Reimbursements/Reimbursements/Reimbursements/Reimbursements ....

OK Indies, you must be a little resourceful. And I don't mean to pick on the indie who sent the following email it's just that V from Katy, TX happened to hit at the right moment.

I get the same question about reimbursed expenses over and over and over. I usually skip the emails and go on to the next one hoping that the creative, intelligent, resourceful indie who asked the question will either come back to the blog and go down the list of Topics/Categories/Labels on the left and find expenses -- reimbursed . Voila! there's the answer. Or, even try one of two search tools on the blog: One at the top left -- note the magnifying glass; the other middle left, cleverly worded, "Search This Blog." Just try variations of what you are looking for -- reimburse, reimbursement, reimbursed expenses. You get the picture. Right.

Indies you must think on your own. Remember my urging you to have an indie-business mindset. Unlike employees, you have no big daddy taking care of you. And as much as I'd like to answer every one of your questions it's just not possible. You need to do a little of the legwork. V made some of the right moves by going to the IRS publication.

So here's V's question:


Hi June,

I enjoy reading your tax solutions, mail and newsletter for Indies. I had a couple of questions. I am an Indie and this is my first year as a self employed. I get reimbursed for my travel and meals expenses from my clients. I provide accurate accounting to my client for all the expenses. I have read Publication 463, page 32 regarding this. It clearly states that if you do not account to your client for the expenses you have to include it in income.

Now my question is: First, if you account to your client for the reimbursements, do you still have to include it in the income? Will it be on Sch C? If I have to include it in income, can I claim the expenses on Sch C as 100% deductible?

Second, for the month of December, I relocated to the city where my client is located and the client is reimbursing my rent. Is this reimbursement taxable?

Thanks,
V
Katy, TX


V --

Do take a look here for the answer to your 1st question -- expenses -- reimbursed .

The reimbursement for rent is income. It is an expense only if it qualifies as a home office deduction and then only part of it will be deductible. Check out my posts on home office here home office or studio .

Thanks for being my "example."

Best,
June

Indies Don't Receive Salary or Wages or Dividends

June --

I Have been a self-employed audiologist for 3 months. Where can I find current info about paying my self-employed self a salary vs salary+dividends and the tax implications for each option?

Specifically, how do I set that up now as I begin the business?

Thanks,
Brandi
South Lebanon, OH


Hello Brandi,

Your question shows that you are new to self-employment and that you need a lot of information.

Indies do not receive salary. They receive gross income from clients, subtract expenses and are left with a net profit. I suggest you read some of these posts on being self-employed .

This, directly from my book, Self-employed Tax Solutions, explains a bit more:

YOU'RE THE BOSS. PAY YOURSELF WHATEVER YOU WANT.
Many self-employed people have a fuzzy idea about their own business profits. They think that the weekly, monthly, or occasional checks they write to themselves -- called draw in the corporate world - is their income or their salary or their profit. They are wrong.

The checks a self-employed makes out to himself have no bearing whatsoever on his income, expenses, profit, or taxes. Whether you write yourself a $100 or $1,000 check every week you are doing nothing other than altering cash flow by moving money from one place to another. It's called draw because you are drawing money away from someplace.

I wish you success,
June

Google AdWords $100 Coupons: Not Taxable Income

June,

I have just received a free $100 coupon from Google to use their AdWords program.

You can use it to establish an ad campaign and are charged per click. Using their offer provide a free $100 worth of Adords before you start getting charged. Do I have to report this as income if I use it?

If so, please explain.

Your book Self-employed Tax Solutions has been very helpful.

Thanks.
Lou


Hi Lou,

Thanks. Glad my book is a help.

No, a coupon or any kind of discount is not taxable income. And neither is it a business expense deduction.

For instance, if you buy $150 from Office Depot and use a 10% discount coupon you may deduct only the amount you actually paid as office supplies expense. In this instance it's $135 [150 - 15 = 135].

Same with the Google AdWords coupon.

And do remember that your income from Google AdWords is taxable income.

June

eBay Sellers: Recordkeeping For Purchases & EIN How-tp

Hello.

I have purchased your book and it has been very helpful.

I have my own ebay business. It started selling mostly things in the house I was no longer using. Now, I purchase items at yard sales and resell them on my store. If I keep a list of items that I purchase at yard sales and what I paid for them, will this serve as a receipt for expenses?

Also, I want to expand my business this year by buying some wholesale items to put on my store. Some require an EIN to purchase. Do you recommend getting an EIN? I am a little afraid to use my social security number when purchasing items.

Your advice would be appreciated. Thanks so much!

Tammie
Lewisville, NC


Dear Tammie,

It's good to hear that you business is growing. Not an easy thing in these hard times. And It's also good to hear that my book is helpful to you.

Your goal in keeping purchase records is not simply to know what you paid for items, your records also need to show that you have a "business motive." That means the more business-like your records or the more they can show that you put some time and effort into them, the better your image should the IRS take a look.

So yes keep a list. If possible get a receipt -- bring your own paper & pen -- from the garage sale seller. Save the ad announcing a garage sale. Take a camera and photograph the sign at the end of the driveway that alerts passersby to the sale. If you buy a big item then photo it. Anything that shows you're doing your best to keep accurate records.

And yes, an EIN is a good idea in your case. Here's the link to apply. And here are some of my posts on EINs.

Best,
June

When & Whether To Hire A Pro

Indies, let’s get a jump on the New Year by looking at how you look at your business.

This post was sparked by an email I received from an indie copywriter in Illinois which concluded that my seminar, website and blog provided a “vast array of resources” for the self-employed. Then she added, “but to be honest I would just like to hand over my materials to someone that I trust to do the job right.” She asked if I could I be that someone?

She didn’t ask for someone who could “help” or “assist” her but someone to whom she could hand over her material and whom she could trust.

Oh my goodness! I have a number of clients who are musicians, a career that has a long history of performers who didn’t want to have anything to do with business and were stripped clean of their money through the musician’s inattention, blind trust, or through the guile or incompetence of their managers. Haven’t you all heard one or two of those stories? The most recent: Leonard Cohen. It happens to talented, intelligent indies who don’t want to deal with the business side of their endeavors. They get ripped off. Somebody else ends up owning their copyrights. They owe Uncle Sam. Royalties are lost. I’m sure there’s no need to go on.

Indie: You are a business! Your business is you. You must develop what I call an indie-business mindset. I’ve talked about it before.

Self-employment requires that you take complete charge of all aspects of your business. It isn’t like writing copy as an employee of Callous Corp where your taxes are withheld every payday, you get paid for sick days, and if you have questions about pensions you go up to the 14th floor and ask the pension guy about it.

By taking charge I don’t mean that you can’t delegate tasks to someone else -- if you have the right person and the funds to pay that person. But you can never just hand it over. You have to be sure that the person doing whatever it is you hired him or her for is trustworthy and competent, well-informed, follows through, uses good judgment, knows when to take the initiative and when to come back to you for guidance. You can’t do that unless you understand the elements of what you have assigned to someone else.

You don’t have to be an expert on websites to hire a web designer but you’d better have a basic knowledge of how they work and what one will do for your business. Do you do it yourself? Spend $500? Spend $15,000? You don’t want to put three hours a day into FaceBook or Twitter or Google without some understanding of whether 15 to 20 hours a week will give you that much valuable business visibility and promotion.

Whether setting up your fee schedule, engaging a tech guy, or hiring a bookkeeper or a tax pro to do your taxes you must make the decisions. You have to assess whether your choice is clear-headed, sure-footed, and reality-based. Are you deciding based on the facts, on price only, on what’s convenient, on what Aunt Tillie told you? Without some understanding of and some familiarity with the aspect of your business that you're turning over to someone else, you can't make competent decisions and intelligent choices.

It’s only the employee who can just do the work and let the company make all the decisions. You are an indie. And whether you’re self-employed by choice or by circumstance due to these difficult times, you don’t have big daddy taking care of you.

You need information. You must educate yourself. As the copywriter from Illinois said: I offer a “vast array of resources.” You are in the right place to access them. Start educating yourself. Start reading.

And a new resource will be available shortly, The Confident Indie. Please be on the watch.

I wish you a creative and successful 2010!
June

IRS owes you money. A BIG BUT as to whether you'll get it or not.

Hi June,

I have been a software developer for 15 years in Oklahoma City, Oklahoma. Loved your book and I have a question about the statute of limitations for refunds that maybe you can address in your blog.

Here is a direct quote from the tax code section 6511:
"Claim for credit or refund of an overpayment of any tax imposed by this title in respect of which tax the taxpayer is required to file a return shall be filed by the taxpayer within 3 years from the time the return was filed or 2 years from the time the tax was paid, whichever of such periods expires the later, or if no return was filed by the taxpayer, within 2 years from the time the tax was paid."

It clearly states "within 3 years from the time the return was filed". There is no use of language such as "timely filed" or "due date" etc. My interpretation of this would be as follows: I file my 2003 return on April 15th 2009. I can take a refund until April 15th 2012. After all, the IRS can assess taxes against that return until April 15th 2012! Obviously, the IRS does not see it this way, but I cannot get anyone on their side to give me a reasonable explanation as to how they arrived at their application of Section 6511. In this case the code isn't acting as code should from a developer's perspective :).

Perhaps you have some insight, like a related section that provides guidance which I may be missing?

Thanks,
Matthew


Well, Matthew. Don't know how insightful I can be. But, I can explain it.

Correct, no matter how late you filed your tax return, you may file a claim for refund for up to three years after you have filed your tax return. But -- BIG BUT -- that doesn't mean you can get the money owed you!

Here's how it works:

*** To be considered for a refund you must file a claim for refund within three years from the date you filed your return.

*** How much of your refund that you may receive depends on whether you filed your return on time or not.

*** Amount of refund received also depends on when you paid the taxes for the year for which you are claiming the refund.

If you filed your return on time, meaning due date plus extensions, then your refund can be up to any amount as long as it was paid during the tax year plus the three years after that.
For example:
If you file your 2007 tax return on October 15, 2008 and you file a claim for refund on October 15, 2011 your refund may not be more than the taxes paid and applicable credits for 2007. The taxes for 2007 must have been paid during 2007, 2008, 2009, 2010 through October 15, 2011.

If you filed your return after the due date plus extensions then your refund can be up to any amount owed you as long as the taxes were paid during the two years prior to filing the refund claim:
For example:
If you file your 2007 tax return on October 16, 2008 -- a day after the deadline -- and you file a claim for refund on October 15, 2011 -- same day as my previous example -- your refund may not be more than the taxes you paid for 2007. But, [this is the BIG BUT] only those taxes paid from October 17, 2009 through October 16, 2011 are eligible for refund..

If you want to read how the IRS explains this, see IRS Publication 556 pages 13 through 15 and IRS Code Section 6511 -1B(2)a.

Since most people pay taxes for a particular year in that year or a little into the next it pretty much means: forget about filing for a refund if you didn't file your tax return on time.

The exception: You receive a notice from the IRS a year or so after filing. You pay additional tax then find out you didn't really owe that tax and you file a claim to get the additional tax refunded.

Best,
June

Are gift baskets tax deductible?

June --

I've been a sole proprietor for 25 years. I am being audited for the second time (in 25 years). I searched Ask.com for "Are gift baskets tax deductible?". As I prepare for this audit I am starting to doubt basic write-offs I have taken primarily because of all the research I am doing.

I got to wondering if a gift basket comprised of food would somehow fall under meals and entertainment.

Thanks for the information.
Janice
Orange , Ca


Dear Janice,

Regardless of the cost of the gift basket your deduction is limited to $25 . And that is the total you may deduct as a gift for a business associate for the entire year.

Were you to purchase the gift basket and take it with you as your meal while on a picnic with your associate and you discuss business before, during or after the picnic meal then you could deduct the basket as a meals & entertainment expense.

Here's an example of the difference in deductions:

You purchase two $150 gift baskets for a client during the year.
Your cost: $300.
Your deduction: $25

You have two $150 business dinners with your client during the year.
Your cost: $300.
Your deduction: $150. [50% of $300]

-- June