Filing taxes for the average consumer can become complex. It’s even tougher for small business owners to navigate our ever-changing tax code to make sure they are claiming all the right deductions and write offs.
Here’s a look at some of the common questions small business owners ask me each season:
If I sell my home, will it have hurt me to have taken a home office deduction?
I won’t lie to you: yes, it might be a little painful. You will have to take depreciation recapture – that is – you claim as income the depreciation deductions you took in the past. It will be taxed as ordinary income rather than at the preferred capital gains rate.
The upside is that you still will be coming out ahead. By taking the home office deduction, not only do you enjoy the depreciation write off, but you are able to claim other write offs as well that you normally would not claim: utilities, repairs and maintenance, homeowners insurance, landscaping, pest control, and other carrying costs.
I have an online retail store. This year I received a 1099-K from my credit card processing company. The grand total on the 1099 is more than the sales shown on my profit and loss, but the 1099 total matches what was deposited into the company bank account. What’s going on?
The 1099-K includes not only your sales figure, but also the sales tax that you collected during the year. Sales tax is not income to you; it is a tax liability that business owners must collect from their customers and pass on to the taxing agency. When posting sales to your books, it’s appropriate to split out the sales tax to a current liability account rather than grouping it with the sales figures.
However, this presents a problem come tax time for companies whose primary source of payment comes from credit and debit card transactions. The IRS will match the sales figure declared on your income tax return to the total on the 1099-K generated by the credit card processing company. When your figure comes out lower, they will assume you are underreporting and send you a tax bill. Or worse yet, they may audit your business.
The remedy is to include the total sales tax received during the calendar year in your sales figure on the tax return. Then list the sales tax paid out as an expense under taxes. The net result will be the same but you will keep the IRS off your back.
I’m a self-publishing author. I understand that I can write off my expenses even if I don’t sell anything. Does this include the cost of printing my books?
Yes, you can write off expenses currently without sales to back them up if operating your writing endeavor as a business and not as a hobby.
However, you cannot write off the cost of any books that are not yet sold.
You must keep an inventory value that will include print cost, cover design and any other direct costs associated with production. As you sell the books, you expense the cost. For example, costs of your new novel are $10 per book. Your inventory is 200 copies for a total of $2,000. You sell 10 books for $20 each for total sales of $200. Your cost of goods sold is $100 (10x $10) and your ending inventory is $1,900. See page 2 of Schedule C, part III Cost of Goods Sold. This is where you make your calculations and track your inventory from year to year.
If I make a lot of money in one year but not much in prior years, can I average out the income for all those years and pay less taxes?
Prior to the tax reform act of 1986, income averaging was used extensively to help those who had wild fluctuations in income from one year to the next. But that device is no longer available.
However, if you experience a loss in any given year (NOL) you may carryback that loss to prior years to get a refund or you may elect to carry the loss forward to future tax years. Consult with your tax professional to determine which course is best for your particular situation.
Bonnie Lee is an enrolled agent admitted to practice and representing taxpayers in all 50 states at all levels within the Internal Revenue Service. She is the owner of Taxpertise in Sonoma, Calif., and the author of Entrepreneur Press book, “Taxpertise, The Complete Book of Dirty Little Secrets and Hidden Deductions for Small Business that the IRS Doesn't Want You to Know.” Her new e-book Taxpertise for the Creative Mind Murder, Mayem, Romance, Comedy and Tax Tips for Artists of all Kinds is available at all major booksellers. Follow Bonnie Lee on Twitter and on Facebook.