Hi June,
I am a mixed media artist, self employed part time for 3 years and this is the first year as a full time artist.
I am donating a piece of art to a non profit. I know I cannot take a "fair market price" deduction. Can I deduct the cost of my materials, direct and indirect costs?
I fill out a Schedule C. Because I'm doing this to also get my name out, do artists ever deduct their costs as advertising expense?
Thank you.
Rebecca
Des Moines, IA
Hello Rebecca,
Yes, when donating your work you may deduct your actual costs. Categorizing the costs as advertising expense is fine.
There is more info on indie income and business expenses in my book Self-employed Tax Solutions.
-- June
Monday, July 7, 2008
Cash vs Accrual Recordkeeping
Hello, June:
It is very nice to find this website to help us new self-employed guys. I am a full-time employee, and recently started to be a part-time contractor.
My problem is that I started working for that contract in Dec. 2007, but did not get my first payment until Jan. 2008. My question is: May I still be able to deductible some cost (like travel) for year 2007 (I do not think I will get a 1099 for year 2007)?
Thank you.
Laser
Minot, ND
Laser --
As long as you are in business to make money it doesn't matter whether you have yet received the money, you may deduct your business expenses.
There are two methods of recordkeeping: Cash or Accrual
As a self-employed in business you get to choose when to report your income and expenses. Don’t get too excited it’s not as liberal a choice as it sounds.
You may opt for a cash basis method of bookkeeping. This is one that claims income when it is received and deducts an expense when it is paid.
Or you may choose an accrual basis. This bookkeeping method claims income when the client is billed, regardless of when the client pays you. You deduct an expense when you become liable for it – which is usually when you get the bill.
You must use the same method for both income and expenses. The cash method is simpler and is used by most self-employeds.
There are examples of both methods in my book Self-employed Tax Solutions .
-- June
It is very nice to find this website to help us new self-employed guys. I am a full-time employee, and recently started to be a part-time contractor.
My problem is that I started working for that contract in Dec. 2007, but did not get my first payment until Jan. 2008. My question is: May I still be able to deductible some cost (like travel) for year 2007 (I do not think I will get a 1099 for year 2007)?
Thank you.
Laser
Minot, ND
Laser --
As long as you are in business to make money it doesn't matter whether you have yet received the money, you may deduct your business expenses.
There are two methods of recordkeeping: Cash or Accrual
As a self-employed in business you get to choose when to report your income and expenses. Don’t get too excited it’s not as liberal a choice as it sounds.
You may opt for a cash basis method of bookkeeping. This is one that claims income when it is received and deducts an expense when it is paid.
Or you may choose an accrual basis. This bookkeeping method claims income when the client is billed, regardless of when the client pays you. You deduct an expense when you become liable for it – which is usually when you get the bill.
You must use the same method for both income and expenses. The cash method is simpler and is used by most self-employeds.
There are examples of both methods in my book Self-employed Tax Solutions .
-- June
Wednesday, July 2, 2008
Home office? No deduction for Thighmaster.
Hello June!
Thank you so much for your blog! The pieces of information that you put together for us are always extremely helpful for us! Thank you, thank you, thank you!
I am a Graphic Designer -- 5 years -- from Huntington Beach, CA.
I was hoping to ask you a question today about setting up a home gym for my sole proprietorship.
This comes after I found this piece of information on the Internet: 3. Your Corporate Gym: Unfortunately, the IRS won’t let you directly deduct the cost of your gym membership. However, under section 132 (h) of the tax code, you can deduct the cost of the Gym equipment. So that Nautilus set, your Bow Flex machine, even the Gazelle Trainer that you’ve seen on television – not to mention free weights, a work out bench, etc – are all tax deductible through your company. Source: http://articles.webraydian.com/article1204-Ten_Golden_Tax_Deduction_Secrets.html
Now, my question is this: I see that a corporation is able to take an expense for gym equipment that they purchase for its corporate gym for employees. Is the same deduction allowed for a sole proprietor setting up a home gym for its owners? I am not in the business of fitness, and the home gym is solely to maintain my physical fitness and well being. I also have a couple follow up questions assuming that the answer above is "not deductible." If I were to convert my sole proprietorship to a LLC, would I be able to take the home gym that I create as a deductible business expense?
Thank you again for your blog, and your considerations on this tax question.
Kind regards,
Hiro
Hiro sent the above question to me quite a while ago. Researching for the correct answer took much time and reading and analysis. The answer may seem simple, seems simple to me, too, now. But, as with so much of the tax code, there is rarely an uncluttered path to a clear understanding.
Here's the scoop:
Whether you are a corporation or a sole proprietorship, the same rules apply regarding the deductibility of gym and exercise equipment or athletic facilities, such as pools and tennis courts, for the use of your employees, their spouses, and children. If the equipment or facility is in a building owned or leased by the employer and there are no residential facilities connected to the gym, then the costs are deductible business expenses.
Here's some examples:
Callous Corporation has a gym and pool for employees in the basement of corporate headquarters. Deductible.
Callous Corporation has a gym and pool for employees in a building a block away from corporate headquarters. Deductible.
Callous Corporation owns a resort where guests may stay overnight. On the premises is a gym and pool for the exclusive use of the employees back at corporate headquarters. No deduction because the gym is adjacent to residential facilities.
Let's use those same examples for an indie with a sole proprietorship.
Victor Visual owns or rents a building in town where he has his studio and a gym for employees. One of the employees is his wife. Deductible.
Victor Visual has a home studio. He owns a building down the block where he stores supplies and also has set up a room with gym equipment for his employees. Deductible.
Victor Visual has a home studio. He set up a gym in basement for his employees. No deduction because of the proximity of residential facilities.
Under no circumstances may Victor deduct the costs of gym equipment or facilities if he has no employees.
If the setup allows for Victor to take the deduction for the gym, then that is a non-taxable benefit to his employee(s).
There were 10 "Golden Tax Deduction Secrets" on the site Hiro refers to. There are problems with a number of them. Take note that one of the two ads on that site is for home athletic equipment.
Indies, be careful. So many tax tips, tax secrets, save thousands, make millions are just a lot of hogwash -- especially on the web. There is no quick fix to low taxes any more than there is a quick fix to fat thighs.
Best,
June
PS to Hiro: Read my posts on LLCs
Thank you so much for your blog! The pieces of information that you put together for us are always extremely helpful for us! Thank you, thank you, thank you!
I am a Graphic Designer -- 5 years -- from Huntington Beach, CA.
I was hoping to ask you a question today about setting up a home gym for my sole proprietorship.
This comes after I found this piece of information on the Internet: 3. Your Corporate Gym: Unfortunately, the IRS won’t let you directly deduct the cost of your gym membership. However, under section 132 (h) of the tax code, you can deduct the cost of the Gym equipment. So that Nautilus set, your Bow Flex machine, even the Gazelle Trainer that you’ve seen on television – not to mention free weights, a work out bench, etc – are all tax deductible through your company. Source: http://articles.webraydian.com/article1204-Ten_Golden_Tax_Deduction_Secrets.html
Now, my question is this: I see that a corporation is able to take an expense for gym equipment that they purchase for its corporate gym for employees. Is the same deduction allowed for a sole proprietor setting up a home gym for its owners? I am not in the business of fitness, and the home gym is solely to maintain my physical fitness and well being. I also have a couple follow up questions assuming that the answer above is "not deductible." If I were to convert my sole proprietorship to a LLC, would I be able to take the home gym that I create as a deductible business expense?
Thank you again for your blog, and your considerations on this tax question.
Kind regards,
Hiro
Hiro sent the above question to me quite a while ago. Researching for the correct answer took much time and reading and analysis. The answer may seem simple, seems simple to me, too, now. But, as with so much of the tax code, there is rarely an uncluttered path to a clear understanding.
Here's the scoop:
Whether you are a corporation or a sole proprietorship, the same rules apply regarding the deductibility of gym and exercise equipment or athletic facilities, such as pools and tennis courts, for the use of your employees, their spouses, and children. If the equipment or facility is in a building owned or leased by the employer and there are no residential facilities connected to the gym, then the costs are deductible business expenses.
Here's some examples:
Callous Corporation has a gym and pool for employees in the basement of corporate headquarters. Deductible.
Callous Corporation has a gym and pool for employees in a building a block away from corporate headquarters. Deductible.
Callous Corporation owns a resort where guests may stay overnight. On the premises is a gym and pool for the exclusive use of the employees back at corporate headquarters. No deduction because the gym is adjacent to residential facilities.
Let's use those same examples for an indie with a sole proprietorship.
Victor Visual owns or rents a building in town where he has his studio and a gym for employees. One of the employees is his wife. Deductible.
Victor Visual has a home studio. He owns a building down the block where he stores supplies and also has set up a room with gym equipment for his employees. Deductible.
Victor Visual has a home studio. He set up a gym in basement for his employees. No deduction because of the proximity of residential facilities.
Under no circumstances may Victor deduct the costs of gym equipment or facilities if he has no employees.
If the setup allows for Victor to take the deduction for the gym, then that is a non-taxable benefit to his employee(s).
There were 10 "Golden Tax Deduction Secrets" on the site Hiro refers to. There are problems with a number of them. Take note that one of the two ads on that site is for home athletic equipment.
Indies, be careful. So many tax tips, tax secrets, save thousands, make millions are just a lot of hogwash -- especially on the web. There is no quick fix to low taxes any more than there is a quick fix to fat thighs.
Best,
June
PS to Hiro: Read my posts on LLCs
Sunday, June 29, 2008
Donated Services ... but I see a hidden problem
Hi June,
I stumbled upon your FAQ while searching whether services donated can be deducted. You explained it nicely.
Question: Is it legal if I donated $1000 cash to a 503c and then got paid for my services by the 503c?
I realize that I'd still be out a good percentage because I'm paying taxes on that income, but given the cause I'd be willing to put up with that. I'm a videographer/photographer who is often dealing with no budget situations (and one who does not depend on this income but would like to see some compensation)
Martin
Golden, Colorado
Hi Martin,
Before answering your question I want to bring to your attention something that may be a serious problem for you. You said that you are "one who does not depend on this income but would like to see some compensation." If you read my posts on hobby vs business you know that you must be in it to make money. If not, then you're engaged in a hobby, not a business. Were you to make a similar statement to the IRS you'd have to do some fancy footwork to prove that you are an independent professional engaged in a business.
I have never had difficulty with someone donating money to a nonprofit that also pays him for services or products. I've frequently seen indies working for an organization and then so impressed with the organization's intent that they donate money, services, products. Be sure to read the posts here expenses -- donated services or products .
There is more info on this topic in my book Self-employed Tax Solutions .
-- June
I stumbled upon your FAQ while searching whether services donated can be deducted. You explained it nicely.
Question: Is it legal if I donated $1000 cash to a 503c and then got paid for my services by the 503c?
I realize that I'd still be out a good percentage because I'm paying taxes on that income, but given the cause I'd be willing to put up with that. I'm a videographer/photographer who is often dealing with no budget situations (and one who does not depend on this income but would like to see some compensation)
Martin
Golden, Colorado
Hi Martin,
Before answering your question I want to bring to your attention something that may be a serious problem for you. You said that you are "one who does not depend on this income but would like to see some compensation." If you read my posts on hobby vs business you know that you must be in it to make money. If not, then you're engaged in a hobby, not a business. Were you to make a similar statement to the IRS you'd have to do some fancy footwork to prove that you are an independent professional engaged in a business.
I have never had difficulty with someone donating money to a nonprofit that also pays him for services or products. I've frequently seen indies working for an organization and then so impressed with the organization's intent that they donate money, services, products. Be sure to read the posts here expenses -- donated services or products .
There is more info on this topic in my book Self-employed Tax Solutions .
-- June
Friday, June 27, 2008
More on State Taxes
Many of you have sent questions about state taxes. I have chosen a few of those questions to help guide you through the 50-dimension state tax maze.
Keep in mind that there is no uniform state tax code. That means that 50 states have 50 different sets of rules.
Some states have an income tax. Some do not.
Some have a sales tax. Some have a gross receipts tax. Some have neither.
In addition to state regulations there are county and municipality tax requirements.
Indian reservation land has a whole different set of rules.
As an indie, you are responsible for finding out what you must do and when you must do it. I will give you what is generally done in interstate situations, but you must check with your individual state tax office to be sure that you are following the rules correctly.
A good place to start is the small business administration in your area. Here’s a link with local contact info http://www.sba.gov/. Then call or go to the site of your state or local tax authorities
Donna
Capitan, New Mexico
Writer/editor
Starting first year home biz as a full time RV'er in NM. What do I have to do in NM to get my RV based writing biz started after moving my base camp from Texas. I have never lived in a state with an income tax.
Donna, your task is simple. Because of state gross receipts tax you need to register for a CRS number. Call 505.827.0700. You may also need to pay state estimated taxes, similar to the way you pay federal estimated taxes. See my posts on taxes -- estimated .
Joanne
Farmington, New Mexico
Clinical counselor for special education children on a reservation
I do not charge taxes, and the entity that pays me does not pay state taxes. My question is do I pay gross receipt taxes since I am not able to charge taxes?
Get info from the tax office of the Indian reservation where you provide your services and contact New Mexico tax – 505.827-700 -- to confirm the info that you received at the Indian tax office. Confirmation is important. People give the wrong info all the time!!
Jordan
Albuquerque NM
Marketing consultant
All of my clients are out of state. All of my invoicing for my services is to out of state clients; I have no clients here in NM. I work on the online marketing and websites of independent hotels around the country (but not in NM). I've tried to wade through the explanations of whether or not I have to pay Gross Receipts Tax, but it is still not clear to me. I don't want to dodge taxes that I legitimately owe, but as a small business with limited income I'd rather not have to pay taxes that I don't owe. Can you shed some light?
Gross Receipts Tax is charged by you and then paid by you to the state.
Gross Receipts Tax is charged on sales and services that you provide to clients in NM. If you do not leave the state to service clients or the clients do not come into NM to see you then you do not charge them gross receipts tax.
For the next four questioners, I’ll provide a general answer.
Mike
Milton, NH
Computer consultant
I live in NH and have the opportunity to do independent work for companies in other states. Here in NH I pay no income tax but as a self employed I do pay a business profit tax. The question is, what about the work I provide to clients in other states? I do most of my work from my home in NH. Am I safe or do I have to start doing taxes for every state that I work in?
Chris
Don’t know where from
Independent contractor; doesn’t say what kind of work
I have earned just a little over $100 from an Illinois-based company. I reside in a state that doesn't collect state income tax. I have never been a resident of the other nor have I have been to the other state. Would such a small amount of income paid by the Illinois-based company be enough to create a tax liability that I would have to file that state's nonresident income taxes?
Robyn
New York City
I assume she is not an indie
I live in New York City and work in New Jersey. I am required to travel for work quite often, usually around 65 days per year. I was told by a number of individuals in a similar situation that when filing the New Jersey Non-Resident New Jersey tax form, I should report and pay taxes on only the amount earned when physically working in New Jersey. Is this true?
Marianna
Albuquerque, NM
My husband has a contract position teaching computer classes for a company based in Virginia. The job requires him to travel to various states. None of the classes he taught last year were in either New Mexico, where we live, nor Virginia where the company is based. The company issued him a 1099 for last year with the state listed as Virginia, although no taxes were withheld. Do we have to file Virginia state income taxes? Please tell me we don't have to file state income taxes for each state he taught in (Washington, California, Texas, Massachusetts).
Here’s the general rule for Mike, Chris, Robyn and Marianna:
If you are physically present and perform work in a state in which you do not reside, you must file a nonresident tax return for that state and pay tax on the income earned in that state. If you work in more than one state you will have to file a return and pay tax to more than one nonresident state.
In the state in which you do reside, the state tax is calculated on your entire income. But most states give you a credit for taxes paid to the nonresident state(s) so that you do not pay tax twice. For instance, Connecticut residents do not get a credit for taxes paid to nonresident states. New York and New Jersey do give credit.
Take a look at this New York Times piece Telecommuters Cry ‘Ouch’ to the Tax Gods by David S. Joachim. It’s written for employees not indies but the state-tax morass is the same for all telecommuters.
Keep in mind that there is no uniform state tax code. That means that 50 states have 50 different sets of rules.
Some states have an income tax. Some do not.
Some have a sales tax. Some have a gross receipts tax. Some have neither.
In addition to state regulations there are county and municipality tax requirements.
Indian reservation land has a whole different set of rules.
As an indie, you are responsible for finding out what you must do and when you must do it. I will give you what is generally done in interstate situations, but you must check with your individual state tax office to be sure that you are following the rules correctly.
A good place to start is the small business administration in your area. Here’s a link with local contact info http://www.sba.gov/. Then call or go to the site of your state or local tax authorities
Donna
Capitan, New Mexico
Writer/editor
Starting first year home biz as a full time RV'er in NM. What do I have to do in NM to get my RV based writing biz started after moving my base camp from Texas. I have never lived in a state with an income tax.
Donna, your task is simple. Because of state gross receipts tax you need to register for a CRS number. Call 505.827.0700. You may also need to pay state estimated taxes, similar to the way you pay federal estimated taxes. See my posts on taxes -- estimated .
Joanne
Farmington, New Mexico
Clinical counselor for special education children on a reservation
I do not charge taxes, and the entity that pays me does not pay state taxes. My question is do I pay gross receipt taxes since I am not able to charge taxes?
Get info from the tax office of the Indian reservation where you provide your services and contact New Mexico tax – 505.827-700 -- to confirm the info that you received at the Indian tax office. Confirmation is important. People give the wrong info all the time!!
Jordan
Albuquerque NM
Marketing consultant
All of my clients are out of state. All of my invoicing for my services is to out of state clients; I have no clients here in NM. I work on the online marketing and websites of independent hotels around the country (but not in NM). I've tried to wade through the explanations of whether or not I have to pay Gross Receipts Tax, but it is still not clear to me. I don't want to dodge taxes that I legitimately owe, but as a small business with limited income I'd rather not have to pay taxes that I don't owe. Can you shed some light?
Gross Receipts Tax is charged by you and then paid by you to the state.
Gross Receipts Tax is charged on sales and services that you provide to clients in NM. If you do not leave the state to service clients or the clients do not come into NM to see you then you do not charge them gross receipts tax.
For the next four questioners, I’ll provide a general answer.
Mike
Milton, NH
Computer consultant
I live in NH and have the opportunity to do independent work for companies in other states. Here in NH I pay no income tax but as a self employed I do pay a business profit tax. The question is, what about the work I provide to clients in other states? I do most of my work from my home in NH. Am I safe or do I have to start doing taxes for every state that I work in?
Chris
Don’t know where from
Independent contractor; doesn’t say what kind of work
I have earned just a little over $100 from an Illinois-based company. I reside in a state that doesn't collect state income tax. I have never been a resident of the other nor have I have been to the other state. Would such a small amount of income paid by the Illinois-based company be enough to create a tax liability that I would have to file that state's nonresident income taxes?
Robyn
New York City
I assume she is not an indie
I live in New York City and work in New Jersey. I am required to travel for work quite often, usually around 65 days per year. I was told by a number of individuals in a similar situation that when filing the New Jersey Non-Resident New Jersey tax form, I should report and pay taxes on only the amount earned when physically working in New Jersey. Is this true?
Marianna
Albuquerque, NM
My husband has a contract position teaching computer classes for a company based in Virginia. The job requires him to travel to various states. None of the classes he taught last year were in either New Mexico, where we live, nor Virginia where the company is based. The company issued him a 1099 for last year with the state listed as Virginia, although no taxes were withheld. Do we have to file Virginia state income taxes? Please tell me we don't have to file state income taxes for each state he taught in (Washington, California, Texas, Massachusetts).
Here’s the general rule for Mike, Chris, Robyn and Marianna:
If you are physically present and perform work in a state in which you do not reside, you must file a nonresident tax return for that state and pay tax on the income earned in that state. If you work in more than one state you will have to file a return and pay tax to more than one nonresident state.
In the state in which you do reside, the state tax is calculated on your entire income. But most states give you a credit for taxes paid to the nonresident state(s) so that you do not pay tax twice. For instance, Connecticut residents do not get a credit for taxes paid to nonresident states. New York and New Jersey do give credit.
Take a look at this New York Times piece Telecommuters Cry ‘Ouch’ to the Tax Gods by David S. Joachim. It’s written for employees not indies but the state-tax morass is the same for all telecommuters.
Thursday, June 26, 2008
Reimbursed expenses: There's more than one way to dress a mannequin
Hi June,
I'm a designer working in fashion, snowsports, and the entertainment industry. I work on everything from costumes and sets to graphics and photography. The work keeps coming so I don't deny it. Currently I live and work in Brooklyn and have been working since 1999.
Here is my question - when working as a costume or set designer, stylist, or even in fashion, I often buy a lot of stuff - IE costume pieces, furniture, accessories, etc. These are items I'm not reselling to the public and are used exclusively for the project. I do invoice them for the cost, but its exactly at cost - more like an IOU.
Exactly how do I classify this on my taxes.
Thank You,
Jess
Hi Jess,
There are several ways to treat your props cost.
If never used again for another project then you may categorize the expense as "client costs" and the income or inflow of the reimbursement as "client costs reimbursement." The expense would cancel out the income and = 0.
If you used the props for other projects, or saw something interesting at an estate sale and bought if for future use, you could classify the income as "supplies." Include any income or reimbursement simply as income.
Sometime the choice depends on the amount of money we're talking about. For instance, $10,000 income, $100 props or $80,000 income with a $1,000 props may be treated differently than $80,000 income and $30,000 props.
Your tax pro may look at your entire tax picture and possibly choose a third method. If you props expense were a large portion of income she might treat the expense as "production costs."
Contrary to the understanding of most indies and the general public, tax preparation is not always a yes/no, this-way/ not-that-way, "exactly" situation. That's why I think indies should use the services of an indie-savvy tax pro.
Best,
June
I'm a designer working in fashion, snowsports, and the entertainment industry. I work on everything from costumes and sets to graphics and photography. The work keeps coming so I don't deny it. Currently I live and work in Brooklyn and have been working since 1999.
Here is my question - when working as a costume or set designer, stylist, or even in fashion, I often buy a lot of stuff - IE costume pieces, furniture, accessories, etc. These are items I'm not reselling to the public and are used exclusively for the project. I do invoice them for the cost, but its exactly at cost - more like an IOU.
Exactly how do I classify this on my taxes.
Thank You,
Jess
Hi Jess,
There are several ways to treat your props cost.
If never used again for another project then you may categorize the expense as "client costs" and the income or inflow of the reimbursement as "client costs reimbursement." The expense would cancel out the income and = 0.
If you used the props for other projects, or saw something interesting at an estate sale and bought if for future use, you could classify the income as "supplies." Include any income or reimbursement simply as income.
Sometime the choice depends on the amount of money we're talking about. For instance, $10,000 income, $100 props or $80,000 income with a $1,000 props may be treated differently than $80,000 income and $30,000 props.
Your tax pro may look at your entire tax picture and possibly choose a third method. If you props expense were a large portion of income she might treat the expense as "production costs."
Contrary to the understanding of most indies and the general public, tax preparation is not always a yes/no, this-way/ not-that-way, "exactly" situation. That's why I think indies should use the services of an indie-savvy tax pro.
Best,
June
Wednesday, June 25, 2008
Meals & Entertainment Expense
... Louisville Ky ... serial entrepreneur ... 1 year ...
I have a question regarding your invite the public, get a bigger deduction on your website: If I am hosting an event ( 3 on 3 basketball tournament) can I deduct the cost of food and liquor for the event?
Thanks,
Matt
Hi Matt,
If the tournament is for invited guests only you may deduct 50% of the cost of the food and drinks.
If the event is open to the public then you may deduct 100% of the cost.
There is more info on this topic in my book Self-employed Tax Solutions .
-- June
I have a question regarding your invite the public, get a bigger deduction on your website: If I am hosting an event ( 3 on 3 basketball tournament) can I deduct the cost of food and liquor for the event?
Thanks,
Matt
Hi Matt,
If the tournament is for invited guests only you may deduct 50% of the cost of the food and drinks.
If the event is open to the public then you may deduct 100% of the cost.
There is more info on this topic in my book Self-employed Tax Solutions .
-- June
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