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Columns by June Walker: IPs Face Unique Tax Challenges Tax Deductions Are There For The Taking You Say You're Self-Employed -- Will the IRS? Criteria for Self-Employment Do You Have a Business or a Hobby? Proving That You're a Business Keeping Records -- It's Not Just for Taxes Three Ways to Expand Your Business Deductions Can I Deduct Disneyland and Other Questions Mixing Business with Pleasure and Other Gray Areas Quicken for IPs Courses That Qualify Training You Can't Deduct Getting There is Half the Battle Taking Deductions on the Road Getting Credit and Taking Allowances Advertising: Do It, Then Deduct It The Subtle Art of Advertising Deductions Billy Bridesnapper's Start-up Saga Starting Up and Shutting Down Start-Up Wrap-Up Giving Gifts, Taking Deductions

Tax Basics for the Self-employed, Part II Tax Deductions Are There For The Taking What makes an item or event a business deduction? You know you're in business, and you're logging your income, so it's time to have some fun by taking business deductions. The IRS says that anything "ordinary and necessary" to your business is a legitimate business expense. Fine. But what is ordinary to an astrologer? What is necessary to a computer games inventor? The things you do that are linked to your work, that make you better at doing what you're doing, that stimulate your business, that nurture your creativity if you're an artist or enhance your style if you're a writer -- these things are business activities and their costs are deductible as business expenses. Understanding business expenses starts with your mind-set. This is not some form of meditation or a guru's self-help method but a practical way to view your business. In contrast to an employee, whose business life is rather sharply defined, the life and work of an IP are intertwined. Just how intertwined depends upon your personal circumstances and type of business. For instance, a musician who is single and without children may do very little that is not considered necessary to his business -- travel, purchase stereo system equipment and CDs, attend concerts. On the other hand, if an IP supports parents, has several children, or narrowly defines her businesses, her expenses will be much more limited -- if not by money available to spend on the business, then by time available due to other commitments. The more multi-faceted and inclusive your field, the more wide-ranging your expenses. For instance, a photojournalist can deduct a more extensive variety of expenses than can a wedding photographer; a technological consultant's expenses will be more diverse than those of a computer repair person. If you're an artist and you drive to Pecos Monument in Santa Fe County, N.M., the mileage may be deductible -- if you sketched the mountain sunset. As a structural engineer or a home decorator, a trip to Tesuque to observe the architecture may be a deductible travel expense. If your business is sewing children's clothing, what about the publications that you read? Do they depict children? Clothing styles? It's not only the tool that the carpenter buys that's deductible, but the expense of dining out to present her marketing plan to a friend, a former advertising director. And the gift given to her brother as thanks for babysitting while she was at this dinner is also deductible. As an IP you need to set your mind to this new way of thinking. Whenever you take money out of your pocket or write out a check, it is possible that the transaction involves your business. Consider it. Let's look at two specific expenses -- research and business gifts. You may think of research as the cost of any event that provides information or experience that you intend to use in your business, now or in the future. For example, a story for children about life on a ranch might require a trip to a ranch with several children -- those expenses are legitimate business costs for the writer. If you're a realtor who keeps up with area trends and affairs through local cable TV, then your monthly cable TV charge, or a portion of it, is a business expense. For a visual artist, admission to museums, movies, theater, opera -- even a rented video, if it develops skills -- adds to understanding and feeds creativity, and is therefore a legitimate business expense. A business gift is deductible up to $25 per business associate per year -- whether it's a bottle of wine brought to a dinner party at which you hope to meet a prospective client or a plant given as a thank-you to a neighbor who kept an eye out for the delivery of your computer (used for business of course). Your mind-set should include the way you think about the people you know. Friends and family who are connected to your business may be primarily business associates and secondarily personal acquaintances. So, a call to a friend inviting her for a visit but also asking her to bring the text from her marketing class so that you may borrow it for business ideas makes that a business phone call. While you don't want to include something personal as a business deduction, be sure not to miss any valid deductions. A better understanding of business deductions will mean a lower tax liability. Now let's look at taxes themselves. An employee has federal and state income taxes withheld from his pay and sent to the governments by his boss. One half of Social Security and Medicare tax is withheld from his pay, the other half is paid by his employer, and both halves are sent to the government, again by the boss. As an IP you are both "employer" and "employee," and therefore have more control and flexibility in managing your tax payments than does a wage earner, but the cost and responsibility are all yours. You must pay 100% of your Social Security and Medicare tax; combined, these are referred to as Self-Employment tax. You send this tax to the IRS along with your Federal income tax. These are called estimated tax payments. Often the amount of Federal and state estimated payments is based upon the previous year's income; the amount may depend, however, upon when you received income. A well-kept income record could help you avoid paying too much tax too early and could also save you interest and late payment penalties. If your income warrants the need for estimated payments -- they are not always necessary -- you would make four payments to the IRS and possibly four to the state. They are due quarterly -- for 1999 the dates are April 15, 1999, June 15, 1999, September 15, 1999, and January 15, 2000. Each IRS payment should combine the Federal income tax and self-employment tax that has been estimated due for that quarter. Send it in one check to the IRS with an IRS 1040-ES Voucher. It is important for an IP to start on the right track when it comes to recordkeeping and taxes. The wrong box checked off on a form or missing a filing deadline can cost lots in penalties, interest, and fees to a tax professional to straighten out the mess. Start off right. It's easier, costs less in the long run and saves time that can be devoted to the business. Pick a professional carefully. Just because an accountant has handled corporate mergers doesn't mean she knows an iota about your business. Ask questions about her experience before you make an appointment. How many sole proprietorships does she have as clients? Get permission to talk to a few. Don't call a tax pro for the first time in March or April. You'll get better and gentler service at other times of the year. Write down your questions. Perhaps fax them ahead of time. Ask a self-employed colleague to join you at the meeting -- split the fee. Don't be intimidated. It's the professional's job to guide you through the financial maze. You should not be told to "just do it" or "just sign it." Make sure it's clear to you. When you ask your financial advisor a question, be sure you understand the answer. Could you explain the answer to a friend the next day? If not, you didn't get it. Ask again. (c) 2000 June Walker. All rights reserved. We'd love to hear your feedback about this column, or put you in touch with June Walker if you like. You may also like to see her biography.