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

Graphic Artist in London

Dear June,

First, thank you for taking the time to help me with my questions and concerns.

I am a freelance artist and designer, I have been freelance for about 20 years.

This coming June 2009, I will be going to London, where my son will attend school for 1 year. Because I used to live there as I was married to an Englishman, and my other two sons are already there with dad, I have the ability to work in London legally.

So my question is about taxes. Will I have to pay taxes to the US on the money that I will be earning in the UK, as well as paying taxes to the UK on the same money? If I have to pay taxes to both countries, I will end up with very little, so I am not sure at all about these tax rules.

I would appreciate any help that you can provide about this situation.

Sincerely,
Adrienne
Winter Springs, FL


Dear Adrienne,

This is how it works from the US side.

You must pay Self-employment [SE] tax on your net self-employed earnings. (Take a look at these posts for more info on SE tax -- taxes -- self-employment tax (7) .)

Since you will be out of the country for a relatively short time you must pay income tax just as you would were you living in the States.

If you were out of the country for an extended period of time -- think of it as almost a year, and the time can straddle years -- close to $90,000 of your income would not be subject to US income tax. But, you must still pay SE tax.

If you must pay income tax to the country you are in then the US will give you credit for taxes paid to that country. That means you will not be doubly taxed. Each country has its own tax laws so you must ask the taxing authorities in the UK what are your tax obligations.

Also be aware that the US has reciprocal tax agreements with many countries.

You might want to take a look at these posts foreign situations (7) .

And, you are welcome!

Best,
June

Taxpayer Advocates Help with IRS Problems

I received an email from someone explaining a complex IRS audit in progress. Although the problem is not of general interest to my readers the question and my response are.

After explaining the situation, Mary, from Williamsburg, Washington, asked: Is there any statute stating that because of undue hardship, monetary, and time, the IRS must grant our request for a change of venue?

Whenever you deal with the IRS and the actions of the IRS cause you undue hardship, you should contact the Local Taxpayer Advocate (LTA) office. The service is offered by the IRS. It gives free, independent, and confidential tax assistance to taxpayers unable to resolve their tax problems through normal channels or individuals experiencing a hardship. The Taxpayer Advocate Service helps individual and business taxpayers resolve problems with the IRS.

In Washington the LTA contact info is:
915 2nd Ave.,
Stop W-405,
Seattle, WA 98174
206-220-6037
206-220-6047


The Taxpayer Advocate Service toll-free phone number is 877-777-4778.

Self-employed Tax Solutions 1st Edition

Some of you have asked about the second edition of my book, Self-employed Tax Solutions, it is now available on Amazon.

The economic morass that we are all in has indies looking to increase income, cut expenses and lower the tax bite. I’d like to help and here’s the scoop on how.

As those of you who have read Self-employed Tax Solutions already know, my book provides a basic education in being self-employed. It explains things like the difference between hobby and business; when travel is deductible as a business expense; how to determine if you can deduct the costs of a home office; and how to calculate estimated tax payments. It arms you with clear, useful, easy-to-understand tax and recordkeeping basics. And it shows you how to pay the least amount of taxes legally possible. The entire Table of Contents can be seen here.

Self-employed Tax Solutions is a book of basics and none of the basics has changed since the original publication in 2005. So let me assure you that the second edition of Self-employed Tax Solutions has everything contained in the earlier 2005 edition. Nothing has been left out. Nothing has been added. Year references in examples, of course, have been updated as has the method for deducting start-up costs. Those of you with the original edition don’t need to spend your money on the new edition. Of course, you may want to alert an indie colleague who doesn't have a copy of my book that both the 1st edition --- on sale at a discount on my site -- and the 2nd edition are available.

Best,
June
[revised 1/15/10]

Is charity work a business?

Hi June,

A number of friends and I would like to start a venture whereby we sell handmade products and donate 100% of net proceeds to a well-established charitable organization. We do not plan to make any profit.

I have questions regarding tax implications on us and if we should or have to form a business structure (and which one is right for us). If we all handle our own activities individually, would this be taxable to us? It seems that it shouldn't be since the sole purpose is to donate to charity.

Could this be considered a hobby?

I appreciate any advice you are able to provide.

Thank you.
Nancy


Hello Nancy,

If you and your friends were to simply make the products and give them to the charity to sell you would not be engaged in a business nor a hobby. You'd be engaged in charitable activities. There is no paperwork nor registration you must do.

Any out-of-pocket expenses you would have for things like supplies, phone calls, driving around, would be deductible as "personal gifts to charity other than cash" on your tax return. You would need to keep a record of your expenses.

If you and your friends want to sell the products and give the proceeds to charity the least costly, although not the most simple, way is to form a not-for-profit organization. You would need to do that with an accountant familiar with non-profits.

If you treated it as a partnership or as individual self-employed ventures you would need to pay self-employment tax on your profit even if you donated the profit to charity.

BY "net proceeds" I assume you mean profit.

Other than those choices, as far as I know, there is no way to sell for a profit and give away the profits to charity and avoid self-employment tax. Because your purpose is to make a profit you are a business. You just happen to want to give your profits to a charity rather than use them for other purposes.

Speak to the money people of the charity for which you want to do this. Maybe they will have an idea.

Good luck. I hope you make it work.

Best,
June

June's Seminars & CDs

June --

I am from Jefferson City, MO. I am a self-employed medical transcriptionist from my home and have been for about 10 years and still have lots of questions about taxes,etc. Where can I find a schedule of your seminars?

Teresa


Dear Teresa,

Thanks for your interest in attending one of my seminars.

Because of business commitments I have put my seminar schedule on hold. Meanwhile, I’m working on new learning tools to enhance the knowledge of self-employed people all over the country who can’t make it to my seminars. When I return to the seminar circuit I’ll announce it on my site and my blog.

FYI -- my CD, Tax Solutions for Creatives, covers a good part of the material presented in my basic seminar.

The topics are:
1. Introduction
2. Self-employed in Business
3. Three Ways to Deductions [Listen]
4. Expenses in General
5. Office-in-the-Home
6. Auto & Transportation
7. Travel or Transportation
8. Meals & Entertainment
9. Income
10. Taxes
11. Recordkeeping
12. A Final Caution


Other CDs are in the works.

Be sure to check both my blog and my website there's lots of info for indies and you might find the answers to your tax questions.

Best,
June

An Indie Business Mindset Regarding Pensions

Hi June,

I'm a sole proprietor who has contributed to SEP IRAS for the past 10 years. Currently, I joined a credit union that doesn't offer SEP IRAs, but has some attractive CD rates for a traditional IRA. I was wondering if I could take some of my money out of my SEP IRA at the brokerage house [It is invested in a money market fund.] and roll it over to a traditional IRA at the credit union. [I would invest it in a CD.]

I would still continue future SEP IRA contributions to the brokerage account.

Frank
Franklin Square, NY


Dear Frank,

Very clever. Yes, you may roll over any kind of pension into an IRA. You can't mix and match ROTH IRAs with traditional IRAs, though.

If, as an indie, you are looking to contribute more to a pension, consider a UNI-k. Also known as a solo-k, individual 401-k or a solo-k.

Best,
June