Donating Your Car to Charity – What You Need to Know!

    A customer of mine, whose car recently “died”, told me he wanted to donate that car to charity for a tax deduction. I know that a number of people have expressed an interest in doing the same thing with their cars but think it is as simple as dropping their car off at their favorite charity and then just taking the tax deduction.

    Well it not quite that simple.

    So, for my customer, all of those who have expressed an interest in donating their vehicle, and all of my valued readers, I thought I would review the rules for donating a car.

    Taking a tax deduction for donating your car is not as easy as commercials make it out to be.
    Taking a tax deduction for donating your car is not as easy as commercials make it out to be.

    I have seen a lot of ads that entice you to donate your car to a charity and get a tax deduction – but you should be aware . . .

    First, you will get no tax benefit from donating your personal automobile to charity unless you can itemize on Schedule A! This means the total of your “itemizeable” deductions exceeds your applicable Standard Deduction amount. While the donation itself can put you over the top and cause you to be able to itemize, to get the maximum tax benefit you must be able to itemize without the car donation.

    A few years ago a customer expressed excitement when telling me that he donated his car to charity, and that he expected to get a big tax deduction. Unfortunately, his tax benefit from the deduction was zero, nothing, zilch. He was not able to itemize, and had not in the past, and even with the addition of the value of the car he was still not able to itemize.

    FYI – you may want to itemize if your total deductions do not exceed your applicable Standard Deduction amount if you fall victim to the dreaded Alternative Minimum Tax (AMT). The Standard Deduction is not allowed in calculating AMT, but an itemized deduction for charitable contributions is.

    Second, the amount you receive “in your pocket” will be only a small percentage of the car’s value. The amount of cash you will realize depends on your federal and, if your state allows a similar tax deduction (New York does not), state tax bracket.

    And third, you have to wait to file your tax return to get the money. If you donate a car to charity today you will not see the cash until at least next tax season.

    When you donate a vehicle (car, motorcycle, boat, or airplane) to a church or charity the amount you can deduct depends on what the organization does with the donated vehicle.

    (1) If the organization sells the vehicle without significant interim use or material improvement your tax deduction is limited to the gross proceeds from the sale.

    (2) If the organization intends to temporarily or permanently use the vehicle in its operations, or make “material” improvements to the vehicle before selling it, or sell the car to a “needy” individual at a price that is significantly below market value, or give the car to such an individual, you can deduct the “fair market value” of the vehicle.

    You can use the “private party value” for the vehicle, adjusted for mileage and condition, as listed in the Kelly Blue Book (www.kbb.com) or a similar established used vehicle pricing guide.  If the fair market value of the vehicle is more than $5,000.00 you must obtain a formal appraisal.

    To claim a deduction of more than $500.00 for donating a motor vehicle to charity you must include Copy B of the IRS Form 1098-C, provided by the charity, with the filing of your Form 1040.

    The Form 1098-C will include the name and Taxpayer Identification Number of the donee organization, the vehicle identification number, the date of contribution, and information on what the charity did with the vehicle. Form 1098-C must be issued within 30 days of either the date of the contribution or the date of the disposition of the vehicle by the donee organization. The charity can give you a statement in lieu of Form 1098-C as long as it contains all the necessary information discussed above.

    So, these are the basics of donating a vehicle to a charitable organization and taking a tax deduction for that donation. If you are considering donating your vehicle, don’t miss out on a very valuable tax deduction. Call Solid Tax Solutions (SolidTaxSolutions.com) before you make the donation: (845) 344-1040.

    Your wallet will thank you!

    __________________________________________________________________________________________________

    Bruce – Your Host at The Tax Nook

    Our Firm’s Website: SolidTaxSolutions.com (or just click on the icon on right sidebar of this page).

    Other Social Media Outlets: Facebook.com/SolidTaxSolutions (or just click on the icon on right sidebar of this page).

    Twitter: Twitter.com/@SolidTax1040 (BTW, We Follow-Back).

    HERE IS WHAT YOU SHOULD KNOW ABOUT YOUR SIDE GIG AND TAXES.

    Ahh…the ‘Side-Gig’, the ‘Side-Project’, ‘Moonlighting’, or the ‘Side-Hustle’ (NO not this Hustle). From Uber to Dogwalker.com, there are tons of ways to make some money on the side while pursuing your dream job – or just digging out of debt. If you’re hoping to pick up some extra cash with a side gig this year, here’s what you need to keep in mind on the tax side.

    1) Income is Income. It doesn’t matter if your extra income is from driving a car or trading stocks, income is reportable unless it’s otherwise excluded.

    2) Understand the Difference Between a Real Business and Just a Fun Way to Make Some Money. Income may be income but how and where it’s reported can vary depending on whether you’re engaged in a business or making money with a hobby.

    Hobbies and businesses are reported on different spots on your federal income tax return (line 21 for hobby income versus Schedule C for business income), and they are treated differently for purposes of self-employment tax (business income is subject to self-employment tax while hobby income is not). When it comes to deductions, if you earn income in the pursuit of a hobby, you can offset the income with deductions but you cannot claim deductions that exceed your income: if you spend more than you make, you’re unfortunately out of luck.

    If, however, you earn income in the pursuit of a business, you can offset the income with deductions, and you can carry losses forward or backward to other years. These are sometimes referred to as the “hobby loss rules,” and they’re important.To distinguish a real business from a hobby, the IRS looks at a lot of factors including whether you expect to make money (if so, you’re typically a business) as well as whether you are actually making money (again, typically a business)—so how seriously you treat your new pursuit will matter.

    3) Keep Good Records. It may seem like all good fun when you’re renting out your apartment on the weekends, but you want to be able to verify your income and your expenses. The best way to do this is contemporaneously.

    If you’re working by the hour, keep a log of your time. Save your invoices and document income: if you can stash it in a separate account, even better. When it comes to expenses, keep receipts and annotate the nature of the expense (you can write this right on the receipt, or use a scanner and upload the image with an explanation). And please don’t ditch those receipts immediately after Tax Day (click here to find out how long to hold onto your tax records).

    4) You May Need to Prorate Some Expenses. Typically, you can only deduct expenses primarily for business use. Sometimes, you may have items like your cell phone or your car that are used for business and personal reasons. When it comes to those expenses, all is not lost: you can typically deduct the business portion of the expense.

    To figure that out, you’ll want to document your use and note when it’s for business. The easiest way to do this is to keep a log of your time and mileage (there are also apps that can help you do this). If at the end of the year, you find, for example, that 40% of the use was for business, then you can typically deduct 40% of the expense. Some exceptions apply (for example, the IRS always considers a primary home landline as personal {not business}, even if you swear it’s used solely for business).

    5) You May Need to Make Estimated Tax Payments.The extra few hundred dollars you earn from ads on your blog might not drastically affect your tax bill, but if you’re making a significant amount of money, you’ll want to plan ahead.

    If you expect to owe more than $1,000 at tax time, you’ll want to make estimated tax payments. To make estimated tax payments, you’ll use federal form 1040ES, Estimated Tax for Individuals (downloads as a pdf). Estimated taxes must be paid quarterly: if you skip a payment or pay late, you may be subject to a penalty.

    6) Consider Hiring a Tax Pro. If your tax situation becomes more complicated from your side hustle—especially since all of your income will not be reported by your employer on a W-2, you may need help. Don’t hire just on cost.

    If you have a Side-Gig or are just thinking about starting that Side Hustle, don’t get caught up in the IRS tax net.

    Solid Tax Solutions (SolidTaxSolutions.com) Can Help You!

    Give Us a Call At: (845) 344-1040.

    We Are Open Year-Round!

    Sometimes, a side hustle is just that. But if it turns out to be something more, don’t ignore the business and tax side of things.

    _________________________________________________________________________________________________

    Bruce – Your Host at The Tax Nook

    Our Firm’s Website: SolidTaxSolutions.com (or just click on the icon on right sidebar of this page).

    Other Social Media Outlets: Facebook.com/SolidTaxSolutions (or just click on the icon on right sidebar of this page).

    Twitter: Twitter.com/@SolidTax1040 (BTW, We Follow-Back).

    Categories: Business, Income Tax

    ARE YOU SELLING YOUR HOME?

    Ahhh……Summer Is Here!

     

    Summer is typically a “hot season” in the home sale market. Young families typically want to get settled in a new home before school begins in the fall, and older home sellers in northern climates want to head south before winter sets in. People who are buying a new home will need to do some serious number crunching to determine what they can afford to pay and how they will pay it. However, those of you who are home sellers will need to do some number crunching as well.

    Under current tax rules, a loss on a home sale is not deductible. On the other hand, the first $250,000 of gain on a home sale is excluded from income. What’s more, for joint filers, the exclusion is generally doubled to $500,000. However, for long-time homeowners, even those generous exclusions may not shelter all of that gain from tax. Therefore, you will need to:

    Get Back to Basis

    To properly determine gain (or loss) on the sale or exchange of a home, a taxpayer must know the basis of the home for tax purposes. And calculating basis will involve information that dates back to the time the home was purchased. Or perhaps even earlier.

    The amount of gain or loss on a sale is determined by comparing the amount realized on the sale to the adjusted basis of the home. If the amount realized is greater than the adjusted basis, the difference is a gain. If the amount realized is less than the adjusted basis, the difference is a loss.

    Cost Basis

    In most cases, the starting point for determining basis is the cost of the home. So, if a home was purchased from the builder or from a former owner, the initial cost basis includes the purchase price and certain settlement costs. The purchase price generally includes the down payment and any debt, such as mortgage or notes given to the seller in payment for the home.

    Settlement fees or closing costs associated with the purchase of the home can be added to basis. However, fees associated with a mortgage on the home (e.g., appraisal fees, costs of a credit report or mortgage insurance fees) are not added to basis. In addition, escrow amounts for payment of future liabilities are not included in the basis of the home. Some examples of settlement fees that can be added to basis include:

    • Abstract of title fees
    • Charges for installing utility services
    • Legal fees (e.g., fees for a title search and for preparing the sales contract and deed)
    • Recording fees
    • Survey costs
    • Title insurance
    • Transfer taxes

    When a home changes hands, real estate taxes for the year of the sale are apportioned between the buyer and seller based on the number of days each of them held the property during the year. The date of the sale counts as a day the property is owned by the buyer. Real estate taxes for the year of sale may increase or decrease basis, depending on how the taxes were handled at the closing. If the buyer paid taxes owed by the seller and was not reimbursed, the taxes increase the buyer’s basis of the home. If the seller paid taxes owed by the buyer and was not reimbursed, the taxes decrease the buyer’s basis of the home.

    In the case of a home that was constructed by or for the taxpayer, basis includes the cost of the land plus the construction costs. However, if the taxpayer did all or part of the construction personally, basis does not include the value of the taxpayer’s own labor or the value of any other unpaid labor. 

    Basis Other Than Cost

    Special rules apply in determining basis if a home was acquired other than by purchase or construction—for example, as a gift or inheritance or as part of a divorce settlement. In addition, a taxpayer may have a basis other than cost if a home was acquired as a replacement home in a home-sale rollover under prior law. 

    Adjustments to Basis

    A taxpayer’s basis in a home is not static. Basis may be adjusted upward or downward to reflect expenditures made in connection with the home or payments or other benefits received.

    Improvements that increase basis include:

    • Additions to the home, such an extra bedroom or bath, a family room, a deck or patio, or a garage.
    • Landscaping and other outdoor improvements, such as a new driveway or walkway, fences and walls, a sprinkler system, or a swimming pool.
    • Systems improvements, such as a new heating system, central air conditioning, a new furnace or ductwork, wiring upgrades, a septic system, a water heater or water filtration system, a satellite dish, or a security system.
    • Exterior improvements, such as new storm windows or doors, roof, siding or shutters.
    • Interior improvements, such as built-in appliances, kitchen cabinetry, flooring, wall-to-wall carpeting and insulation.

    CAUTION: Improvements that are no longer part of a home are not included in the home’s basis.

    Example: John Smith bought his home for $200,000 in 2005. In 2006, John added a deck to the home at a cost of $6,000. In 2012, John remodeled the home, which involved removal of the deck and the addition of a new covered porch. The addition and porch cost $30,000. Result: After the addition of the deck in 2006, John’s basis in the home increased to $206,000. However, after the deck was removed in 2012, it was no longer included in the home’s basis. Therefore, John’s basis for the home following the remodeling is $230,000 ($206,000 – $6,000 + $30,000).

    Some examples of repairs that do not increase basis (unless they are part of an overall renovation or remodeling) include interior or exterior painting, fixing gutters, repairing leaks or plastering, and replacing broken windowpanes.

    AND HERE ARE 11 ADDITIONAL ‘HOME SELLING’ TAX TIPS:

    1. Generally, you can exclude a gain from the sale of only one main home per two-year period.
    2. If you can exclude all of the gain, you probably don’t need to report the sale of your home on your tax return.
    3. You can choose not to exclude the gain from a sale. If you expect to sell another main home within two years, you may want to consider claiming the gain on sale of your current main home instead of excluding the gain. You can only claim an exclusion on the sale of your main home once every two years (See Tax Tip #1). Depending on your specific sale, it may be more beneficial to claim the current gain as income and use the exclusion on the future sale of your main home.
    4. If you can’t exclude all of the gain, or you choose not to exclude it, you’ll need to report the sale of your home on your tax return. You’ll also have to report the sale if you received a Form 1099-S – Proceeds From Real Estate Transactions.
    5. If you have more than one home, you can exclude a gain only from the sale of your main home. You must pay tax on the gain from selling any other home. If you have two homes and live in both of them, your main home is usually the one you live in most of the time.
    6. If you received the First-Time Homebuyer Credit when you purchased your home, you may have to pay some or all of it back.
    7. If you didn’t live in the home the entire time you owned it, you may have to pay tax on part of the gain. If your house went up in value when you were not living in it; for example, when you used the property as a rental house, you cannot exclude gain from the time you rented it out. For determining the amount of the gain you cannot exclude, the property is assumed to have gone up in value evenly over the period of time you owed it.
    8. You don’t have to buy a home of greater value, or any other home, to exclude this gain.
      There are no longer any requirements to buy another home after you sell in order to exclude the gain from the sale of your home.
    9. Long-term capital gains rates are lower than the ordinary tax rates you pay on short-term gains. Long-term capital gains tax rates for 2017 are 0%, 15%, or 20%, depending on your income tax bracket. Ordinary income tax rates for 2017 range from 10% to 39.6%. High-income taxpayers must pay an additional 3.8% tax on Net Investment Income (NIIT), including any gain from the sale of a residence that is not excluded from income. For this purpose, a high-income taxpayer is a taxpayer with a Modified Adjusted Gross Income (MAGI) of more than $200,000 ($250,000 if married filing jointly or a qualifying widow(er), $125,000 if married filing separately).
    10. When you sell your home and move, be sure to update your address with the IRS and the U.S. Postal Service. File Form 8822 – Change of Address, to notify the IRS.
    11. Most Importantly——>If you are selling your home (or are just thinking about it) contact Solid Tax Solutions and let us help you: (845) 344-1040.

    Hey, if you like this article let us know and also take the time to look at some of the other helpful articles here at The Tax Nook and please feel free to share our blog with your family and friends.

    Until the next time….

    _________________________________________________________________________________________________

    Bruce – Your Host at The Tax Nook

    Our Firm’s Website: SolidTaxSolutions.com (or just click on the icon on right sidebar of this page).

    Other Social Media Outlets: Facebook.com/SolidTaxSolutions (or just click on the icon on right sidebar of this page).

    Twitter: Twitter.com/@SolidTax1040 (BTW, We Follow-Back).

    This is NOT the best way to claim the Residential Energy Credit!

    A recent Tax Court case, Wainwright v. Commissioner.. Tax Court Memo 2017-70, provides a lesson in how not to claim a residential energy credit. The taxpayer and his friend worked and lived together. They lived in a home that the friend had purchased before she and the taxpayer met. While they were living together in the home, they refinanced the mortgage as co-borrowers. During 2010 and 2011, the taxpayer lived in the home, paid the mortgage payments, and maintained the property. On his 2010 federal income tax return the taxpayer claimed, among other credits and deductions, a $1,500 residential energy credit arising from the installation of energy-efficient windows and “other energy saving assets” in the property. When the IRS issued a notice of deficiency, one of the items it disallowed was the residential energy credit.

    To substantiate the credit, the taxpayer provided an invoice from a local window company, issued to the taxpayer’s friend who also lived in the home. The invoice showed a “contract amount” of $11, 934, a “deposit” of $3,580, and “payments” of $8,354. It showed an “install date” of March 5, 2011.

    The Tax Court found that the invoice was insufficient proof of the claimed credit, pointing to several shortcomings. First, it did not describe in any detail what sort of windows were installed. Second, it did not specify the property on which they were installed. Third, the taxpayer’s name was not on the invoice. Fourth, the invoice did not disclose who paid the deposit or who paid the payments. Fifth, and this is the clincher, the invoice stated that the windows were installed in 2011, but the taxpayer claimed the credit on his 2010 federal income tax return.

    Ouch!

    _______________________________________________________________________________________________

    Bruce – Your Host at The Tax Nook

    Our Firm’s Website: SolidTaxSolutions.com (or just click on the icon on right sidebar of this page).

    Other Social Media Outlets: Facebook.com/SolidTaxSolutions (or just click on the icon on right sidebar of this page).

    Twitter: Twitter.com/@SolidTax1040 (BTW, We Follow-Back).

    Categories: Income Tax, Tax Court

    The Self-Employment Tax. What is It and How Does it Effect You?

    If you’re just beginning business (or even if you have an existing business) as a sole proprietor, a partner in a partnership or a member of an LLC (limited liability company), it’s very important you understand the self-employment tax. Failure to take the tax into account when making your estimated tax payments could result in a substantial penalty. At the very least, you’ll have a big surprise when you file your 1040 in April. If you’re familiar with this tax, you should still read this article. There are plenty of pointers that many taxpayers overlook.

    So let’s start off with: What the heck is the Self-Employment Tax? If you’re a sole proprietor or a partner or an LLC member, you are not considered to be an employee. You will receive no W-2 and nothing is withheld from your pay for FICA (Federal Insurance Contributions Act) or medicare taxes. (If you’re an employee, 7.65% is withheld from your pay and your employer matches that amount, paying a total of 15.3% to the government). In order to collect a similar amount for social security and medicare, a sole proprietor has to pay 15.3% of his self-employment income. The tax is sometimes called SECA (Self-Employment Contributions Act). It’s actually more complicated than that; I’ll get into the details shortly.

    Employers will make regular deposits of FICA and other withheld taxes to the IRS. Individual taxpayers who owe the self-employment tax are responsible for paying the FICA and medicare taxes directly to the IRS. That’s done through quarterly estimated tax payments. For most taxpayers that’s April 15, June 15, September 15, and January 15. There’s no separate tax return. Instead, when you file your individual income tax return you must complete Schedule SE (Self-Employment Tax) to compute the tax and report the liability on the back of Form 1040. The self-employment tax is reported separately and added to your individual income tax on Form 1040. Estimated tax payments and withholdings are credited against your total tax liability.

    Example: Sue Smith has self-employment income during 2016. The associated self-employment tax is $4,500. Her regular income tax liability for the year will be $3,250. In addition, she withdrew money from an IRA and owes a penalty of $500. She worked a regular job for part of the year and had $1,500 in income tax withholdings. She made estimated tax payments of $3,000. Here’s a computation to show what she owes with the tax return.

    	Income tax liability                         $3,250
    	Self-employment tax                           4,500
    	Early withdrawal excise tax			500
    	 Total liability                              8,250
    	Less: Withholdings                           (1,500)
    	Estimated tax payments                       (3,000)
             Net tax due with return                      3,750
    

    Sue owes $3,750 with her tax return. Even though it’s paid to the IRS, the self-employment tax portion will end up with the Social Security Administration. However, when it comes time to compute the penalty due for tax underpayments during the year, no distinction is made. If you’re in the 15% bracket or the lower portion of the 25% bracket, the self-employment tax can easily be more than your income tax. For example,  lets say that you’re married, no children, take the standard deduction, have $40,000 of net income on your Schedule C and have $3,000 of other income. For 2016 your income tax liability would be about $1,990 (after accounting for a deduction for one-half of the self-employment tax on your income taxes); your self-employment tax would be $5,652.

    Detailed computation. While all you need do is complete Schedule SE to figure your tax liability, you should know that the computations aren’t as simple as portrayed above. Keep in mind that the total FICA tax is really made up of two pieces. The first portion is the 12.4% OASDI (Old Age, Survivors, and Disability Insurance). The tax only applies to earnings of $127,200 or less (2017 amount; it’s indexed for inflation). The second portion is for medicare. That’s 2.9% of all your self-employment income or wages. There’s no upper limit on that portion. Beginning in 2013 an additional 0.9% medicare tax is assessed on self-employment income in excess of $200,000 (single) or $250,000 (married filing joint). In an effort to equalize the tax burden of individuals and corporations (who get to deduct their half of the FICA taxes), the calculations involve several steps. Assume in the steps below your net self-employment income is $140,000.

    Step 1. The tax isn’t on all of your net earnings. The base is only 92.35% of net earnings. Thus, the base using our $140,000 of self-employment income is $129,290.

    Step 2. Only the first $127,200 (2017 amount) is subject to the full 15.3% tax. Thus, multiply $127,200 by 15.3%; the result is $19,461.60. The difference between $129,290 and $127,200 is $2,090. That amount is taxed at only 2.9%, so the tax is $60.61. The total tax is $19,522.21 ($19,461.60 + $60.61).

    If your self-employment income was only, say $60,000, you would only have to first multiply by 92.35%, then by the full tax rate, 15.3%.

    Step 3. If, during the year, you also received wages or a salary as an employee and your employer withheld FICA, the computations are more complex. Those wages will count toward meeting the wage base. Use the ‘long-form’ on Schedule SE to compute the tax. Thus, if you’ve already had a salary of $127.200 or more, the earnings from your sole proprietorship (or partnership, etc.) would only be subject to the 2.9% medicare tax and the 0.9% additional Medicare tax (when applicable).

    Step 4. You can deduct one-half of the self-employment tax on the front page of Form 1040. Using the numbers from our example, that would be $9,761.11. Since this amount reduces your adjusted gross income (AGI), the deduction is worth more than if it were simply an itemized deduction.

    When computing your earnings subject to the tax, you’ve got to net your profits and losses from all your business activities that would be subject to the tax. For example, you have $60,000 of self-employment income as a partner and a $35,000 loss from your auto repair shop you run as a sole proprietorship. Your net earnings subject to the tax are $25,000. If you have a net loss, you’re not liable for the tax.

    Beginning in 2013 there’s an Additional Medicare Tax of 0.9% on self-employment income (as well as regular wages) on income over $200,000 ($250,000 for a married couple filing jointly; $125,000 married filing separate). For a single individual, computation is easy since there’s only one income. For a married couple the threshold applies to the couple. For example, Wilma has a job in Manhattan and makes $175,000 a year. Fred works in Middletown and makes $50,000. Fred has a side business and made $45,000 in 2014. The couple has a total of $270,000 in earned income and pays tax an additional tax of 0.9% on the $20,000 ($270,000 less the threshold amount of $250,000).

    Persons Subject to the Self-Employment Tax. You’re subject to the tax if you were self-employed and your net earnings from that source were $400 or more. (You’re considered self-employed if you carry on a trade or business either as a sole proprietor or partner in a partnership). You don’t have to be in business on a full-time basis. Part-time work also qualifies.

    A trade or business is generally an activity carried on for a livelihood or in a good faith attempt to make a profit. While this depends heavily on the facts and circumstances, the IRS wins most of the cases on this issue. There have been a few situations where a taxpayer was able to show he wasn’t in a trade or business, but don’t count on being able to do so. You might be able to show that, for example, you grow fruit for your own consumption. You’ve done so for a number of years and never sold any. Because of crop losses by others in your area, you can sell enough one year to show a small profit. In subsequent years you don’t sell any of your crop. You might be exempt. Get good advice if you’re going to make such a claim.

    Special Situations:

    • Inactive partners are subject to the self-employment tax.
    • Limited partners are only subject to the tax on guaranteed payments such as salary and professional fees received for services performed.
    • Retired partners are not subject to the tax on retirement income. However, the amounts received must be under a written plan that meets certain requirements.
    • The income from a single member LLC (treated as a sole proprietorship for federal tax purposes) is self-employment income.
    • The law is not entirely clear on LLC members where the LLC is treated as a partnership. However, guaranteed payments to a member should be considered self-employment income. An LLC member who is active in the LLC should also be considered liable for the self-employment tax on his or her distributive share.
    • Resident aliens are generally subject to the same rules as U.S. citizens. Nonresident aliens generally do not pay the self-employment tax.
    • Executors and administrators of estates may or may not be liable for the tax. You are liable if you’re a professional fiduciary, an attorney, or a nonprofessional fiduciary and your duties require extensive managerial activities on your part for an extended period of time or your fees are related to the operation of the business and you actively participate in the business. If your duties are limited to handling an ordinary estate where any business management is small or nonexistent, then the income is not subject to the self-employment tax.
    • Fishing crew members come under some special rules. Generally, they’re considered self employed if they take a share in the catch.
    • Newspaper carriers and distributors are generally considered independent contractors and subject to the tax. Carriers or distributors and vendors under the age of 18 are not subject to the self-employment tax.
    • Notary public fees are not subject to the tax.
    • Trailer park owners may or may be liable for the tax. The outcome here depends on the amount of services provided to the tenants. Minimal services such as sewerage, water, electrical connections, etc. won’t result in the income being subject to the tax. Substantial services beyond those required for occupancy (such as maintaining a recreational hall, operating a laundry facility, etc.) will make the earnings self-employment income.
    • Director’s fees received in performing services as a director of a corporation are self-employment income.
    • S corporation income distributed to you is not subject to the self-employment tax. However, you can’t avoid the FICA taxes by not taking a salary. If you take no, or too low a salary, the IRS can recharacterize some of the earnings as salary that’s subject to FICA taxes.
    • Your spouse is subject to the self-employment tax if he or she is a partner in your business. You may want to put him or her on the payroll as an employee. That way you withhold FICA taxes and your business pays its portion, just as you would for a regular employee. Talk to your tax advisor about this approach. You may be able to make higher contributions to your pension plan and deduct health insurance premiums.
    • Income subject to the tax. Finding your self-employment income is generally straight forward. It’s the bottom line on your Schedule C. If you’re a partner, you should be able to get the info from your K-1.

    Even though associated with the business, some income is not considered self-employment income. For example, gains and losses on the following types of property are not included:

          1. Investment property.
          2. Depreciable property or other fixed assets used in the business.
          3. Livestock held for draft, diary, breeding, or sporting purposes and not held primarily for sale, regardless of how long the livestock were held or whether they were raised or purchased.
          4. Standing crops sold with land held more than one year.
          5. Timber, coal, or iron ore held for more than one year, if an economic interest was retained.

     

        • Income from the sale of property that is stock in trade or held primarily for sale to customers is subject to the self-employment tax.

    Example: Middletown Lawns, a sole proprietorship, sells small tractors, lawn mowers, etc. At the end of 2017 it sells some old inventory at a substantial loss. The loss reduces the owner’s self-employment income (the loss is taken on Schedule C).

    Example: The facts are the same as in the example above, but Middletown Lawns also owns some equipment that is used only for rentals. Middletown Lawns sells this equipment at a loss. The loss doesn’t reduce the owner’s self-employment income. Similarly, if the equipment were sold for a gain, it wouldn’t increase the owner’s self-employment income.

    • Dividends and interest received on securities are generally not self-employment income. However, interest you receive in your business (e.g., interest on overdue accounts receivable) is part of your self-employment income and subject to the tax. Payments for lost income, such as insurance payments after a casualty to your business, are subject to the tax.
    • Real estate rental income and personal property leased with the real estate is generally not self-employment income. However, if you receive rent as a real estate dealer, the income is included in your self-employment income.
    • Renting personal property (e.g., equipment) generates self-employment income.
    • Hotel or motel income is generally subject to the tax. Whether or not income from a real estate rental or hotel is subject to the tax depends on the facts and circumstances. If you provide substantial services for the convenience of the occupants, not normally provided with the rental of rooms for occupancy only, the income is subject to the self-employment tax. For example, providing maid service for individual rooms would make the income subject to the tax. On the other hand, the cleaning of stairways and lobbies would not.

    Optional methods. If your gross income is $2,400 or less you may be able to use an optional method of computing the self-employment tax. You’ve got to meet a number of tests. I won’t go into the details here, because so few people normally qualify. However, you should be aware the method exists. It allows you to pay the self-employment tax if your profit for the year is small or if you have a loss. Why pay more taxes than you have to? Using the method allows you to qualify for social security coverage when you normally wouldn’t. That increases your quarters of coverage. It may also allow you to claim a larger credit for dependent care expenses and the earned income credit.

    Estimated tax payments. As discussed, you pay the self-employment tax along with your estimated individual income taxes during the year. The law doesn’t make a distinction. That is, your income tax and self-employment tax are added together and treated as one. The same rules apply. That is, you can usually avoid a penalty if you pay in at least as much as your prior years’ liability. You may be able to reduce your estimated payments by annualizing your income and making payments based on your actual income during the year.

     

    So, in closing this particular blog post, let me say that this presentation was an overview of (and primer about) the Self-Employment Tax.

    Keep in mind that each business (and the form of ownership that each business takes) is different and has its own Self-Employment Tax ‘details‘.

    Solid Tax Solutions (SolidTaxSolutions.com) can help you with ‘Self-Employment Tax’ issues or any other issues concerning your existing business, new business, or business that you are considering.

    You can reach us (year-round) at: (845) 344-1040.

    __________________________________________________________________________________________________

    Bruce – Your Host at The Tax Nook

    Our Firm’s Website: SolidTaxSolutions.com (or just click on the icon on right sidebar of this page).

    Other Social Media Outlets: Facebook.com/SolidTaxSolutions (or just click on the icon on right sidebar of this page).

    Twitter: Twitter.com/@SolidTax1040 (BTW, We Follow-Back).

    A New Presidential Administration Will Soon Be Upon Us. What Tax Changes Can We Expect???

    Effects on Businesses

    What do the election results mean to your business? Your taxes? There’s no one answer to that. As far as the effect on your business, with small exceptions, it should be positive. Most experts believe they’ll be a move away from regulations that have negatively impacted many businesses. But the actual impact will vary widely. The plumber working on his own faces regulation on the local, county, and town level. Federal rules probably have little, if any, effect. Some health care businesses will do much better, as evidenced by the surge in prices for drug companies. Some will do worse as many hospitals believe the demise of Obamacare will hurt their business.

    Donald J. Trump
    Donald J. Trump

    It can get far more complicated. Will home prices rise? It depends. If immigration (legal and illegal) is severely restricted, new home prices will rise because smaller contractors often use immigrant labor. Higher interest rates, which some professionals predict, would also have an effect on home prices. On the other hand, reduced regulation of banks could ease lending rules which could offset higher interest rates. And a lower tax rate would increase available income.

    From a business standpoint, the best advice is to analyze the situation, listen to any trade organizations, and don’t overreact in either direction. While it seems fairly certain Obamacare will be attacked rather quickly, many other changes could take much more time.

    Effect on Taxes

    What will happen to taxes? Some changes are fairly predictable, some aren’t. Here’s my brief rundown of the most predictable ones. These are based on President-Elect Trump’s proposals.

    Individual Tax Rates: They’re heading lower, at least the top rates. The proposed rates are 12 percent, 25% and 33%. The lowest rate would apply to the first $75,300 for those married folks filing jointly ($37,650 for single); 25% on taxable income up to $231,450 ($190,150 single). Everything above those levels would be taxed at 33%. The 3.8% tax on net investment income would be eliminated. The head-of-household filing status would be eliminated.

    NoteThe income breakpoints indicated are based on a House of Representatives proposal.

    Capital Gains: The capital gain rates might be unchanged, with the exception of eliminating the 3.8% tax on investment income. The same rates would apply to qualified dividends.

    Deductions: The standard deduction would increase to $30,000 for married filing jointly ($15,000 for single). There would be a $200,000/$100,000 cap on itemized deductions. No personal exemptions.

    Childcare: An above the line deduction for child and elder care expenses limited by a taxpayer’s income.

    Alternative Minimum Tax: Trump’s proposal would be to eliminate the tax.

    Corporate Tax Rates: The corporate rate would drop to 15% under Trump’s proposal. That may be unrealistically low. Passthrough entities would be taxed at 15%, but taxed again on distributions. Good news for businesses that retain a substantial share of their income.

    Section 179 Expensing: The limitation would increase from $500,000 to $1 million per year.

    Estate Taxes: The estate tax would be eliminated. But so could the stepped up basis on assets at death, at least on assets above the current estate tax threshold.

    Those are the highlights, the ones that affect the most taxpayers, and the ones that have the best prospect of passing.

    But the devil is in the details. Here are some points to consider.

    Congress: The Republicans do have a majority in both houses, but the Senate for one, is thin and not all members vote the party line. That means some compromise might be necessary. In addition, the Trump plan isn’t the only one. The House has its own plan. And many individual members have their own thoughts.

    Paying for the Cuts: The cuts have to be paid for in some way. Some estimates put the 10-year deficit increase at $9 trillion. There is some sleight-of-hand that can be used to ignore at least part of the problem currently, but it’ll show up quickly. That’s happened in the past. The economy will have to grow faster than it has in some time to solve the problem. If not, tax rates could creep higher after the initial cuts. That’s happened in the past. It might be avoided with significant spending cuts, but that approach has proved elusive in the past. And at some point spending cuts will be felt at the voting booth.

    Fewer People will Itemize: That’s definitely true. And for a number of taxpayers, taxes will be simpler. But having three tax rates rather than seven won’t help much. Most tax returns are prepared by professionals on computer. Few people actually use the tax tables to compute their tax liability. And for many taxpayers, itemizing isn’t the problem. It’s dealing with capital gains, education expenses, rental properties, a sole proprietorship, etc. and that will continue to cause headaches.

    State Taxes: Most states use federal taxable income as a starting basis for their tax. Many states use the same itemized deductions, some with modifications. Unless they change their approach, you still could be itemizing.

    Retirement Plans: Look for additional benefits for contributions to retirement plans.

    Other Changes: It’s more than likely that Trump’s proposals will be incorporated into a host of other changes. Where this will end up is hard to predict. Overall tax liabilities are almost sure to be lower, but deductions for individuals reduced. There could be cutbacks in certain credits and other deductions for particular industries or taxpayer benefits. Thus, some taxpayers may benefit less than others. Once more information is available, you should discuss your situation with your tax advisor.

    Timing of Changes: Clearly nothing will happen in 2016 to affect 2016 returns. Any changes will be in 2017 although the actual timing is difficult to predict. At this point many experts predict early attention to taxes, but it may be far enough along in the year that some of the changes will not be retroactive to the beginning of 2017.

    Tax Planning: The safe bet now is to defer income into 2017 and take deductions this year. For a more detailed discussion of tax planning and to see how any upcoming tax changes will affect you, contact Solid Tax Solutions (SolidTaxSolutions.com). We can be reached, all year-long, at (845) 344-1040.

    ___________________________________________________________________________________________________

    Bruce – Your Host at The Tax Nook

    Our Firm’s Website: SolidTaxSolutions.com (or just click on the icon on right sidebar of this page).

    Other Social Media Outlets: Facebook.com/SolidTaxSolutions (or just click on the icon on right sidebar of this page).

    Twitter: Twitter.com/@SolidTax1040 (BTW, We Follow-Back).

    You and Your Spouse Own a Business Together. What are the Tax Issues?

    Ahhhhh……….The Husband and Wife owned business.

    Love, love, love……….

    A man and a women holding hands.

    No one knows for sure how many businesses in the U.S. are co-owned by spouses.

    A professor from Oklahoma State University estimated in 2000 that there were 3 million such businesses, so the number today likely is much higher.

    Some giant corporations — Fiji Water, Forever 21, Panda Express, and Houzz — were founded by husband-wife teams.

    There are many personal issues that couples face when co-owning a business.

    Here are some of the tax issues that spouses co-owning a business should think about.

    Tax Filing for Spousalpreneurs

    A couple who co-owns and operates a business that is unincorporated and shares in the profits and losses are in a partnership, whether or not they have a formal partnership agreement. Usually they must file a partnership tax return, Form 1065, as well as report the income, losses, etc. on their personal return. However, they can elect to file Schedule Cs along with their Form 1040 instead of Form 1065, saving them from the complexities of the partnership return. To make this election:

    • Both spouses must materially participate in the business, which essentially means working on a day-to-day basis. (Material participation tests can be found at the IRS.) Neither spouse can be merely an investor.
    • Each spouse must file a Schedule C to report his or her share of income, gain, loss, deduction, and credit attributive to the respective interests in the business. If they split things equally, then both Schedule Cs will look the same.
    • Each spouse must file a Schedule SE to pay self-employment tax on his/her share of the net income from the business. This is the same action that would occur if the couple had filed a partnership return.

    Divorce

    It’s not uncommon for spouses who co-own a business to get divorced. What happens in the property settlement? Some spouses continue to co-own the business after divorce. Others may transfer interests to the other so that only one spouse owns and runs the business after the couple splits up.  How the business interests are addressed all depends on the couples involved.

    From a tax perspective, the transfer of property incident to divorce is tax free. This means the transferring spouse does not recognize any gain or loss on the transfer to the other spouse. The spouse who now owns the business steps into the shoes of the other spouse when it comes to tax basis, so that if the business is later sold, the recipient-spouse recognizes the gain on any appreciation the transferor-spouse had but did not recognize at the time of the property settlement.

    If spouses try to co-own and run a business after the divorce but it doesn’t work out, they can still part ways tax free. That’s what happened recently to one couple who had co-owned three dance-related businesses. After 17 months following the divorce, one party bought out the other for $1.6 million, and the Tax Court said this wasn’t a sale but rather part of the property settlement.

    Innocent Spouse Relief

    Spouses who co-own businesses typically file joint tax returns. These tax returns include the couple’s business income. By filing jointly, each spouse is jointly and severally liable for the tax due on the return, plus any interest and penalties. Can an owner obtain innocent spouse relief for the actions of the other spouse? Seems so.

    In another recent case, one spouse was the sole owner of the business; the other handled the books and all other back-office operations. This spouse routinely had the tax return prepared and, after obtaining the other’s signature, filed it. The problem: She didn’t file it one year and he was assessed interest and penalties (she had died by this time). While he owed the tax, the Tax Court gave him innocent spouse relief for the interest and penalties.

    Bottom Line

    Spouses who co-own businesses should have very good lawyers and tax professionals so that each spouse’s interests are protected.

    Solid Tax Solutions (SolidTaxSolutions.com) is skilled in such matters and can be reached year-round at: (845) 344-1040.

    __________________________________________________________________________________________________

    Bruce – Your Host at The Tax Nook

    Our Firm’s Website: SolidTaxSolutions.com (or just click on the icon on right sidebar of this page).

    Other Social Media Outlets: Facebook.com/SolidTaxSolutions (or just click on the icon on right sidebar of this page).

    Twitter: Twitter.com/@SolidTax1040 (BTW, We Follow-Back).

    The House Has Passed Legislation Regarding the Itemization of Medical Expenses!

    Hello Everyone! I just wanted to share some good news with you about a possible change regarding itemizing medical expenses.

    The U.S. House of Representatives Voted on a Bill That Could Affect Your Taxes.
    The U.S. House of Representatives Voted on a Bill That Could Affect Your Taxes.

    So, last week (September 13 to be exact), the U.S. House of Representatives passed a bill titled ‘Halt Tax Increases on the Middle Class and Seniors Act’ (the bill is H.R. 3590 which you can view right here => H.R. 3590), by a vote of 261 to 147, that would lower the Adjusted Gross Income (AGI) threshold for an itemized deduction for unreimbursed medical expenses—from 10% to 7.5%—for all taxpayers, regardless of age under the Affordable Care Act (ACA).

    Under the ACA, taxpayers may deduct from their AGI, to reach their taxable income, the cost of unreimbursed medical expenses that exceed a certain percentage of their AGI. Following a law change in 2013, individual taxpayers under the age of 65 could only deduct medical expenses when they totaled at least 10% of their AGI – the value of expenses above this 10% threshold can be deducted.

    The Bill passed by the House of Representatives would prevent a change to the threshold for those over 65 years of age, which from the end of this year (2016) would have increased the threshold applying to this category of taxpayers from the current 7.5% to 10%.

    The House Ways and Means Committee Chairman Kevin Brady (R – Texas) welcomed the Bill, he said: “Before Obamacare, Americans could find some relief in their ability to deduct high-cost, out-of-pocket medical expenses on their taxes. … This Obamacare provision is a tax hike, plain and simple. It makes paying for care even more difficult for individuals, families, and seniors who may already be struggling to afford the care they need.”

    The National Taxpayers Union added that the Bill would “have an enormous impact on the budgets of American families. … Over 10 million taxpayers every year use this deduction to cushion the burden of medical expenses and this tax increase would cause an undue financial burden to seniors and those struggling with chronic medical conditions.”

    However, the Center on Budget and Policy Priorities noted that “Congress has already delayed the medical device tax, the health insurance tax, and the excise tax on high-cost health plans (the so-called Cadillac tax). Repealing the increase in the medical expense deduction threshold would encourage efforts to scale back still other revenue provisions of health reform.”

    Ways and Means Committee Ranking Member Sander Levin (D – Michigan) also criticized the unfunded nature of the legislation, and pointed out that it would reduce revenues by $32.7 billion over 10 years, according to the Joint Committee on Taxation. He went on to say, “approximately two-thirds of the tax benefit from [the bill] will accrue to taxpayers earning $100,000 or more.”

    Mr. Levin noted that the White House has issued a Statement of Administration Policy that “strongly opposes” the Bill and confirmed that it would be vetoed if presented to President Obama for his signature. The Statement added that the Bill “would repeal a provision of the Affordable Care Act that limits a regressive, poorly targeted tax break for health care spending.

    If you would like to see the results of the final House vote for this bill you can view them here.

    Do you think this has any chance of actually becoming law?

    __________________________________________________________________________________________________

    Bruce – Your Host at The Tax Nook

    Our Firm’s Website: SolidTaxSolutions.com (or just click on the icon on right sidebar of this page).

    Other Social Media Outlets: Facebook.com/SolidTaxSolutions (or just click on the icon on right sidebar of this page).

    Twitter: Twitter.com/@SolidTax1040 (BTW, We Follow-Back).

    How Often Should Business Income Be Taxed?

    A recent post (August 26, 2016) on the Tax Justice website was titled:  Why We Must Close the Pass-Through Loophole? Well that ‘kinda’ caught my attention as I was trying to think what the “loophole” might be?  A loophole is a provision that can be used beyond its intended purpose because the rule is not written specifically enough. When a rule is being used as intended, it is not a loophole. So, for example, sometimes the mortgage interest deduction is called a loophole, but it is not. People deducting interest on the mortgages on their primary and vacation homes are using the rule as intended.

    A figurine struggling to hoist a barbell with the word tax written on each end of the barbell.
    Double Taxation! Is It Necessary?

    The “loophole” that was the subject of that blog post is large businesses operating as partnerships rather than as corporations. Partnerships, S-Corporations and Sole Proprietors do not pay corporate income tax. Instead, the income is taxed directly to the owners and only one level of income tax is paid at the federal level (and state level). In contrast, C corporations pay the corporate income tax AND when they distribute earnings (dividends) to shareholders, the shareholders pay income tax. Therefore, C corporation income is taxed twice.

    That just happens to be the way it works in our (i.e., the United States for readers abroad) tax system. It doesn’t have to work that way and not all countries double tax corporate income. In the U.S., there is some relief in that ‘qualified dividends’ received by individuals are subject to the lower capital gains tax rate.

    Over the years, there have been numerous studies by the government and various organizations on how to ‘integrate’ the corporate tax. In other words to have corporate income taxed only once.  There are numerous ways this can be done.  Two easy ones would be to not have a corporate tax (only tax dividends) or not tax dividends (only tax corporate income at that level when earned).  Neither is ideal because not all corporations pay dividends and not all corporate shareholders are taxable (a lot of corporate stock is owned by tax-exempt organizations).

    The Tax Reform Act of 1986 called for the United States Treasury to study corporate taxation. This resulted in two reports issued in 1992 on corporate integration (January 1992 and December 1992).  Most recently, Senator Orrin Hatch, chair of the Senate Finance Committee (SFC) reported that he is working on a plan for corporate ‘integration’ and the SFC held two hearings on an approach called the ‘Dividends Paid Deduction’ model (May 17, 2016 and May 24, 2016. You can also see the Joint Committee on Taxation report prepared for the hearings right here.

    Some of the advantages of corporate ‘integration’ include:

    • Treats all business entities similarly (although this also depends on the corporate versus individual tax rates applicable to business income).
    • Removes or lessens a corporation’s tax preference for debt over equity.

    So, I will ask the question a bit differently from the The Tax Nook blog post: why not eliminate double taxation of corporate income and find a way to tax all business entities similarly?

    So, what do you think?

    _________________________________________________________________________________________________

    Bruce – Your Host at The Tax Nook

    Our Firm’s Website: SolidTaxSolutions.com (or just click on the icon on right sidebar of this page).

    Other Social Media Outlets: Facebook.com/SolidTaxSolutions (or just click on the icon on right sidebar of this page).

    Twitter: Twitter.com/@SolidTax1040 (BTW, We Follow-Back).

    Categories: Business, Income Tax

    Are You Making Money With Pokémon Go? The IRS Is Watching!

    Pokémon GO has been downloaded an estimated 30 million times since its release on July 5 with more daily active users than the mobile versions of Pandora, Twitter, and Netflix . Millions of users every day log in and attempt to catch different types of Pokémon, ranging from Pidgey to Charmander to Squirtle and, of course, the most recognizable Pokémon, Pikachu.

    pokemon-go-money-6819527Q

    Last month, I touched on the Pokémon GO phenomenon. You can read that article here.

    The amount of money being spent is mind-blowing with millions of dollars being generated every day. Nintendo, which controls one third of Pokemon, has seen its stock value double and because of the way iPhone charges users, Apple is said to be in a position to make billions. Not surprisingly, entrepreneurs are looking for ways to crack the Pokémon GO market, too. Here are a few ideas generating interest:

    • Drive: One cab driver in Mexico came up with the idea of driving customers around to help them “hunt” for Pokémon. Emilio Cacho, a 29-year-old cab driver, started calling his cab “Poketaxi” after offering his services to players. Mr. Cacho, who charges by the hour as a “Pokémon hunter”, has received more than 20 calls since he got started. BUT WAIT! Do you want to hear the irony? Cacho doesn’t even play the game, saying, “I don’t even know how to play, but I downloaded the app to help my clients.” And Cacho isn’t alone – there’s also a Pokémon bus.
    • Walk: You don’t even have to be a cab driver to earn extra cash You can just use your feet. You can take a user’s Pokémon GO account for a walk. Those users that are too busy to catch creatures on their own or maybe don’t want to deal with the heat are willing to pay. Ads are showing up online like this one on Craigslist in Houston (will walk for $15/hour).
    • Write: If you’ve figured out all of the best spots and strategies for catching Pokémon, why not share your expertise? You can write your own “how to” guide to help new users figure out the game. You can post your tips online via the web, newsletter, or eBook to sell or monetize.
    • Make a Video: If writing isn’t your strong suit, why not share your expertise? “How to” videos are popping up online every day telling users how to find the best creatures, what to spend money on (and what to avoid), and master tips. Monetizing those videos with ads can bring in extra revenue.
    • Promote: Small businesses have figured out that advertising Pokéstop locations can be a great advertising tool: attaching specials to Pokéstop locations can bring in new customers. Some businesses are even using lures (you have to buy these) to attract Pokémon to woo customers. New ideas for promotion are constantly bouncing around the internet. The possibilities are practically endless.

    If you’re hoping to pick up some extra cash in the Pokemon GO craze, here’s what you need to keep in mind from a tax perspective (Oh, you didn’t think it would be that easy…….did you?):

    1. Income is Income. It doesn’t matter if your extra income is from walking Pokémon accounts or investing in the stock market, income is reportable unless it’s otherwise excluded.
    2. Understand What’s Business and What’s Just for Fun. Income may be income but how it’s reported can vary depending on whether you’re engaged in a business or a hobby. Hobbies and businesses are reported on differently on your Federal Income Tax return and they are treated differently for purposes of self-employment tax (business income is subject to self-employment tax while hobby income is not). When it comes to deductions, if you earn income in the pursuit of a hobby, you can offset the income with deductions but you cannot claim deductions that exceed your income – there’s no loss for a hobby. So if you spend more than you make, you’re out of luck. If, however, you earn income in the pursuit of a business, you can not only offset the income with deductions, you can carry any losses forward or backward. These rules are sometimes referred to as the “hobby loss rules” and they are important. To distinguish a bonafide business from a hobby, the Internal Revenue Service (IRS) looks at a bunch of different factors including whether you expect to make money (if so, you’re typically a business) as well as whether you are actually making money (again, typically a business). So how seriously you treat your new pursuit will matter. For more on distinctions between a hobby and a business, click here.
    3. Keep Good Records. It may seem like all good fun when you’re chasing a Pikachu, but you want to be able to verify your income and your expenses. The best way to do this is contemporaneously. If you’re working by the hour, keep a log of your time. Save your invoices and document income. When it comes to expenses, keep receipts and describe the nature of the expense (you can write this right on the receipt, or use a scanner and upload the image with an explanation). But, don’t get rid of those receipts immediately after Tax Day. You can read an article from our blog describing how long to keep your tax records by clicking here.
    4. You May Need to Prorate Some Expenses. Typically, you can only deduct expenses that are primarily for business use. Sometimes, you may have items like your cell phone or your car that are used for business and personal reasons. When it comes to those expenses, all is not lost. You can typically deduct the business portion of the expense. To figure that out, you’ll want to document your use and note when it’s for business. The easiest way to do this is to keep a log of your time and mileage. If, at the end of the year, you find, for example, that 30% of the use was for business, then you can typically deduct 30% of the expense. Some exceptions apply (for example, the IRS always considers a primary home landline personal, even if you jump up and down all the while swearing that it’s used solely for business). And, be careful, cars can be tricky.
    5. You May Need to Make Estimated Payments. The extra few hundred dollars you earn from walking or ad revenue might not drastically affect your tax bill, but if you’re making a significant amount of money, you’ll want to plan ahead. If you expect to owe more than $1,000 at tax time from your extra efforts, you’ll want to make estimated payments. Estimated taxes must be paid quarterly: if you skip a payment or pay late, you may be subject to a penalty.
    6. Consider Hiring a Tax Professional. Don’t assume that hiring a good tax professional will be complicated or expensive. If your tax situation becomes more complicated from your side business, especially since all of your income will no longer be reported by your employer on a form W-2, you may need help. Don’t hire just on cost.

    Sometimes, a side business is just that. But if it turns out to be something more, don’t ignore the business side of things.

    __________________________________________________________________________________________________

    Bruce – Your Host at The Tax Nook

    Our Firm’s Website: SolidTaxSolutions.com (or just click on the icon on right sidebar of this page).

    Other Social Media Outlets: Facebook.com/SolidTaxSolutions (or just click on the icon on right sidebar of this page).

    Twitter: Twitter.com/@SolidTax1040 (BTW, We Follow-Back).

     

    Categories: Business, Income Tax