Meals Deductions: A Quick Overview.

June --

After 20+ years as an executive and employed consultant, I had an opportunity to go on my own last year as an independent. It was a successful year. I provide program management services in the technology implementation space.

I was on a temporary project assignment that has now concluded. I read the tips on your site on deductibility of meals using the IRS per diem meal allowance. As an independent and self-employed, if I use the per diem amount in lieu of actuals, is the per diem amount subject to the 50% limit. Example: per diem rate for 2008 Washington DC is $64. Do I use $64 or $32?

Please advise.

Thank you.
Jason
Bethel Park, PA


Jason --

Here's a quick overview.

Food and beverages offered to the general public are 100% deductible. That means if an artist has a gallery opening and invites the public or if an IT indie invites the community to his new office, then the food and drink is served at these events is a 100% deductible meals expense.

All other meals, whether calculated as actual amount paid or taken from the per diem table, are deducted at 50%.

If not traveling you may deduct meals only when you paid for yourself plus someone with whom you have a business connection and dined for a business reason.

When traveling you may deduct all meals and snacks for yourself; no business associate need be with you. Although all travel meals are deductible they, too, may be deducted at only 50%.

Hope that clears it up for you.

-- June

Unemployment Compensation

"W-2 people" is my shorthand for employees who receive wages or a salary.

Someone can be both an employee and self-employed. For instance, someone works 9 to 5 for the local pet shop and is pet sitter by night and weekends.

I have received many questions from former W-2 people about receiving unemployment compensation and how it impacts self-employment. And vice versa. Here are two typical emails followed by my response.


Hi -
I have an odd question... I was laid off from a tv station in June 2007.. got unemployment for 20 weeks - when it ran in December of 2007 I was still unable to find full time work but did pick up
several short term (independent contract) gigs last year.

I got notice that unemployment insurance was extended in June 2008 but since I had some short term projects I didn't enroll. When those projects dried up - I did enroll and am back on Unemployment Insurance extended for the next 20 weeks.

My question is: When I do my taxes for 2008, if I file as a self-employed will that create a problem with the current unemployment that I am collecting?

Just not sure what to do.
Dee


June --

I am from Portland, Maine. I am a graphic designer/editor. Just started as an indie.

My question is with regard to unemployment insurance, taxes and self-proprietorship. When I was laid off last year, I began to collect unemployment insurance. This year, I have started an indie biz as a freelance designer/editor. I have a small amount of money coming in, but it does not cover my start-up and operating expenses.

Can I continue to collect my unemployment insurance payments while I get the biz off the ground?

What are the tax implications of this?

My unemployment benefits will run out before the end of the year. Is it possible/advisable to postpone payments from clients until the benefits run out, and if so, how do I report it on quarterly estimated tax payments?

Michael
Portland, Me


Unemployment Compensation -- let's call it UC -- is a benefit provided by both the federal and state governments. That means that the Feds as well as each state has a say in how it is regulated.

The intention of UC is help W-2 people who are temporarily unemployed due to work-related circumstances which are beyond their control.

Typically state laws require that someone requesting UC meet the following conditions:
** is not currently employed
** is able to work
** is available for work
** is actively seeking work

If you are self-employed you are you own employer. That means that even though you may not be making any money you are working. You are currently employed by yourself. So you are not currently unemployed.

An odd job to pick up some money does not make you a self-employed in business. Read these posts being self-employed for more info.

Your circumstances and your state's laws determine which conditions must be met.

For instance, if yours is a temporary layoff from your job and you have a reasonable expectation of being recalled, you may not be required to seek work.

If the work you did is no longer in demand, and you are not trained to do anything else, the state agency may provide you with vocational training and your work search requirements may be waived so that you may collect unemployment while going to school.

And, some states will pay UC while you start a business of your own.

Call or log onto your state agency and get an explanation of the benefit requirements. Know before you act so that you don't mess up.

Tax treatment for indies, whether on or off self-employment, is the same. One does not alter the other.

June

More on Business Expenses

I sent Christine my complimentary list of business expenses. She received it and here are her questions on business expenses. As most of you know I have a full-time accounting practice which serves wacky, wonderful indies. And so, because it's tax season, I am going to do the quick-answer mode for Christine. I EMBEDDED my response below ... June


Thank you very much.... YOU ARE WELCOME!

I plan on purchasing your book so I can look further into what I may deduct. SMART MOVE.

My main job as a Nurse Practitioner I am employed at a private practice but I also sub-contract for a physician at a local prison and I need to find some deductions for that. UNLESS YOU COMPLETELY SHUT-OFF WORK WHEN YOU ARE NOT AT THE PRISON YOU MUST HAVE SOME DEDUCTIONS. AND WHAT ABOUT TRANSPORTATION WHEN GOING FROM ONE WORK PLACE TO ANOTHER?

I have an office in my house with a computer and furniture that I do my research and continuing education in. WOW! I SEE LOTS OF DEDUCTIONS RIGHT THERE.

My husband keeps telling me that I can not deduct part of that as an expense IF THERE IS AN AREA USED EXCLUSIVELY FOR YOUR WORK THEN YOUR HUSBAND IS WRONG. AND WHERE DID YOU SAY YOUR HUSBAND STUDIED ACCOUNTING? I beg to differ with him, my accountant in the past has not been too much on some deductions but with the sub-contractor part I need to find some deductions. I

also have cleaning ladies that clean my house but also they clean my office how do I deduct that as part of an expense? I guess what I am asking is how I deduct part of the utilities, house payment, insurance or what percentage I guess would be a better question. YOU MAY FIND THE ANSWER IN THESE POSTS home office or studio (25). IF NOT THEN HOME OFFICE DEDUCTION IS COMPLETELY EXPLAINED IN MY BOOK.

Thank you I found that your website was very insightful.

Christine
Elida, OH

To deduct or not to deduct.

Hi.

I'm a small business owner online retailer for 1 year.

Is it wiser to spend more money through my business and claim legitimate deductions, than to spend less? If you spend less of your business income, or "save money", then the IRS is going to get a larger portion of the unspent money as taxable income, so why not just spend more through the business? You can spend more on what you want, while reducing your taxable income at the same time.

Any downsides to this?

Jamie
El Paso Texas


Hi Jamie,

This is a confusing question. I am not sure what you are asking. However, here is what you and every indie should do regarding business expenses: Deduct every single legitimate business expense you possibly can. Don't cheat by deducting personal expenses.

A business deduction typically saves 1/3 in taxes. So a $900 expense save $300 in taxes. Could be less. Could be more.

The upside to a low income: Helps when applying for school financial aid or government benefits.

The downside to low income: It make it more difficult to get a mortgage or other loan or credit card.

Be sure to read Is it a deductible Business Expense? on my website.

And visit here for a complimentary List of 100+ Indie Business Expenses .

-- June

Home Office When Sharing the Rent

Hi June,

I'm a graphic designer living in Brooklyn, NY. I entered the indie world last October. I'm very green in the indie world and your book has proven to be quite helpful.

My question concerns deducting home office expenses when living in a rental unit with roommates. How does one determine the total area of his home? In my scenario: • 3 roommates live in a rented apartment, each with their own bedroom. • We share a common space that consists of the living room, kitchen, etc... • I pay a higher portion of the total rent for the largest bedroom, half of which I use exclusively for business. My concern is correctly determining the total area of my home for the IRS form. What I think is fair is: Area of my bedroom + 33% of shared space = Total area of my home Will that fly with the IRS? Do I have to include the entire common area even though the 3 of us pay for it?

Thank you,
Sunil


Dear Sunil,

Your way is fine. It gives you a little bit extra deduction. But more easily understood by an IRS guy whose math may not be top notch is to take the total area of all the common space as well as your room as your total square feet of living space and then take your office area.

More posts on home office are here home office or studio (24) .

-- 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

Indie Time-Travel: Reconstruct 2008

Hi June --

I'm a reset merchandiser, less than 1 year as an indie. I'm frustrated and confused because I have made some serious mistakes as an indie meaning I didn't hold onto my receipts and now I don"t think I can get my write-offs. Is there anyway I can still get my 1. mileage 2. my uniform 3.tools HELP THIS INDIE NEWBIE!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

Melanie
St Berryville, Va


Hello Melanie,

All is not lost. You just need to do some time travel through 2008. Open your date book or computer calendar and relive last year. Recall what you did.

Regarding mileage, you must go through calendars and appointment books perhaps phone records as well, anything that will refresh your memory as to where you drove for business during last year. You may estimate but you'll need something to substantiate your estimates -- client business cards, an invitation to an event, emails still on your computer that you could print out.

For uniforms and tools if you paid by check or credit card it is easy enough to contact the bank and have copies of statements and cancelled checks sent to you. Take pictures of the tools and uniforms to help substantiate your purchases.

Learn from your past mistakes.

Best,
June