Tax Planning for Procrastinators

Oh, I'm so excited to introduce you to a new awesome contributor to this here BIZtips blog, Caroline Devoy, from jcaroline creative! You may know her as your source for all things creative, but she's also an accountant and will be stopping by 1-2 times a month with accounting and money related advice. I think anyone who can make me laugh out loud while reading about taxes is a good lady to have around, so, without further ado, here's her first timely installment...

Tax Planning for Procrastinators a guest post by Caroline Devoy

{photo by Amit Gupta. Tax day in NYC. Don't let this be you.}

Too late to do tax planning for 2008 for you business filers? Heck no. But in 28 days it will be! It is too late to change the outcome of your year, but you can spend some time making sure you find every expense possible before you file. For purposes of this post, I'm only focusing on your business return (Schedule C) due April 15. Not getting into the personal stuff. Personal stuff, yes. Personal tax stuff, no.

For those of you that don't keep "accounting" records during the year, don't stress. Accounting is not a revenue-generating activity and though necessary, it is not a good use of your time. So, don't beat yourself up. But you do need to pull together your information in order to comply with the government. Here is a plan to do that:

Sit down with your checkbook (or bank statements), your credit card statements and your PayPal account. Any money you received or spent in your business went through one of these accounts, yes? Oh, and grab a calculator and paper or a computer and let's start grouping these numbers together. I'm also assuming that most of you are cash basis taxpayers, meaning you don't report anything where cash did not change hands. If that isn't the case, go beat up the accountant that didn't make you a cash-basis taxpayer. By default, individuals (Schedule C filers) are cash basis.

Income is pretty easy. If you got money for virtually anything, it is taxable income to your business. You may have received some 1099-Misc from your clients, but they should just replicate what you already knew from your checkbook. Paperclip them together nicely and stuff them in your tax folder. Also, remember that any money you put into your business personally or any loans you received are not income.

Expenses are where it gets exciting. Really. The IRS says any expenses are deductible that are considered "ordinary and necessary" for your business. So if the expense is for your business, it is deductible. (Okay, there are a few exceptions, but start by assuming EVERYTHING is deductible and then we can eliminate later.) Obviously, what is ordinary and necessary for a graphic designer is different than what is ordinary and necessary for a plumber. You are the authority on what is ordinary and necessary for your business. Of course, the IRS can argue with you, but we'll worry about that later.

Start with a spreadsheet of basic expenses and then put everything you spent for the year in one of these categories. Here's a list to get you started:

• Office Supplies. Include any money spent at Office Depot, Staples and the like.
• Telephone. Include your cell phone and your business land line, if you have one.
• Internet Access. Even if you work from home, that internet connection is there for your business. I'd take it. Be sure to also include any hosting fees and other internet charges.
• Advertising. Any thing you paid for in the marketing and advertising category- print ads, people standing on the corner with signboards, tattoos (if they show the name of your business).
• Professional Fees. Any payments to attorneys, accountants, consultants. No psychiatric expenses here, however. Massages and pedicures also do not qualify.
• Consultants/Contractors. If you outsourced any of your work, be sure to include the costs here. The only reason you wouldn't include this is if you had the consultant bill your client directly, but then it wouldn't be showing up your checkbook.
• Travel. Did you attend any conferences or meetings related to your work? Include your airfare, the hotel, the rental car and your meds, I mean meals.
• Meals. If you took out clients, prospective clients or total strangers and discussed business, whether traveling or at home, throw the costs in here. The IRS does limit this category to 50 percent deductible because they assume you are lying about the business nature of these meals. But you might as well get the 50 percent.
• Rent. If you have a physical space for your business, total up your rent, maintenance costs and utilities. If you have an office in your home, oh golly. The home office deduction is one of the most talked about and most useless deductions EVER. Most people aren't going to qualify for this simply because the IRS requires that the office be used exclusively for business. Which is usually not the case, if you are working in your living room or guest room. Also, if you own your home and you take the home office deduction, you are creating issues when you sell the home. You can no longer roll the entire gain into another home to the extent you claimed a home office deduction. I personally am not a big fan, because of the Pain in the Butt (PITB) versus benefit potential. If you want to know more about this deduction, visit the IRS publication on Home Office Deductions.
• Interest. Any interest you paid on your credit card is deductible, if the interest stemmed from balances on the card that were business related. Hopefully, you keep a separate credit card for your business expenses. If you don't, you could attempt to compute the interest on the business balance versus the personal balance. Also, if you have any loans, business or personal, that the money was used in your business, you may deduct the interest. (The IRS doesn't care how you got the money- through a personal or business loan- they just want to make sure the money went to your business. Besides, these days, even many loans labeled as "business" loans are technically personal loans.)
• Printers, computers, other equipment. If you purchased any in 2008 and you made money in your business and you didn't buy more than $800,000 in assets (cough), you can deduct the entire purchase price up to $250,000 under something called Section 179. Pull that out at a party- people will be impressed. Or they might think you are talking dirty. If don't qualify for Section 179, you depreciate the equipment, usually over 5 years (well, really 6, but the IRS still calls it a 5-year life). Depreciation is fancy talk for "you don't get to take the expense all at once". Instead you use this system the IRS invented called MACRS and you take a certain percentage of the cost over 6 years. Crazy, huh? Also good party conversation.
• Software. Any software that has a shelf life of one year or less can be deducted in its entirety in that year. I argue that almost ANY piece of software has a shelf life of less than 1 year, simply because I am hard pressed to think of a piece of software that won't issue an upgrade next year. If the software does have a life greater than one year, you must amortize it over 36 months. Again, amortize is more of that fancy talk for "you don't get to just write that stuff off right now, sillly- it's gonna take you three years".
• Auto Mileage. This item is deductible, but you aren't going to find this expense in your checkbook. If you work out of your home, I would argue that every time you leave your house for business, it is business mileage. If you work from an office, you are not allowed to deduct the mileage from home to the office, but you are allowed to deduct the mileage from the office to a client or other location. If you didn't keep a mileage log (cough), sit down with your calendar and Google Maps. Google will give you the mileage between locations, your calendar will tell you where you went on what days. Add up the mileage, multiple by $.505 and that is your mileage expense. You can (gag) keep track of all your auto expenses during the year and compute the percentage of personal versus business, but using the standard mileage rate is infinitely easier.
• Parking fees and tolls. You probably paid cash for those, but you could figure it out based on your calendar and how much you pay for parking at that client or location.
• Leftovers. If you have a few dollars here and there of various expenses, don't worry about creating a category for each and every one- throw it under Office Supplies or the closest category. The IRS doesn't care that $1.99 went towards an IPhone App that you needed for your business and they don't need to see it separately. Trust me. I believe that would actually beg you not to show it separately. I know your tax preparer would.
• Inventory. Most service businesses don't have any, so don't sweat it. If you sell a product, however, you are not allowed to deduct as expenses the items that you haven't SOLD yet. That is where inventory comes in. In a very simple world, here is what how you can compute it. Total up all the money you spent on purchasing and making product for the year (Number A). (You would have a check or credit card statement to a particular vendor or vendors.) Then, count how many items you have not sold (your inventory) and multiple it per your per unit cost (Number B). Subtract B from A and you get a number known as Cost of Goods Sold, or COGS, if you are really cool. That is the amount you get to deduct. Simple, yes? Okay, inventory isn't always that simple, but hopefully, yours is.

Now, if you take your income and subtract all of the above expenses, you will have your net income for the year. If you made money, good for you. I believe there are now three of you. If you have a loss, your spouse should take you out to dinner for reducing the household tax burden.

There is one thing you can do to affect your taxes this year and that is contributing to your IRA (not your Roth IRA, mind you, but your regular IRA). You can contribute up to the lesser of $5,000 or your taxable compensation by April 15 to reduce your taxable income. More information on IRA Contributions is available on the IRS website.

As you may have noticed, I approach taxes very aggressively. I didn't say untruthfully. I just think businesses have the right to take every expense that the law allows without fear. The same with documentation. I say that if you take your checkbook, your credit card statements and your PayPal statements and put them in your tax folder with the spreadsheet you used to compute your income and expenses, you have the documentation you need for the IRS. Don't spend three weeks and several hundred dollars copying every little piece of paper you can get your hands on and stuff them in a shoebox or create the world's most intricate file folders. If you get audited, it might overwhelm the IRS, but it also means they have to spend more time on your audit, which means they will be determined to find something to make up for the time. Really, there is a huge argument for making it easy for the IRS to figure out what you did. It gets them in and out of your hair FASTER. These days, I'm also a big fan of downloading your statements online, saving them to a CD with your tax return and making a couple of copies. Documentation- done.

Now your annual tax compliance is complete. Go forth and make money.

Caroline Devoy graduated with a B.S. in Accountancy some time in the 20th century. She worked as a CPA until the public accounting firm found her serious demeanor to be a problem in their fun-filled environment. In pursuit of further initials, she got her M.B.A. in Entrepreneurism and in her spare time, she runs jcaroline creative!, a website retailing fabric, ribbon, notions and a questionable hedge fund. Just kidding, we don't sell notions.