A good deed is not a tax deduction.

Hi June,
I really enjoy your newsletters -- Ways Through the Maze . I've been doing my own taxes for close to 20 years using Turbotax and it's predecessor, MacinTax. For many of those years, I was an employee with a part-time business. I'm now in business for myself publishing a local home improvement magazine.

The business is now 2 years old and struggling but surviving. My dilemma is this: I sold an ad last year to Habitat for Humanity at a highly discounted rate and they've given me a receipt for a donation for the balance of the amount. However, I can't figure out where on my Schedule C to place this donation. Turbotax doesn't seem to allow for a business to make a donation but I know that this is not that uncommon.

Can you tell me how I should account for this on my tax forms. I'm structured as an LLC.

Thanks,
Alan


Dear Alan,

Glad you like my eLetters. Please tell your indie colleagues.

You can't find it on TurboTax because there in no accounting for donated time other than the feeling in your heart that you get for doing a good deed.

Read this post about Donating Time: 10 Cents A Minute .

Best,
June

File an extension. It really is the smart thing to do.

June:

I saw your post on Turbo Tax, and I am now completely confused. I own a small web programming company (sole prop) LLC in Ohio, and I would usually use Turbo Tax… What do you recommend now? It’s such a late date, and I am sure most accountants are too busy for a new account.

Please let me know what you recommend!

Jeremy


Hello Jeremy,

First of all there is no need to rush. Read my post File an extension. It's the smart thing to do. If you file an extension you'll have until October 15 to file your tax return. That'll give you time to find a tax pro.

In the interim, learn as much as you can. Read my blog and the columns on my website. Be sure to check out my posts on finding the right tax pro.

Best, June

Indies: Steer Clear of Tax Prep Programs

The advertising for tax preparation software gets heavy during tax season and this year it seems like a heavier barrage than usual. Turbo Tax and other tax programs are blitzing the Internet with promotion, some of it well disguised. For instance, Turbo Tax has an arrangement with Comcast, describing itself as “the official tax software of Comcast.net.” Comcast’s articles, which are ostensibly written to give you tax tips and alert you to deductions -- the same tired, old tips and deductions you’ve heard before -- are simply plugs for Turbo Tax. These guys are slick.

I have warned indies against using tax preparation software in the past, see these posts on Turbo Tax . A recent story on Fox News quotes a Turbo Tax spokesperson as saying: "There's a lot of time that's put in to make sure that the product is easy to use for the average American." Well, as you know: Indies are not average Americans. Wage-earners and employees may be but not the self-employed.

The software is probably adequate to handle relatively straightforward tax returns for somebody who collects a weekly paycheck, but self-employed tax returns are not Taxes 101, they are complicated. Many CPAs don’t have a clue about how to do taxes for self-employed people. So can a software program handle returns that are nuanced and complicated by the continuous interplay of business and personal that exemplifies the indie life?

An aside here: the Turbo Tax program supposedly geared to indies costs $79.95. My tax prep program costs several thousand dollars every year and I use it with the benefit of 30 years’ experience. And I educate my clients in good, simple, accurate recordkeeping.

It’s not that these cheap software programs are “wrong.” The program may operate correctly if the data input is done right. The question is whether an indie knows what questions should be asked of the program. Many brilliant indies aren’t aware of the business aspects of what they do. Software is like any tool; if you know how to handle it and use it properly, it ought to work. But does an indie who puts all her time and effort into her indie business know enough about the rules of home office deductions to choose the right prompts?

The experience of Timothy Geithner, see my post How are your plumber and the Treasury Secretary nominee alike? , paints a sorry picture of a guy who deals with the most arcane financial matters (He’s our Treasury Secretary now!) but apparently couldn’t figure out how to do his indie tax return using Turbo Tax.

Take a look at TurboTax’s Home and Business. Billed as the program for sole proprietors, it says: "Biggest Refund For You and Your Business.”

The word “refund” is used seventeen additional times in the copy. “Watch your refund add up as you complete your return,” is one inducement to buy the software. Savvy indies who read my blog know that a refund means you’ve just loaned Uncle Sam a chunk of your money, for a whole year, interest free!

The goal for indies – as it should be for all taxpayers – is to have the lowest tax liability legitimately possible; to have paid about that much over the course of the year; and to not get a refund, but owe a wee bit. That way you’ve used Uncle Sam’s money interest free!

It shows that Turbo Tax is more interested in its own profits than in the financial well-being of indies. It shouldn’t be programming you or any other taxpayer to get refunds.

Incidentally, the company is suffering through a public-relations embarrassment, as many purchasers of the software complain about serious glitches in the program.

I know I’ve given you a daunting task: Find an indie-savvy tax pro. Take a look at this post, Two Parts to Finding the Tax Professional Right for You .

A less daunting task is to learn the basics of self-employed taxes and recordkeeping. You can start here on my blog and on my website and in my book.

Best,
June

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

Reimbursed Expenses Included on a 1099

Hi June,

I just discovered your site today.. am I glad!!

I have been an independent consultant since Oct 2006.

I received a 1099 which includes all my reimbursed expenses. My question has to do with the meals deductions: in using Turbo tax, it appears that only 50% of my meals are deductible. That would mean that 50% of meals becomes ordinary taxable income.

Am I wrong?

Claudia
San Mateo, CA


Dear Claudia,

It is not you who are wrong. Turbo Tax is wrong.

When an indie is reimbursed for expenses and those reimbursements are included on a 1099, the indie may deduct all the reimbursed expenses.

Reimbursed meal & entertainment expenses are not subject to the 50% reduction. I put them on the "Other Expenses" line on the Schedule C and label them "Expenses included in 1099 income above."

The person or company who reimbursed you is subject to the 50% reduction. They often try to get around that by including the reimbursement on a 1099 to an unsuspecting or unknowing indie.

The regulation sounds this way in tax jargon: A nonemployee service provider (e.g., an independent contractor) that provides the required substantiation to and is reimbursed by the service-recipient for meal and entertainment expenses incurred on the latter's behalf isn't subject to the percentage reduction rule. The rule applies to the service-recipient, who can deduct only 50% of the reimbursement.

For those of you wanting to argue this with your tax pro: This is IRS Code Section 274(n)(2)(A) and Notice 87-23.

You see. I told you all I read a lot of those thousands of pages of tax code!!

Cheers,
June

More on Tax Prep Programs

Hi June,

I am a Validation Consultant new to the indie world and want to know if it's better to hire a tax pro to prep/file my taxes or is it just as good to do it with something like Turbo Tax?

Is the IRS suspicious of indies who do their own taxes, as opposed to having a certified pro prepare them? The Turbo tax software (Business version for consultants/contractors)so far is straightforward and thorough enough it seems for me to do on my own.

Thanks for all your great advice!

Richard
Alameda, CA


Hello Richard,

You sent this in a while ago so you may already have filed your return using a program rather than a pro.

In my post Tax Prep Software is Not a Substitute for Knowledge I say that Turbo Tax, like any other tool , is just that. It's a tool. No tool works if you don't have the knowledge. Photoshop doesn't give someone the talent and skill of an artist. Family Lawyer doesn't give someone the education of an attorney.

Just as there is more than one way to design a business card or write a contract there is also more than one way to prepare a tax return for an independent professional. What you put into the program is what you get on your return. If you are savvy enough about indie tax regs you will end up with a satisfactory tax return. Keep in mind that the program will not give you advice. That you'll need to get elsewhere.

I recommend an indie savvy pro over a tax preparation program.

The IRS isn't "suspicious." It looks for cheaters -- randomly and with a vision. Don't cheat the IRS. Don't cheat yourself. As you may have read on my site or in my book, if you keep records using my Most Simple System you never need fear an audit.

Best,
June

Artist Tax Problems

Hello Ms. Walker,

Me and my husband are self-employed artists.

The question that I have for you doesn't really belong to the self employed category, though. Here it is: I have a trust that sends me 1099's. This year, the 1099B said that my proceeds from an exchange,(a trust merger) gave me a net proceed of 80,000.

When I plugged this number into TurboTax, there wasn't any spot for "exchange", so I listed it as a "sale": it said I would owe $5000! Did I do this right? Are exchanges "sales"? I'm just not sure if I'm doing this right, and, ironically, I don't have the money to pay an accountant. I'm an artist, I do my own taxes, I get $300 a month from the trust, and I made $0 in 2007 (I moved to Mexico, where I can live more cheaply). I

I know this is totally not what your site is about, so thank you for listening. It's hard in Mexico to find someone face to face who knows about US taxes. If you have any other site/person to send me to, please please do so! I've been trying to read as much as I can online to figure it out.

Best wishes from Baja California Sur


Hello Baja California,

Your dilemma is not unique to you. Many artists have tax questions about the non-indie part of life and don't have the resources to hire a tax pro.

Here's a little general tax info about income statements received at year end from different sources:

An employee must get a W-2.
A self-employed may receive a 1099-MISC.
An investor with interest or dividend income receives a 1099-INT or 1099 -DIV.
An investor who sells a stock or other product receives a 1099-B.
A partner in a partnership receives a K-1.
A trust beneficiary [one who receives money from the trust] receives a K-1.

Your first step should be to go the source. By the source I mean the accountant who prepares the trust tax return. Unless yours is an unusual situation, you should not be receiving 1099s from the trust. You should receive a K-1.

You don't say what kind of artist you are but for my purpose I'll think of you as an accomplished watercolorist. Just as putting a paintbrush into the hand of your neighbor doesn't make him a skilled painter, nor does putting you at the keyboard of TurboTax make you proficient or even skillful in taxes. Over and over in my writing I warn about the inexperienced using tax programs.

A 1099-B is sent when there is a sale. If you receive a 1099-B showing a sale of $2,000 you might have a gain or you might have a loss. If you bought the stock for $500 you would have a $1,500 gain. If you bought the stock for $3,000 you would have a $1,000 loss.

An exchange is just that, one thing is exchanged for another. In your case maybe one trust for another trust. For instance if a $50,000 trust is exchanged for a different $50,000 trust there is no gain nor loss. Thats's why you need to call whoever is handling the trust. If you get no help there call the IRS directly at 800.829-1040. [The # may differ when calling from Mexico. If it is, please let me know.] Don't be afraid of contacting the IRS. The new IRS is friendly and often helpful. Don't use a tax program for this situation.

Best,
June

Tax Prep Software is Not a Substitute for Knowledge

Here's an email from Eliza. Apologies to Eliza I cleaned it up a little to help my readers understand the situation better.

Hi there,

I am an environmental educator, doing many odd jobs throughout the year so that I can spend my summers doing environmental programming in the woods.

I graduated from college in '06, and so had very little income in that year (around $6000), and received refunds on all my taxes.

In 2007, however, I worked in a variety of capacities throughout the year, and ended up earning about $16,000 in wage income plus the tax refunds from the year before, plus about $3,400 in investment interest.

Of the $16,000 in wage income, about $6,500 of it was as an independent contractor, and I've received two 1099-MISC forms to account for it.
June says: Remember, "wage" is not synonymous with earnings. You earned $16,000. $6,500 was self-employment income. The balance, $9,500 was wage or W2 income.

On Turbo Tax, it asked me to set up a "business entity" and taxed me twice for that income, telling me that I would owe $1500 in federal taxes. When, out of frustration, I deleted the "business entity" line on the Turbo Tax worksheet, my tax liability dropped to an $86 refund.
June says: Turbo Tax, like any other tool , is just that. It's a tool. No tool works if you don't have the knowledge. Photoshop doesn't give someone the talent and skill of an artist. Family Lawyer doesn't give someone the education of an attorney.

What gives? I thought single people making $16,000 were not supposed to have heavy tax burdens? I mean, I almost qualify for the EITC!
June says: [Earned Income Tax Credit. That's money the government gives you if you have a low income.] Do I really need to pay that much tax? It's half of what I managed to save all year! 0

June says: If you read my website column Taxes: Which ones and how much do I pay? you'll see that you pay approximately 15% of your net self-employed income as SE tax. Assuming no expenses deducted from your $6,500 income that's $975 tax. Add income tax to that.

I didn't document my auto expenses, etc., well enough to specifically deduct them, but I can guesstimate.
June says: In my book, Self-employed Tax Solutions, there's an explanation of which expenses may be estimated.

I guess I'll be really careful about that in the future, and I hope your free deduction worksheet will help. This is really the first time I've filed full taxes on my own, but I do have some help from my parents' local accounting firm, as they've handled that investment income up until now.
June says: And, of course you know what I say over and over again about tax pros: Get one who understands the indie tax situation.

I hope there's a short answer to this long question! Thank you so much.

--Eliza from Northampton, MA

Notary Public / Court Reporter

Hi June,

Let me preface by saying, this year I attempted to do my own taxes through TurboTax to have a greater and deeper understanding of same; I believe that's the only reason that this was brought to my attention. I truly don't believe this question has ever been asked of me recently by any accountant that I've used.

There was a question regarding being a notary public and that any services as such were being performed as a public official and, therefore, those services were tax exempt.

As a court reporter it is my responsibility to swear in all witnesses and to then also certify every page of the transcript as being true and correct (also why I need to be a notary) as far as what was said, the parties present, events that happened, et cetera.

I feel that being a notary is an integral part of my job and, therefore, I am not sure if I should have to pay any self-employment tax. I have thought and thought about it and I don't see how you can separate out the two and I do believe my client pays me for both services being performed at the same time. If I were to lose my ability to be a Notary I would no longer be able to report. I looked on my previous tax years and I have always paid this self-employment tax.

Any guidance and standing I would have on this matter would be greatly appreciated. Thanks so much, in advance, for all of your time.

Sincerely, April in North Carolina



Hello April,

Public officials and public officers do not have to pay self-employment [SE] tax. There is no precise definition of "public official." The IRS says it is anyone who who administers or enforces public laws and exercises significant authority. . This includes positions such as governor, mayor, member of the state legislature or school board, justice of the peace, tax assessors.

A notary public, although she must pay income tax on fees earned, does not have to pay SE tax on income.

The IRS, on its website, gives the following examples of independent contractors: "People such as lawyers, contractors, subcontractors, public stenographers, and auctioneers who follow an independent trade, business, or profession in which they offer their services to the public, are generally not employees ... The earnings of a person who is working as an independent contractor are subject to Self-Employment (SE) tax."

A court reporter or stenographer who offers her services to attorneys or anyone else needing her services is considered self-employed, that's an independent contractor, and so does not get the exemption from SE tax that public officials get. A court reporter is not considered a public employee.

Here's a decision from a court case [Allen C. Moore and Annette Moore, plaintiffs v. U.S. defendant] in California in 1984: SE tax must be paid by court reporters who were also notary publics. The court reporter's services generated business fees subject to SE tax despite the practical necessity of being notary." Being "notary was merely incident to court reporting business."

I'm sure that's not the answer you want but it was a great question.

And, I'm glad you learned something from TurboTax, but, be careful. If you've read some of my other writing you know that many tax prep programs do not do the best job for indies.

Best,

June