get started in his own business. (I told you he was unusual for a photographer.) When Phil announced he was going to sell the business to his brother Phineas, Billy really got busy, because he knew he did not want to work for Phineas. In a few months Billy spent $7,200 on locating and doing some repair work on a studio (with the help of his cousin, a carpenter) and printing high quality promotional literature which stresses the merits of his exclusive use of black and white photographs for all his assignments, including weddings, bar mitzvahs, retirement parties, and so on.

His decision to concentrate exclusively on black and white photography sets him apart from and avoids competition with Phineas; he can send customers who want the color photograph treatment to Phineas, who can reciprocate by sending to Billy those interested in black-and-white photos. They shake hands, part company, and Billy heads out on his own.

The expenses that Billy incurred in the organizing and planning stage of his new venture can be classified as START-UP COSTS.

The list of possible start-up expenses is as long and varied as a list of expenses for an existing business. Here's a sampling of business start-up expenses:
· Advertising for the grand opening
· Analysis of available facilities, labor, and supplies
· Fees for the professional services of accountants and lawyers
· Office supplies
· Repairs
· Salaries and fees for consultants
· Survey of potential markets
· Training employees
· Travel to find customers, suppliers, or financing
· Travel to look over business sites
· Utilities

Since Billy is now in business, all his start-up expenses are deductible.

However, deducting the costs of checking out a new indie venture are not always deductible. That's because start-up expenses fall into two types, general and specific.

Exploratory or General
These are costs you have before making a decision to begin or acquire a specific business. They include any costs incurred during a general search for, or a preliminary exploration of, a new venture. If you do not go into business then these costs are personal and nondeductible.

Investigative or Specific
These are costs incurred in your attempt to acquire or begin a specific trade or business. Even if you do not go into business, the costs are capital expenses and you can deduct them as a capital loss – similar to a loss on a stock sale.

Looking at the IRS guidelines on start-up costs for a business that never gets off the ground, it's quite clear that the agency wants to rein in people who have a notion to deduct ski trips and South American adventures under the pretext of business exploration.

If a business never gets started then exploratory expenses never can be deducted; but specific expenses always can be deducted. Be aware that when the IRS says "specific business" it means just that -- that the costs are incurred trying to start a new business or buy an existing one. It does not mean exploring a specific type of business.

There's more on Billy's business and a more complete explanation of start-up costs in Chapter Three of SELF-EMPLOYED TAX SOLUTIONS.

Travel Or Start-up Costs

Hello June,

I have been a self-employed chiropractor for 28 years. I am taking a brief trip with my wife and daughters to Las Vegas. I have considered moving there to practice chiropractic. Would my expenses and my families' expenses be deductible if I could document investigation of health care environment, locations, visit other chiropractors, etc?

Craig from Minnesota


Hello Dr. Craig,

The expenses for your family members are not deductible. [If your wife were your employee, her expenses would be deductible in the same way as might yours.]

If you go to Las Vegas for business purposes, your expenses would fall into one of two categories: Travel or Start-up Costs.
The two posts below Expenses While Changing Work Locations and Travel Expenses should help you determine whether or not the expenses fall into the "travel" category.

If they don't fit the travel category, then consider start-up costs. Let's think of a practice in Las Vegas as a new business. Expenses prior to opening a new business are considered start-up costs. If the new business actually gets started, then you may deduct the expenses.

However, if the new business does not get started, the expenses you had in trying to establish yourself in business fall into two categories:

1. Exploratory or General: The costs you had before making a decision to begin or acquire a specific business. They include any costs incurred during a general search for or preliminary exploration of a new venture. These costs are personal and nondeductible. These include going to Las Vegas to check things out, as you described.

2. Investigative or Specific: The costs incurred in your attempt to acquire or begin a specific trade or business. These costs are capital expenses and you can deduct them as a capital loss. For instance if you paid an attorney or accountant to review a Las Vegas chiropractor's practice that you were thinking of purchasing.

Looking at the IRS guidelines on start-up costs for a business that never gets off the ground, it's quite clear that the agency wants to rein in people who have a notion to explore the possibility of going into business for themselves, but only as long as they can write off the "search" at the expense of their fellow taxpayers.

If a business never gets started then exploratory expenses never can be deducted; but specific expenses always can be deducted -- one way or another. Be aware that when the IRS says "specific business" it means just that -- that the costs are incurred trying to start a new business or buy an existing one. It does not mean exploring a specific type of business.

Therefore, someone aspiring to a new indie business can be assured of getting a tax deduction if he settles on a business and makes concrete moves toward starting it up, whether the business actually gets started or not.

Expenses While Changing Work Locations

Hi June,

For the past several years, I have owned a portrait photography business in Florida as a sole proprietor. I've closed the business now in anticipation of a move to Tennessee, where I plan to re-open my business as a full-time venture. If I make business purchases like new equipment prior to the actual start-up in Tennessee, will they qualify as business deductions on my taxes? Someone once told me that if you purchased items prior to being "official" (licensed), then you couldn't write them off.

Thanks, Cheryl D


Hi Cheryl,

And I bet that someone was Aunt Tillie whose grocer's son once delivered food to an accountant. Right?

I assume you did not stop being a photographer during the move. You simply put things on hold while you packed up boxes and made the trip. You are not changing professions, simply changing locations. I'm sure that if you met someone on the trip who said he wanted to use your services, you'd take the information and contact him as soon as you were settled in your new place. You see you were open for business even though your studio was on the move.

Your business did not end its existence. And so because you were in business and willing to take clients all your expenses are the same as before and after the move.

Were you not already in business but had expenses preparing to go into business those costs would be start-up costs and would be treated differently on your tax return than regular business expenses.

And, as always, read the book that can simplify your tax and financial life, AND save you money!SELF-EMPLOYED TAX SOLUTIONS .

-- June