Taxi and Taxes: How do you all do it?

[Paulie]

There are a couple of threads about taxes, but they are a little out of date. I'm thinking of setting up a business for 2016 so I can somehow leverage my expenses/losses later down the road. I know this varies by state, but how are some of you folks managing expenses as it relates to things like home office deductions, etc.? Years ago I was itemizing my music expenses like crazy because I had a day job and the music income. Over the past years I have not earned enough as a musician to bother itemizing. Tax laws change, and I remember that the IRS was extremely anal about how closely its scrutinized things like home office expense deductions. I remember that you could not use any equipment for both personal and work. This includes computers, desks, floor space, etc. I just have a typical man cave with all of my music stuff in it, along with everything else I want to keep away from the family and pets.

This might be a great topic for the rally as well. Any good books, web sites or personal experience to share? I'm in Texas, so no state income tax for me. (It's not a free ride thought, we get hammered with property taxes).

Thanks!

[mojobone]

Yeah, as far as computers and personal use are concerned, that attitude seems ridiculously out of date. What kind of idiot buys two Blackberrys, one for business, one for personal?

Strictly speaking, everyone I know or speak/email/text with is a potential client, it's what's referred to as a warm market; people who already know and like me, who are already kindly disposed. I offer such a wide array of services, it's difficult to imagine a non-business use for any communication device I might have on my person, including the baritone jaw harp in my pocket.

[mojobone]

That said, I'm currently in the throes, because of some recent energy-star compliant home/business upgrades; I'll let you know what I find out, after I talk to my accountant. This much I know already; I'm probably not gonna take depreciation on the jaw harp.

[jazzstan]

For personal/business splits... you will want to keep pretty detailed records. The have a new flat-rate home-office use allowances, just a fixed $ per sq.ft but it ain't much. But you have the option of which method to use. For the home office - it should just be business stuff in the "business" portion. A TV or a sofa could blow the deduction.

To be pristine, you'd want to have a separate bank account for the music biz (could be in your name or a DBA - depends on whose name the income checks are made out to.) But if you have the biz banking, you may also need a "home business permit" from your local city. Mine is $200/year. But stuff like that makes it more of a 'serious' business, which could help if you were ever challenged on deductions.

If you will be at the Rally, look me up.

Stan

PS. My day gig is as a consulting/part-time CFO to private companies and non-profits in the L.A. area; so I have a bit of relevant business background.

[RichardCharles]

Hi Paulie,

When you say setting up a business, I assume you don't mean organizing as an LLC or Incorporating, but simply mean operating as a business for tax purposes.

Here are some relevant IRS publications that you might find useful
Pub 334 Tax Guide for Small Business
Pub 463 Travel, Entertainment, Gift, and Car Expenses
Pub 535 Business Expenses
Pub 583 Starting a Business and Keeping Records
Pub 587 Business Use of Your Home
Pub 946 How to Depreciate Property
Pub 3995 Recognizing Illegal Tax Avoidance Schemes

Here is a useful link also.
https://www.irs.gov/Businesses/Small-Bu ... a-Business

As mentioned by Stan, the IRS has a new option for home office deductions which eliminates the requirement for "Depreciation Recapture" when you sell your home.
https://www.irs.gov/Businesses/Small-Bu ... -Deduction

Another good idea is to look at Schedule C and organize and total your expenses by the categories shown on that form and give your tax accountant totals. You can still point out any expense to your accountant that you included that you were not sure about. It is much preferred than to hand your tax accountant a "shoebox" full of receipts. You will get a better and less expensive tax return preparation.

As far as business expenses in general, keep this in mind from the IRS website:

What Can I Deduct?
To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.


Here is one more good link.
http://www.thetaxadviser.com/issues/201 ... c2013.html

The main things I would encourage is

A) Develop an organized method to capture all your business expenses by major category - EG Separate business checking account and Credit Cards

B) Do not get overly aggressive in your deductions. "Pigs grow fat, and hogs get slaughtered"

You also have three other issues that are a factors or things to consider.
#1 Are you operating as a Hobby or Business? - If you are normally showing a profit, than this should not be an issue.
#2 Home office deductions - You must use the area exclusively and on a regular basis, either as your principal place of business or a setting to meet or deal with patients, clients or customers. “Exclusively” means the space is used just for work. You should be fine because most home studio serve only that single purpose.
#3 "Mixed use" / "Listed Property" - Listed property includes cars and other property used for transportation, property used for entertainment, and certain computers. - Your car would fall under this category, but your computer should be ok because I assume your computer is dedicated to your music business. Basically, such items are subject to special reporting and depreciation rules.

Best of luck to you!

fwiw I have been an Enrolled Agent since 2000