As the holidays and the end of the year approaches, it’s a good time to review your financial plans and ensure you’re doing all you can to both maximize your savings and reduce your tax bill. Don’t wait until December to assess your finances—you could miss out on opportunities that disappear at year end.
Here are five things to consider doing right now:
1) Maximize your retirement savings: Contributions to tax-deferred retirement accounts—such as a 401(k)—reduce your taxable income and provide tax-free growth until retirement. Now is a good time to evaluate your overall savings and determine if you can bump up what you’re putting away for retirement. You can also make lump-sum contributions from an annual bonus to give your savings a boost. And if your employer offers matching contributions—don’t leave free money on the table—it’s a good idea to take full advantage of those additional funds.
If you’re currently in a lower tax bracket and you’re likely to be in a higher tax bracket when you retire (a lot of younger people fall into this category), consider making contributions to a Roth IRA or Roth 401(k). Though contributions to Roth accounts are made with after-tax dollars, that money grows tax free and when you retire, you won’t have to pay taxes on ANY of the withdrawals.
Those who are self-employed should consider making contributions to a tax-deferred retirement account such as a SEP-IRA, SIMPLE IRA or Solo 401(k). These contributions will lower your taxable income and could help you stay under the phase-out limitations for the new 20% deduction on pass-through income. Each type of retirement plan has different income limitations, so you need to know what your taxable income will be for the year before you decide which type of retirement plan to contribute to.
2) Consider a Health Savings Account (HSA): It’s open-enrollment season, and if your employer offers an HSA—and you qualify to contribute to one—this can be a tax-smart way of setting aside money for qualified medical expenses. HSAs offer a triple tax advantage: You pay no federal taxes on your contributions, no federal taxes on investment earnings and no taxes on withdrawals as long as the money is used for qualified medical expenses.
If you’re fortunate enough not to have to many medical expenses and have money left over in your HSA during retirement, you can use that money to pay for living expenses—the only caveat being, you’ll have to pay taxes on the withdrawals when they’re not just for medical expenses.
3) Give to a favorite charity: The end of the year is a time when many people think about charitable giving. As with other aspects of your finances, it’s important for charitable giving to be part of a broader financial plan.
One way to maximize the tax benefits of charitable giving is to concentrate your giving into a high-tax year. By giving a large amount one year and not the next, you could maximize your itemized deductions in that year and take the new increased standard deduction next year. Giving appreciated assets in this manner is a great way to maximize your charitable giving deduction, and a donor-advised fund (DAF) could be used to facilitate that gift.
If you’re 70½ or older, you could also consider donating directly to a charity from your retirement account, using a qualified charitable distribution (QCD). A QCD allows you to meet the required minimum distribution and has the added benefit of not being included in your taxable income.
4) Gift assets to your loved ones: Each year you’re allowed to give up to $15,000 to any number of people without them having to pay a gift tax. Taking advantage of this yearly exclusion can allow you to transfer a large amount of wealth to your loved ones tax free and without eating into your gift and estate tax exemption. Those gifts can be used for any number of financial goals, including funding a grandchild’s 529 college savings plan or helping a loved one make a down payment on a new house.
5) Consider tax-loss harvesting: Tax-loss harvesting is an underappreciated investing strategy that you should consider. Investors have a tendency to avoid selling anything at a loss, but there can be a significant tax benefit to selling a losing position if you have capital gains to offset. Tax-loss harvesting can also serve as a motivation to sell under-performing investments or to re-diversify overly concentrated stock positions.
If you need help with any of these tax savings strategies, please call! I love helping my clients save as much money as possible!
In order to keep my business running smoothly there are countless things to manage. Invoicing. Billing. Collections. Accounting. Taxes. A few years ago I was doing everything manually in Excel spreadsheets, but that took way too much of my time. I finally started using software to help automate many of my processes.
I have since come to truly appreciate QuickBooks Self-Employed for all of my accounting needs. Without it, I wouldn’t have time to actually do the work I love doing! Because doing my own accounting and taxes is the last thing I ever want to do! It's much more fun to do everyone else's!
To make things easier on yourself, (and me, if you're my client!) try out QuickBooks Self-Employed with 50% off for a full year by signing up with my link: https://quickbooks.grsm.io/JaimieEck, and let me know what you think!
You can use QB SE on your smart phone, an iPad, or your laptop or desktop. It connects to your bank and credit cards and downloads all of your transactions for you. You can take pictures of your receipts and it will link your transactions with your receipts and store your receipts on the cloud. It also automatically keeps track of your mileage! You can invoice and estimate quarterly taxes as well!
Don't wait until the last minute before you get organized! Get a head start on taxes now with QuickBooks Self Employed!
People often confuse the roles of bookkeepers, accountants and certified public accountants (CPAs). It's not surprising since many of their duties overlap, but the overall responsibilities of each role and the level of authority held by the positions differ. They all share fiscal responsibility – in degrees – for the company or organization for which they work.
Often considered by accountants and CPAs as just technicians or clerks, bookkeepers perform some of the same daily tasks as do accountants and certified public accountants. Many bookkeepers work as freelancers for small businesses in need of financial recordkeeping. Bookkeepers maintain daily accounting records, posting debits and credits, generating invoices for clients and checks for vendors as well as handling payroll. Many small business owners often double as bookkeepers. Bookkeepers typically lack the education of an accountant or CPA, as they gain on-the-job experience. Professional organizations for bookkeepers help to improve professional recognition for bookkeepers by accounting professionals as well as providing certification programs of abilities and skills.
Accountants have a four-year college degree. While many accountants have an educational background in accounting, some are more general business majors. Accountants work with accounting clerks and technicians who handle daily financial entries. Accountants oversee or perform billing, make general ledger entries, review accounts payable activity completed by clerks or technicians or handle payroll. A mid-level position in the accounting department, accountants report to accounting managers, company controllers or financial directors, all of whom might be certified public accountants.
Certified Public Accountants
Certified Public Accountants have a focused education in accounting and must pass the Uniform Certified Public Accountant Examination. CPAs must meet state education and experience requirements before they can sit for the exam. Accountants not meeting these requirements cannot use the CPA designation legally. Certification is renewable every two years, subject to state requirements. CPAs have a higher level of responsibility than bookkeepers or accountants; because of their certification, they can perform auditing, tax and financial services for individuals, corporations and other business or nonprofit organizations.
Many entrepreneurs who launch their own businesses start out by wearing the bookkeeper's hat and doing their own books & taxes, in addition to doing just about everything else in the business, too. Simple bookkeeping software, such as QuickBooks, makes that possible. But there comes a time in a growing enterprise when it makes sense to hand over responsibilities for taxes, accounting, and the rest of the financial functions to specialists.
The right CPA can help a business with not only ensuring that the accounting records are accurate and maximizing deductions on tax returns, but with longer term tax planning, business planning, and even personal tax planning. I'd love to help you when you are ready to upgrade to a CPA!
Do you wait until two weeks before the deadline to file your tax return?
It's almost time for you to get started then - we only have 4 weeks left before this year's tax deadline!
Last minute filers typically fall into two categories: Either they owe the IRS money, which removes any incentive to file early, or they’re procrastinators who would go have dental work than prepare their tax returns.
This year, the calendar is the procrastinator’s friend. April 15 falls on a Sunday, and because April 16 is a holiday in Washington, D.C., you have until Tuesday, April 17, to file your federal tax return.
If You Don’t Owe...
If you’re due a refund, there’s no reason to sweat this deadline. The IRS will gladly hold on to your money until you get around to filing your return.
There are instances in which you should file on time or file an extension even if you don’t owe the government money. If you converted a traditional individual retirement account to a Roth IRA in 2017, you have until October 16, 2018, to undo the transaction and avoid paying taxes on it. But to qualify, you must file your tax return or request an extension by April 17.
File for an Extension?
Filing for an extension will give you until October 15 to file your tax return. Approval is automatic. Use IRS Form 4868 to file your request. Most tax software programs provide this form.
Filing for an extension gives you more time to file your return, but it doesn’t give you more time to pay taxes you owe.
If You Can't Pay...
If you can’t come up with the money by April 17, you should still file a tax return or request an extension. Otherwise, you will get hit with failure-to-file penalties, along with underpayment fines and interest on the balance.
If you need just a little more time to come up with the money, you can ask the IRS for an additional 120 days to make your payment. There’s no fee to set up this agreement, although you’ll owe interest and other fees on the balance until it’s paid off. To request an agreement, call 800-829-1040.
If the amount you owe is large and you can’t pay by April 17, consider requesting an installment plan with the IRS. With an installment plan, you can make monthly payments until the balance is paid off. Taxpayers who owe $50,000 or less can apply online. You’ll have to pay a set-up fee of $225 (or $107 if you arrange for direct debit from your bank account).
Another option is to pay taxes with your credit card. This may appeal to taxpayers who would rather owe money to Visa or American Express than the IRS, especially if they have rewards cards. But while the IRS will accept payments via credit card, it won’t pay the “convenience fees” credit card companies charge retailers. Fees range from 1.87% to 2% of the balance. If you use tax software to e-file, the fees are even higher: TurboTax charges a 2.49% convenience fee. If you don’t pay off the balance by the credit card due date, you’ll also owe interest.
If all of this is overwhelming you, you are not alone! Contact me ASAP! Give me all your tax documents and let me deal with it all for you! I actually like this stuff!! I'll get you filed on time and I'll also ensure you are taking every deduction that you are able to take to help minimize your tax bill.
While both tax deductions and tax credits can save you a significant amount of money on your taxes, they work in significantly different ways.
What is a Tax Deduction?
A tax deduction is a result of a tax-deductible expense or exemption which reduces your taxable income. A common tax deduction on your federal income tax return is a personal exemption. An example of how this works: If your income was $50,000 your personal exemption would reduce your taxable income by the 2017 personal exemption of $4,050 so your taxable income would now be $45,950.
What is a Tax Credit?
Unlike tax deductions, tax credits are subtracted from your tax liability (not taxable income). A common tax credit is the child tax credit. If you have a qualifying child, you can take a credit of up to $1,000 per child against your tax liability in 2017. If besides the child tax credit, you would otherwise have a total federal income tax liability of $2,500, child tax credit for one child would reduce that tax liability to $1,500.
Which is better? A Tax Deduction or a Tax Credit?
If you were ever faced with a hypothetical choice between a $100 tax deduction and a $100 tax credit, you would want the credit. Unlike a tax deduction, a $100 tax credit reduces your tax dollar-for-dollar ($100). On the other hand, a tax deduction reduces your taxable income by $100. The resulting amount of tax you save depends on your marginal tax bracket (in everyday language: your tax bracket). If you are in the 25% tax bracket in 2017, a $100 tax deduction reduces your taxes by $25.
Itemized Deductions vs. Standard Deductions
Just about everyone qualifies for the standard deduction. Although based on your filing status (e.g., single, married filing jointly, married filing separately, or head of household), all people with the same filing status receive the same standard deduction amount (the only exceptions are for the elderly, disabled, or blind – they receive a somewhat higher standard deduction).
By contrast, itemized deductions are numerous and their amounts vary by individual. Common itemized deductions include:
There’s a bit of a hitch with itemized deductions, however. You can only benefit from itemized deductions to the extent they exceed your standard deduction ($6,350 if you are single and $12,700 married filing jointly in 2017). Said another way, each taxpayer is permitted to take the higher of either their standard or itemized deductions – but not both.
Say you are married and filing jointly and your standard deduction is $12,700. When you add up the total of your itemized deductions you get $12,800. Since your itemized deductions exceed your standard deduction by $100, you get to take the itemized deduction. So, it really pays to remember every additional deductible expenses that may bump you up over the standard deduction, such as charitable contributions and unreimbursed employee expenses.
Whether an expense qualifies for an income tax deduction or a tax credit, you want to take advantage of every opportunity to lower the taxes you’ll pay! I often find deductions or credits my clients hadn't realized they could take. I'd love to help you find tax savings you hadn't thought of too. Contact me today to get started on your 2017 tax return.
Currently, for 2017, C-Corp rates range from 15% to 39% (except for personal service corporations which are taxed at 35%) while individual tax rates range from 10% to 39.6%. So if you have a sole proprietorship, an LLC or an S-Corp, you have a pass through business and your business income is taxed at your personal rate.
The new tax law now provides for a flat 21% tax rate for C-Corps. Individual rates have decreased slightly with the highest rate now at 37%. And people with pass through businesses will get a new deduction of up to a 20% on Qualified Business Income (QBI). But the QBI deduction is complicated.
For personal service business, including realtors, attorneys, architects, engineers and brokers, the 20% deduction is only available for married couples filing jointly with incomes up to $315,000 and $157,500 for single taxpayers.
S-Corps get even more complicated. How much you save is dependent on how much of your S corp. is comprised of salary versus pass-through income. Since an attorney or realtor has to take a salary, the 20% deduction is only applied to whatever amount of income is leftover as specifically the pass-through portion.
While S-Corps business owners may be tempted to shift funds around and take a smaller salary in order to get a larger deduction, the Internal Revenue Service (IRS) has been diligently auditing businesses to determine how much money is pass-through and how much is salary.
For other employee-driven businesses, like restaurants and manufacturers, the deduction for S-Corps is dependent on your payroll. The 20% deduction is limited to 50% of your payroll.
For example, a restaurant making $1 million, with $600,000 in total expenses and an owner’s salary of $100,000, nets $300,000. But if it pays $400,000 in payroll, the deduction is 20% of $300,000 and limited to 50% of total payroll, so the deduction would be $60,000 in this case and could be no greater than $200,000.
The new law seems to reward companies that have a lot of employees and essentially provides an incentive to go out and hire new workers.
No matter your business, it's is a good time to be a small business owner with the new Qualified Business Income Deduction. If you have any questions please contact me.
I often get asked if I have a list of expenses that can be deducted for independent contractors, freelancers or those in direct sales. Well, my answer is usually to say that generally anything you you spend money on in the pursuit of building and growing your business can be written off. But for those who like lists - here is that list! Assuming they apply to your chosen business (you can’t deduct movie tickets if you have no reason to be at the movies…but if you have a blog all about movies and reviews, go for it).
Of course, you need proof of this stuff. No good saying you bought 50 magazines last year if you can’t find the receipts. With the government hemorrhaging money, they’re looking for any opportunity to keep as much of your cash as they can. In the event of an audit (aaarggghhh) you want your finances to be watertight.
On that note, here we go:
1) Industry books & periodicals, including audio books
2) Other books and periodicals used for research
3) Library book charges
4) DVDs and CDs related to your business
5) Movie or theater tickets, if related to your blogging or freelancing
6) Music and TV show downloads (if related)
7) Magazine subscriptions (if related)
8) Research sites that require a subscription
9) Further education classes
11) Business podcasts
12) Business-related websites
13) Memberships to professional clubs and affiliations
14) Internet access fees (at about $40 a month, that’s a biggie)
15) Public internet access fees (Internet café’s, airports etc)
16) Stock photo purchases for your blog or website
17) Search Engine Optimization services and fees
18) Paid site submissions
19) Website hosting fees
20) Website design and/or maintenance fees
21) Website/blog templates
22) Domain name cost(s) and renewals
23) Blog expenses (e.g. WordPress additions)
24) Film & Digital cameras
25) Web cameras
26) Handheld video recorders
27) Digital memory cards
28) Recordable CDs and DVDs
29) Zip drives
30) Photo printouts
31) Film & film processing
32) Printer ink and copier toner
33) Phone charging stations (e.g. at the airport)
34) Second phone line for your business/fax machine
35) Long distance charges related to business
36) Cost of phone/fax/scanner/copier equipment
37) Cell phone & PDA expenses (bills, equipment, accessories)
38) Personal voice recorders and memo machines
39) Business equipment rental
40) Computer equipment & peripherals
41) Computer upgrades
42) Depreciation costs of computer equipment
43) Data storage (both online and external HDDs)
44) Any business related software (not games…unless you review them)
45) Software licensing fees
46) Anti-virus and anti-spam subscriptions
47) Unpaid invoices. If you do some work for someone, be it a simple blog article or a much bigger job, and you get stiffed on the bill, you can write off your loss.
48) Fees for other bloggers and freelancers. If you get overwhelmed and pay a friend or relative to help out, any money you pay that person for their assistance is a tax deduction.
49) Tax and accounting software
50) Tax preparation fees
51) Business incorporation costs
52) Costs for Trademarks or Copyrights.
53) Business logos and graphic design fees
54) Business cards, letterhead and other stationery (even stuff you print yourself)
55) Office supplies (everything from paper to paper clips)
56) Home office expenses. You can deduct the part of your home you use exclusively for blogging or freelancing as an expense, including a portion of the rent, water, heating bills and so on.
57) Percentage of your home insurance (for your home office)
58) Online self-promotion fees (that includes banners and Adwords costs)
59) Trade show fees
60) Advertising costs (online or offline, stickers, posters, postcards etc)
61) Photography fees (e.g. headshots, pack shots etc)
62) Photocopying/faxing fees
63) Transportation costs: car mileage; airline tickets; taxis; buses; trains.
64) Highway tolls
65) Parking fees
66) Hotel costs for business trips.
67) Cleaning & laundering services when traveling for business.
68) Costs of conferences, plus all related expenses
69) Health insurance costs (if you’re self-employed)
70) Computer equipment insurance
71) Food and drink purchased on business trips
72) Client entertainment (be reasonable…not sure you’ll get away with Strip Club deductions)
73) Postage costs (Stamps.com is ideal for keeping track of postage, and the service itself is tax-deductible)
74) PayPal and Western Union fees
75) Post Office Box fees.
76) Safe Deposit Box fees.
77) Self-storage fees, especially useful if your files and records are spilling over into your garage and you need extra space.
Advice. Any professional advice you pay for that pertains to your business is a tax deduction, and that includes counseling or coaching.
78) Membership dues to labor unions
79) Charity work or donations (this one’s tricky. It’s limited to your out-of-pocket costs, not the final cost of the product. In my case, I’ve done some writing for charity, which is not applicable because you can’t deduct time spent. But any materials used during your charity work can be deducted).
80) Prizes and giveaways.
81) Business furniture. If you use it exclusively for your business.
82) Business functions. If you hold a little get-together for clients, even just one or two, then everything from the rental of the room (or golf course…know what I mean?) to food and drink can be deducted.
83) Business lunches. Meals are 50% deductible on your tax return.
84) Props. I sometimes use props for photoshoots, and the cost of those props can be deducted.
85) Job search expenses. Any money you spend trying to get work, from postage to travel, is a deductible expense.
86) Alcohol and drug abuse treatment. If the pressure turns you into a Betty Ford patient, you can deduct the expenses of treatment. Let’s hope you never have to though.
87) Any losses due to theft. Away on business, your laptop gets stolen…write it off.
88) Moving expenses related to your blogging or freelancing.
89) You can deduct 50% of your self-employment tax
90) Home improvements. Turn the basement into a home office, those expenses are deductible.
91) Clothing and accessories. If you have to buy any clothing for a particular job (maybe you needed protective clothing & headwear to write an article about a building site) then those costs are also deductible. But don’t try and write off your new Gucci watch.
92) Business checking expenses. If you have anything more that free checking, it’s a deduction.
93) Business gifts. This is cool. If your mom watched the kids while you went off to do an interview or write an article, and you then bought her flowers or choccies, well, the gift is tax deductible. Very sweet.
94) Annual fees for business credit cards.
95) Physical therapy. Writing for eight hours a day can cause all sorts of problems, including the dreaded Carpel Tunnel Syndrome. However, medical expenses are a complex beast, and usually need to be a percentage of your income.
96) Wages. Say you pay your kid $20 a month to empty your office trash can, maybe as a way to earn an allowance. Well, you can deduct that expense.
97) Your dog. No kidding, if you can prove it's a guard dog and is protecting your equipment, you can write-off the doggie expenses.
More than 50 IRS income tax provisions are being adjusted for inflation in 2018, including the tax rate schedules and other tax changes. Revenue Procedure 2017-58 provides details about these annual adjustments. The tax year 2018 adjustments generally are used on tax returns filed in 2019. The tax items for tax year 2018 of greatest interest to most taxpayers include the following dollar amounts:
1) The standard deduction for married filing jointly rises to $13,000 for tax year 2018, up $300 from the prior year. For single taxpayers and married individuals filing separately, the standard deduction rises to $6,500 in 2018, up from $6,350 in 2017, and for heads of households, the standard deduction will be $9,550 for tax year 2018, up from $9,350 for tax year 2017.
2) The personal exemption for tax year 2018 rises to $4,150, an increase of $100. The exemption is subject to a phase-out that begins with adjusted gross incomes of $266,700 ($320,000 for married couples filing jointly). It phases out completely at $389,200 ($442,500 for married couples filing jointly.)
3) For tax year 2018, the 39.6 percent tax rate affects single taxpayers whose income exceeds $426,700 ($480,050 for married taxpayers filing jointly), up from $418,400 and $470,700, respectively. The other marginal rates – 10, 15, 25, 28, 33 and 35 percent – and the related income tax thresholds for tax year 2018 are described in the revenue procedure.
4) The limitation for itemized deductions to be claimed on tax year 2018 returns of individuals begins with incomes of $266,700 or more ($320,000 for married couples filing jointly).
The Alternative Minimum Tax exemption amount for tax year 2018 is $55,400 and begins to phase out at $123,100 ($86,200, for married couples filing jointly for whom the exemption begins to phase out at $164,100). The 2017 exemption amount was $54,300 ($84,500 for married couples filing jointly). For tax year 2018, the 28 percent tax rate applies to taxpayers with taxable incomes above $191,500 ($95,750 for married individuals filing separately).
5) The tax year 2018 maximum Earned Income Credit amount is $6,444 for taxpayers filing jointly who have three or more qualifying children, up from a total of $6,318 for tax year 2017. The revenue procedure has a table providing maximum credit amounts for other categories, income thresholds and phase-outs.
6) For tax year 2018, the monthly limitation for the qualified transportation fringe benefit is $260, as is the monthly limitation for qualified parking.
7) For calendar year 2018, the dollar amount used to determine the penalty for not maintaining minimum essential health coverage remains as it was for 2017: $695.
8) For tax year 2018, participants who have self-only coverage in a Medical Savings Account, the plan must have an annual deductible that is not less than $2,300, an increase of $50 from tax year 2017; but not more than $3,450, an increase of $100 from tax year 2017. For self-only coverage, the maximum out-of-pocket expense amount is $4,600, up $100 from 2017. For tax year 2018, participants with family coverage, the floor for the annual deductible is $4,600, up from $4,500 in 2017; however, the deductible cannot be more than $6,850, up $100 from the limit for tax year 2017. For family coverage, the out-of-pocket expense limit is $8,400 for tax year 2018, an increase of $150 from tax year 2017.
9) For tax year 2018, the adjusted gross income amount used by joint filers to determine the reduction in the Lifetime Learning Credit is $114,000, up from $112,000 for tax year 2017.
For tax year 2018, the foreign earned income exclusion is $104,100, up from $102,100 for tax year 2017.
10) Estates of decedents who die during 2018 have a basic exclusion amount of $5,600,000, up from a total of $5,490,000 for estates of decedents who died in 2017.
11) The annual exclusion for gifts increased to $15,000, an increase of $1,000 from the exclusion for tax year 2017.
Any questions? Shoot me an email or message or give me a call!
Congratulations! You sold your home and you came out ahead! Did you know you could owe taxes on your gain?
In most cases, gains from sales are taxable. But you may not have to pay any taxes! Here are ten facts to keep in mind if you sell your home this year.
1. Exclusion of Gain. You may be able to exclude part or all of the gain from the sale of your home. This rule may apply if you meet the eligibility test. Parts of the test involve your ownership and use of the home. You must have owned and used it as your main home for at least two out of the five years before the date of sale.
2. Exceptions May Apply. There are exceptions to the ownership, use, and other rules. One exception applies to persons with a disability. Another applies to certain members of the military. That rule includes certain government and Peace Corps workers. For more information about these exceptions, please call me.
3. Exclusion Limit. The most gain you can exclude from tax is $250,000. This limit is $500,000 for joint returns. The Net Investment Income Tax will not apply to the excluded gain.
4. May Not Need to Report Sale. If the gain is not taxable, you may not need to report the sale to the IRS on your tax return.
5. When You Must Report the Sale. You must report the sale on your tax return if you can't exclude all or part of the gain. You must report the sale if you choose not to claim the exclusion. That's also true if you get Form 1099-S, Proceeds From Real Estate Transactions.
6. Exclusion Frequency Limit. Generally, you may exclude the gain from the sale of your main home only once every two years. Some exceptions may apply to this rule.
7. Only a Main Home Qualifies. If you own more than one home, you may only exclude the gain on the sale of your main home. Your main home usually is the home that you live in most of the time.
8. First-time Homebuyer Credit. If you claimed the first-time homebuyer credit when you bought the home, special rules apply to the sale. For more on those rules, please call.
9. Home Sold at a Loss. If you sell your main home at a loss, you can't deduct the loss on your tax return.
10. Report Your Address Change. After you sell your home and move, update your address with the IRS. To do this, file Form 8822, Change of Address. You can find the address to send it to in the form's instructions on page two. If you purchase health insurance through the Health Insurance Marketplace, you should also notify the Marketplace when you move out of the area covered by your current Marketplace plan.
Questions? Help is just a phone call away.
This is a Tax Guide for all the would be home-based business millionaires. This guide will tell you virtually everything you need to know about how taxes should, and do, work for a Multi Level Marketing type business. The kind of business where someone in the business recruits you to sell the products, and, eventually, you recruit others into the business. This guide works for Rodan + Fields, Lularoe, Plexus, Wildtree, Mary Kay, Avon, Pampered Chef, Herbalife, Isagenix, Scentsy and dozens of others you've never heard of.
First, a couple of terms, some basic advice, and some warnings:
1. You should be, at this point, a sole proprietor. This means that you own and run the business by yourself, with no employees. You will file the business taxes as a part of your personal taxes, usually on a Schedule C.
2. You are going to spend more time doing taxes, and it's going to cost more. Even if you use software (which I highly discourage if you are running a business) you will pay more for the programs.
3. You might not actually be a business. Many of the people starting these businesses will never have a dime of profit, and, after a few years, the IRS will put the kabosh on taking a negative income from your business off of your regular taxable income. The IRS will it Hobby Income. It means you do it more for fun than for profit. You still have to claim the income (on Line 21 - Other Income), but you deduct the losses on your Itemized Deductions (subject to 2% of income limit, maximum deductions equal to income and a bunch of other restrictions that ensure that you pay taxes on the income instead of getting write offs.) My advice is to go full bore, gung-ho towards making a profit for 3 years. File the Schedule C's and take the losses on your taxes (improving your refund). If, after three years, you haven't made a profit, and gross revenues aren't approaching 5 digits ($10,000), take real stock of where you're at. If revenues are growing and profitability seems close, keep things going. If revenues are flat, profits are a distant dream, and/or your enthusiasm is waning, bite the bullet and either shut the business down, or tone it back and start filing as a Hobby.
Record Keeping: This is where the rubber meets the road. Good record keeping will save you when it comes to tax time. Your records don't need to be extensive, but they do need to be accurate and useable. The best and easiest record keeping method involves a small notebook, a big notebook and an envelope or box. The small notebook is for mileage, discussed below. The big notebook is for every other expense. You need simple columns set up: date, description, cost and payment received (if you pay something, it goes in the cost column, if you’re paid it goes in the payment received column.). You can add categories, but don't really need to, if you're unsure something's deductible, write it down and let your tax guy tell you if it's deductible. The box/envelope is for receipts - just throw them in. Really? No sorting, categorizing or organizing? No. Simply put, your odds of ever needing them for an audit are slim to none. Save the box, notebooks and tax returns for 7 years, and then throw it all away. If you ever do get audited, there's plenty of time to sort through the box and organize it to match the notebooks - but why do it if it's not necessary. If I'm doing your taxes I'm going to use the notebooks, and remind you that you should have a receipt for everything. You don't have to prove things to me. It’s important to understand not to over think things. For example, if you make a sale involving sales tax, which you know a portion will go to the government, you still write down 100% of what you were paid (including the tax). Later, when you remit the sales tax to the government, it is entered as a payment (deduction.) Get it – you get money, it’s entered as income, you pay money, it’s entered as a deduction.
The trick to your kind of business is that sometimes you don't make the sale, it happens through a website and is fulfilled by the company, with the payment going straight to the company, the product going straight to the consumer, and you getting a commission. Generally the company will only report the commission as income to you, which means you don't need to track any expenses like shipping, sales tax or the wholesale price - just the commission, which you can track when the payment comes to you. Just make sure your company handles it this way, and you'll be good. If the product is paid for by you, comes to you, and then you pass it on to the client for a markup, the entire price paid goes into your records as income, and all the costs to you (shipping, wholesale price, sales tax) go into your records as an expense.
Expenses: You can deduct any ordinary and necessary expenses for your business. I generally describe the requirements like this: If it will make you more money, is required by someone in authority, or makes your business more efficient or your life as a business person easier, it's probably deductible. Here's a non-exhaustive list:
1. Pretty much anything the company charges you for. If they deduct it off your commission check, deduct it off your taxes (you report the gross commission, not the commission after deductions).
2. Marketing Expenses: Business cards, website fees, posters, signs, sponsorships, commercials, advertising, pretty much anything you do to get someone to call YOU when they want your product.
3. Insurance: I'm not talking about homeowners insurance here. I'm talking about ‘oops I screwed up and someone is suing me insurance.’ Sometimes this is called Errors and Omissions Insurance, sometimes it’s a liability bond, or a rider on your homeowner’s insurance. Also, if you pay a rider to your car insurance for business use, the difference between that and regular insurance is deductible. There is also a self employed health insurance deduction that allows you to deduct your health insurance costs if you have no other insurance source (if you can get insurance through your spouse’s work this is a no-go.)
4. Entertainment Expenses: Those party expenses count. The food, the favors, the entertainment. It all counts if you expect there's a chance you'll make money. Eventually you'll be with a client, or potential client, and pick up the tab for lunch, or dinner. Generally, if you expect the expense to result in a sale that makes you money, either immediately, or in the future (whether it ultimately does or not doesn't matter, as long as you expect it to) it's deductible. I recommend writing the name of the client on the receipt, as well as a quick description - "referral source", "potential client" or something like that.
5. Travel Expenses: These are a toughie. People love conflating personal and business travel. If you travel to Maine to visit family and see the lobster festival, and try to sell to some family and friends, the trip is primarily personal. You can deduct expenses DIRECTLY RELATED to the sales efforts, but little else. You can visit a friend for dinner on a three day business trip, but don't do business for an hour on a three day personal trip. Also avoid what I call BS travel. Flying to Vegas to assess potential markets is transparent vacationing disguised as business travel, especially if you spend 23 out of every 24 hours in the casino! Be reasonable! Go on trips that are going to increase your money-making potential. Stay away from any others. For legitimate travel, you get airfare, rental car, tips, taxis, laundry, internet and phone, as well as 50% of meals and any other reasonable and necessary expenses. Travel assumes overnight trips away from your home area.
6. Cell phones, laptops and tablets: Do yourself a favor, get a business only laptop, cell phone, tablet and/or computer. It is simply too difficult to calculate expenses on a part personal and part business electronic device. Don't share your business number with friends and family (other than wife and kids). If you keep everything separate, the deductions are easy and legitimate. If you don't, you have to establish a business use percentage, and worry about listed property rules - which suck!
7. Vehicle Expenses: Keep a mileage log. Let me say it again, unless you have a vehicle that is 100%, no s**t, total business and no personal use, keep a mileage log. Don't worry about gas, repairs, oil changes, insurance or any other car expenses (except as discussed above under insurance). There are other ways to track vehicle expenses, but mileage is the best. Do track annual car taxes and finance charges. The easiest mileage log is a notebook where you right the date, the trip purpose and the miles driven. You will also need to know the total miles the vehicle is driven for the year, so write the odometer reading down every January 1st! Mileage will be one of your biggest expenses, so keep track of it religiously! 10,000 miles of properly tracked vehicle mileage can result in $1500 of tax savings! Mile IQ is the absolute best way to do this. It is a mileage tracking app the AUTOMATICALLY tracks every trip, allowing you to very simply identify business vs. personal, and add notes on the purpose. HIGHLY recommend using this!
8. Home Office: Set aside a space in your home that is 100% business use. Never used for anything else, and regularly used for business. This is where you keep your business records, your business computer or laptop, make your sales calls from and meet clients. The tax term is regular and exclusive business use. If you do this, you deduct a percentage of the household expenses - rent, interest, taxes, utilities, insurance, repairs, etc, based on the square footage of the office ratioed to the home square footage. Expenses directly related to the office, such as a dedicated phone line; do not have to be ratioed. You can also take a small depreciation deduction for the home losing value. The IRS "simplified" this, allowing you to take $5 for every square foot of Home Office, up to $1500, but it's BS to call it simplifying, because any tax guy worth their salt is going to run the numbers both ways and take the number that makes the most sense.
9. Depreciation: Some items that you buy for your business, that have a useful life longer than a year will have to be depreciated over time rather than deducted all at once (examples include computers, digital cameras, machinery, big tools or office furniture). There are many options for deducting it up front, but be wary of this, there are tripwires that can cost you if you dispose of something before it has passed its useful life. Talk about these items with your tax advisor.
10. The stuff you buy to sell: This can get tricky. If everything you sell is paid for and shipped through the company, it's easy, as discussed above about commissions. If you order the stuff, pay for it and either deliver it or ship it to the customer, you have to track the wholesale price, shipping, sales tax and the amount you received. Even worse, if you order items to keep on hand for later sale directly to customers, you need to track all the purchases you made (at your cost is my recommendation) and track what is sold and what is on hand. This is the devil called inventory. You need to know what you have on hand at the beginning and end of the year, what you bought, and what you sold. The easiest way to do this is with an inventory notebook - now you have three. If you buy something, write it down with date, description and price paid. Have columns for date sold, and price sold for, and another column to make a note if it's disposed of without selling it (given away, used by yourself, or expired/lost/stolen. Track each item as it's disposed of, and then, at the end of the year, total everything left - that's Ending Inventory, everything bought during the year - that's Cost of Goods Sold, and everything sold - that's Gross Receipts. Ending Inventory this year becomes Beginning Inventory next year. If you sell some this way and some through the company on commission, you'll have to add commissions to your Gross Receipts, but I think you get the point. If I ran a business like this I would desperately try to avoid inventory, but that might cost you some sales - so - do what works best for you. A lot of scenarios involving display items, demonstrators and personal items can be handled through inventory. Also, since most companies accurately report total purchases, all you need is that number, and the cost of items at the end of each year, and inventory is DONE. Just make sure to use wholesale or retail price for both inventory and purchases. I recommend wholesale.
11. Taxes: Mainly sales taxes. You need to work with your State or County to make sure you collect and remit sales taxes. Don't blow this off. Things get bad. The sales tax you collect and remit is deductible if included in the price you charge, and the income you report. You also may need to pay business taxes and licensing fees to State/County/City. These are deductible, but you need to work these out on your own - this is an income tax guide, and these other taxes vary too much by locale to cover here. Again, don't screw these up. The local governments can be worse than the IRS if you mess up.
Keep the record keeping up to date. It's a nightmare to back fill. Work your ass off to generate business and make money. Research best practices and talk to the people making money doing this. The idea is to MAKE money, and then be unhappy that you are paying taxes on it. Getting a big tax deduction from your unprofitable business is only good at tax time. Paying taxes is a sign of success!
Hi! I'm Jaimie and I have a B.A. in Accounting, an MBA with an emphasis in Accounting and a CPA license. I worked for about 10 years in CPA firms doing audits and reviews and then for about 10 years in private companies managing accounting departments. I've learned a lot about accounting, finances and taxes over the last 20 years! And now I want to share my knowledge with you here!