Dear June,
I am a graphic artist, writer and musician - sometimes separately, sometimes in combination. Currently, I make revenue from all three endeavors, but only profit from two. Do you think these three activities make sense as a single business?
I was thinking "independent creative services" might be the ticket. Am I on the right track or way off base?
Thank you for your help!
Jamie
Los Angeles, CA
Hello Jamie,
Yes, you are not only on the right track you're on the right train. And independent creative services is a perfect business description.
So many people in the arts combine many creative endeavors. Their thinking, supplies, equipment, business acquaintances, clients, books, and more cannot be separated into different businesses.
Don't get too creative though by trying to combine dog walking with graphic design.
This post Jack or Jane of All Trades: How does an indie define a business? will give you more info.
Best,
June
Friday, April 11, 2008
Monday, April 7, 2008
Hubby in the Office: Not Good
Hi June,
I have been self-employed as a writer and editor since 1991. About half of my income is from travel writing...I'm coauthor of guidebooks to Oregon, Montana, and Utah. In the past, I've always deducted my meals and entertainment when I'm traveling to research these books (which require regular updating) at the 50% level.
But since reading your book, it occurs to me that I could classify them as research and thus claim 100%. What do you think?
Also, about that home office...mine is a small portion of a room that I use all day long for work. Sometimes, after dinner my husband will space out in front of You Tube or check sports scores on the computer in my office space. Does this disqualify me for the home office deduction?
Thanks so much,
Judy
Portland, OR
Hello Judy,
Meals and entertainment while traveling for business are considered meals & entertainment expense and so are deductible at 50%.
If you take a client to a jazz club and discuss business before, during or after the show that's an entertainment expense. What I think you may be confused on is this: If a jazz musician goes to a jazz club to hear a certain saxophonist, that's research or education for the jazz musician, not an entertainment expense. In the same way that your going to a writers' workshop would be a research or study expense.
If your husband spaces out in the portion of the room that you use an an office, then absolutely no home office deduction allowed.
-- June
I have been self-employed as a writer and editor since 1991. About half of my income is from travel writing...I'm coauthor of guidebooks to Oregon, Montana, and Utah. In the past, I've always deducted my meals and entertainment when I'm traveling to research these books (which require regular updating) at the 50% level.
But since reading your book, it occurs to me that I could classify them as research and thus claim 100%. What do you think?
Also, about that home office...mine is a small portion of a room that I use all day long for work. Sometimes, after dinner my husband will space out in front of You Tube or check sports scores on the computer in my office space. Does this disqualify me for the home office deduction?
Thanks so much,
Judy
Portland, OR
Hello Judy,
Meals and entertainment while traveling for business are considered meals & entertainment expense and so are deductible at 50%.
If you take a client to a jazz club and discuss business before, during or after the show that's an entertainment expense. What I think you may be confused on is this: If a jazz musician goes to a jazz club to hear a certain saxophonist, that's research or education for the jazz musician, not an entertainment expense. In the same way that your going to a writers' workshop would be a research or study expense.
If your husband spaces out in the portion of the room that you use an an office, then absolutely no home office deduction allowed.
-- June
Pensions for Indies
Hi!
I'm a bookkeeper off Long Island, NY. Work 1099 several jobs and also on the books for 2 other companies.
I have come into some money. I know I can pay into an IRA and I have up until tax due date 4/15 to put money in from the previous year. My question is: Does the IRA have to be set up in the year you are claiming?
Thanks for any help.
Dana
Hello Dana,
Of all the retirement plans available to indies -- and there's many!! -- the only two that may be opened for the previous year are IRAs and SEPs. All other must be opened by December 31 or earlier.
You may open and contribute to a 2007 IRA -- traditional or ROTH -- until April 15, 2008.
You may open and contribute to a 2007 SEP up to the filing deadline for your 2007 tax return. That could be as late as October 15, 2008. SEP stands for "simplified employee pension." Don't let the name confuse you. It's for the self-employed and you may contribute up to 20% of your net self-employed income.
-- June
I'm a bookkeeper off Long Island, NY. Work 1099 several jobs and also on the books for 2 other companies.
I have come into some money. I know I can pay into an IRA and I have up until tax due date 4/15 to put money in from the previous year. My question is: Does the IRA have to be set up in the year you are claiming?
Thanks for any help.
Dana
Hello Dana,
Of all the retirement plans available to indies -- and there's many!! -- the only two that may be opened for the previous year are IRAs and SEPs. All other must be opened by December 31 or earlier.
You may open and contribute to a 2007 IRA -- traditional or ROTH -- until April 15, 2008.
You may open and contribute to a 2007 SEP up to the filing deadline for your 2007 tax return. That could be as late as October 15, 2008. SEP stands for "simplified employee pension." Don't let the name confuse you. It's for the self-employed and you may contribute up to 20% of your net self-employed income.
-- June
Business expense purchases made via bank credit card are deductible even tho' unpaid.
Hi June,
I live in Holland, PA, about 15 miles north of Philadelphia. I'm doing the taxes for my boyfriend who started a carpentry business this year in August.
He has put a few expenses and purchased materials on a business credit card. He has not paid off the credit card bill in full, it carries a balance. Can I add up these items and include them as itemized deductions, even if they haven't technically been paid for yet?
Also what do I do with the payments made to the credit card during the year?
Thanks so much, your site is very useful, and I enjoy your writing style.
Best regards,
Karen
Dear Karen,
Any charge made on or before December 31 via a bank credit card is an expense for that year regardless of when the credit card balance is paid. You ignore the amount of payments made on the credit card.
For a store credit card it is a deductible expense in the year it is paid. Your deduction each year is the amount paid on the credit card.
Use your Citibank Mastercard to buy your indie business a computer as a Christmas gift? It's totally deductible in the year you bought it.
Were you to buy that same computer with a BestBuy credit card it is not deductible until you've paid off BestBuy.
Want to know why? Let's say in the first scenario you bought the computer at BestBuy. BestBuy is paid for the computer by Citibank. You owe Citibank the money.
In the second scenario, Best Buy sold you the computer and still owns it until you pay BestBuy the balance.
It's similar to purchasing a home from Harry and Hortense using mortgage financing. Harry and Hortense receive payment for their house from the bank. You get the house but owe the bank the money. If you don't pay the mortgage the bank can take your house. That's what's happening to thousands of people right now who cannot make their mortgage payments.
-- June
I live in Holland, PA, about 15 miles north of Philadelphia. I'm doing the taxes for my boyfriend who started a carpentry business this year in August.
He has put a few expenses and purchased materials on a business credit card. He has not paid off the credit card bill in full, it carries a balance. Can I add up these items and include them as itemized deductions, even if they haven't technically been paid for yet?
Also what do I do with the payments made to the credit card during the year?
Thanks so much, your site is very useful, and I enjoy your writing style.
Best regards,
Karen
Dear Karen,
Any charge made on or before December 31 via a bank credit card is an expense for that year regardless of when the credit card balance is paid. You ignore the amount of payments made on the credit card.
For a store credit card it is a deductible expense in the year it is paid. Your deduction each year is the amount paid on the credit card.
Use your Citibank Mastercard to buy your indie business a computer as a Christmas gift? It's totally deductible in the year you bought it.
Were you to buy that same computer with a BestBuy credit card it is not deductible until you've paid off BestBuy.
Want to know why? Let's say in the first scenario you bought the computer at BestBuy. BestBuy is paid for the computer by Citibank. You owe Citibank the money.
In the second scenario, Best Buy sold you the computer and still owns it until you pay BestBuy the balance.
It's similar to purchasing a home from Harry and Hortense using mortgage financing. Harry and Hortense receive payment for their house from the bank. You get the house but owe the bank the money. If you don't pay the mortgage the bank can take your house. That's what's happening to thousands of people right now who cannot make their mortgage payments.
-- June
Sunday, April 6, 2008
You must have a profit in 3 out of 5 years: Hogwash!!
June --
How many years are you allowed list a negative and still deduct expenses like CS3, or art materials and marketing as you get started...It's tough to get "on the ticket" and get to be someone art directors call on for work and then give you the job.
Thanks,
Elizabeth
Hello Elizabeth,
There's an urban myth been circulating for a long time that an indie must make a profit in three out of five years in order to be considered a business. Hogwash! Sloppy thinking. A logical fallacy.
The IRS reg says that you are a business if you make a profit in three out of five years. It does not say that you are not a business if you don't make a profit in three out of five years.
Here's some excerpts from my blog posts to help explain:
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. From Exotic Dancer and more ...
There is no rule about a time limit on losing money. Never was a rule, an old husbands' tale, maybe. For a better understanding, think of it in reverse: If your business makes a profit in three out of five years you're home free. You are a business. Notice that says that if you make a profit not that you must make a profit. As long as your goal is to make money, you're OK.
The IRS says that in order for you to be engaged in a business rather than a hobby, the goal must be to make a profit. The IRS doesn't insist that you actually make a profit, but there must be a reasonable expectation of one.How do you prove you're in it to make money if you're not making any money? That's too long to go into here but the full explanation is in my book, Self-employed Tax Solutions -- with Cheech and Chong as the solo entrepreneur example.
And read this in its entirety HOBBY OR BUSINESS: Are you a professional artist?
-- June
How many years are you allowed list a negative and still deduct expenses like CS3, or art materials and marketing as you get started...It's tough to get "on the ticket" and get to be someone art directors call on for work and then give you the job.
Thanks,
Elizabeth
Hello Elizabeth,
There's an urban myth been circulating for a long time that an indie must make a profit in three out of five years in order to be considered a business. Hogwash! Sloppy thinking. A logical fallacy.
The IRS reg says that you are a business if you make a profit in three out of five years. It does not say that you are not a business if you don't make a profit in three out of five years.
Here's some excerpts from my blog posts to help explain:
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. From Exotic Dancer and more ...
There is no rule about a time limit on losing money. Never was a rule, an old husbands' tale, maybe. For a better understanding, think of it in reverse: If your business makes a profit in three out of five years you're home free. You are a business. Notice that says that if you make a profit not that you must make a profit. As long as your goal is to make money, you're OK.
The IRS says that in order for you to be engaged in a business rather than a hobby, the goal must be to make a profit. The IRS doesn't insist that you actually make a profit, but there must be a reasonable expectation of one.How do you prove you're in it to make money if you're not making any money? That's too long to go into here but the full explanation is in my book, Self-employed Tax Solutions -- with Cheech and Chong as the solo entrepreneur example.
And read this in its entirety HOBBY OR BUSINESS: Are you a professional artist?
-- 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
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
Wednesday, April 2, 2008
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.
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.
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