Uber and AirBNB Tax Information

If you use one of the many online platforms available to rent a spare bedroom, provide car rides, or to connect and provide a number of other goods or services, you’re involved in what is sometimes called the sharing economy.

An emerging area of activity in the past few years, the sharing economy has changed how people commute, travel, rent vacation places and perform many other activities. Also referred to as the on-demand, gig or access economy, sharing economies allow individuals and groups to utilize technology advancements to arrange transactions to generate revenue from assets they possess – (such as cars and homes) – or services they provide – (such as household chores or technology services). Although this is a developing area of the economy, there are tax implications for the companies that provide the services and the individuals who perform the services.

This means if you receive income from a sharing economy activity, it’s generally taxable even if you don’t receive a Form 1099-MISC, Miscellaneous Income, Form 1099-K, Payment Card and Third Party Network Transactions, Form W-2, Wage and Tax Statement, or some other income statement. This is true even if you do it as a side job or just as a part time business and even if you are paid in cash. On the other hand, depending upon the circumstances, some or all of your business expenses may be deductible, subject to the normal tax limitations and rules.

Uber Tax Tips

  1. Pay Self-Employment Tax
  2. Tax deductions for your car

 

Other tax deductions for ride-share drivers

Commissions you pay to the ride-share company are a business expense, as is any cost you may have to pay for technology installed in your car. Other tax deductions include:

  • Car washes and interior cleaning
  • Water, gum or snacks for passengers
  • Tolls and parking fees

In addition, ride-sharing companies typically require use of a smartphone.

  • The portion of your mobile phone expenses attributable to your ride-share work can be used to reduce your self-employment income.
  • For simplicity’s sake, it may make sense to have a dedicated phone for work.

AirBNB Tax Tips

  1. Learn About 14 Day Rule
  2. Learn About Exceptions for Rooms

  3. Don’t Panic if You Get an IRS Letter

  4. Keep Flawless Records of Rental Periods

  5. Document All Business Expenses

  6. Apportion Mortgage Interest and Taxes if You Rent Room Only

  7. Fill Out Form W-9 Taxpayer Identification Number

  8. Deduct the Guest-Service or Host-Service Fees

  9. Learn About Applicable Occupancy Taxes

  10. Pay Self-Employment Taxes

 

If you receive rental income for the use of a house or an apartment, including a vacation home, it must be reported on your return in most cases. You may deduct certain expenses, but special rules and limits often apply. These deductible expenses, which may include mortgage interest, real estate taxes, casualty losses, maintenance, utilities, insurance and depreciation, reduce the amount of rental income that is subject to tax.

If you use the dwelling unit for both rental and personal purposes, you generally must divide your total expenses between the rental use and the personal use based on the number of days used for each purpose. You won’t be able to deduct your rental expense in excess of the gross rental income limitation.

There’s a special rule if you use a dwelling unit as a personal residence and rent it for fewer than 15 days. In this case, don’t report any of the rental income and don’t deduct any expenses as rental expenses. If you provide substantial services that are primarily for your tenant’s convenience, such as regular cleaning, changing linen, or maid service, you report your rental income and expenses on Schedule C (Form 1040), Profit or Loss From Business, or Schedule C-EZ (Form 1040), Net Profit From Business. Use Form 1065, U.S. Return of Partnership Income, if your rental activity is a partnership (including a partnership with your spouse unless it is a qualified joint venture). Substantial services don’t include such things as heat and light, cleaning of public areas, or trash collection.

How stock traders can prepare their tax returns

Although a trader’s security gains and losses are excluded from SE earnings, there is no guidance as to how the trading expenses reported on Schedule C impact SE earnings. Presumably, a trader who has SE earnings from other sources can reduce those earnings by the SE loss generated from the trading expenses.

 

Trader Tax Returns

Because of the unique tax rules that apply to securities traders, properly reporting trading information on Form 1040 can be a challenge. Practitioners should consider the following reporting issues and recommended solutions:

 

Stock Trader Schedule C Loss

Traders who do not make a Section 475 election report no income and only expenses on Schedule C, resulting in a loss on that form. This reporting may get the IRS’s attention since Schedule C losses sometimes stem from disallowable hobby losses. To help avoid IRS questions regarding this reporting, a footnote or statement explaining the taxpayer’s trader status and the filing implications should be attached to the return.

 

Stock Trader Reconciling to Forms 1099-B

Because traders report their security sales on Form 8949, the amounts reported to them on brokers’ Forms 1099-B will normally agree with the reported gross proceeds. However, traders who make the Section 475 election treat their trading gains and losses as ordinary income reported on Form 4797 (Part II). The Form 4797 instructions state that these traders should enter the total gross proceeds from Forms 1099-B on line 1 of Form 4797. To help avoid IRS matching notices for gross proceeds shown on Form 1099-B and ultimately reported on Form 4797, taxpayers should also report the gross proceeds for these transactions on Form 8949 and enter the appropriate code (see the Form 8949 instructions) in column (f) and the appropriate dollar amount in column (g) to reconcile any Forms 1099-B and 8949 differences.

 

Stock Trader Detailing Trading Activity

In many cases, the taxpayer will have detailed records reporting each trade that can be attached to the return to support the amounts shown on Form 8949. The Form 8949 instructions indicate that, instead of reporting each stock transaction on a separate line, taxpayers can report them on an attached statement containing all the same information as Form 8949 and in a similar format. They can use as many attached statements as they need.

IRS Form 8949

The combined totals from all the attached statements are entered on a Form 8949 with the appropriate box checked. The Form 4797 instructions state that traders who make the Section 475 mark-to-market election should attach a statement to the return detailing each trading transaction and carry the totals to line 10 of Form 4797.

Proper calculation of a self-employed person’s retirement plan deduction

Proper calculation of a self-employed person’s retirement plan deduction can be really difficult. We had kind of planned on this being a really more involved discussion of it, but we had so much that came out new this year that the slide on this kept getting smaller, and now it’s kind of tiny. During my audit days, I did not look forward to the audits involving self-employed plan sponsors, but I frequently ran across them.

 

Self-Employed Retirement Plans

Many had trouble with the calculation for the owner’s contribution and that related deduction, and I’ll say I also had trouble with it. It can be kind of difficult and with such a large group of people and only part of an hour, it’s going to be almost impossible to keep everybody awake to do a complete discussion. So, what we’re going to do is talk about some of the issues that we would see on audits mainly.

 

IRS Issues with Self-Employed Retirement Plans

First, the number one issue really had nothing to do with the self-employed plans. These plans had the same issue that we regularly find. Nearly half of them that I had seen had not been timely amended for these required law changes. Now, the majority of these really small plans use pre-approved plan documents. And remember you have until April 30, 2016, to update those pre-approved prototype documents on these defined contribution plans – that’s profitsharing and 401(k)-type plans.

 

Common Issues on IRS Audits of Self-Employed Retirement plans.

Now, another common issue we saw was also just leaving employees out of the plan that had met the eligibility requirements. Self-employed plans do tend to be very small employers, and I think a lot of times they look at some of their people as part-time employees and they don’t realize how easy it is to meet the plan’s eligibility requirements. All they have to have is 1,000 hours.

 

Taking Deduction on Self Employed Retirement Plan

The question is where should you take the deduction for contributions to the plan? I know that’s been kind of an issue also. For the employees that are participants in the plan, these are the employees, the contributions are deducted on the owner’s Schedule C. For the owner, the deduction for a contribution to them was taken on page one of the Form 1040. That’s kind of the easy part really; it’s just getting to that contribution amount that can be a little tricky. Now, to calculate the plan compensation for that owner, you get to reduce their net earnings from self-employment by the deductible portion of the self-employment tax from page one of the Form 1040 and also the amount of the contribution made for the owner.

 

Owner’s Contribution to Retirement Plan

The amount of the owner’s contribution is dependent on how much the owner is contributing on their own behalf. It’s a real circular calculation here, and there are a couple of methods that you can use to find that amount. One way is you can use the rate table that is in Publication 560, or you can compute the reduced plan contribution rate yourself. You do that by dividing the plan contribution rate by one plus the plan contribution rate.

 

Example of Owner’s Contribution to Retirement Plan

For example, if the rate the other employees received was 10 percent, you divide 0.10 by 1.10 and you get the owner’s contribution percentage of 9.0909 percent. You take the Schedule C net profit, deduct half the SE tax and you multiply that by 9.0909 percent to find the amount of the owner’s contribution in that little example.

 

IRS Worker classification and Employment Taxes

Worker classification does seem to be a recurring employment tax issue. We’ll provide an overview of the issue. Workers may be classified as either independent contractors or employees. An independent contractor is different from an employee, both in definition and tax responsibility. If a worker is an employee, the business will have to meet all of the withholding requirements, file the proper employment tax returns, and furnish a W-2 wage and earnings statement to the employee. Generally, if the worker is an independent contractor and the business pays $600 or more to the worker during a calendar year, the business must issue a Form 1099-Miscellaneous to the worker.

 

Backup Withholding Responsibilities

The business should also be aware that they may have backup withholding responsibilities if they fail to secure a valid taxpayer identification number, or TIN, from the worker. On the next two slides are copies of Forms W-2 issued to employees and 1099-Miscellaneous issued to independent contractors. Form W-2, which is used to report wages to employees, Form 1099- Miscellaneous is used to report income to independent contractors.

 

How to make a determination as to who is an employee and who is an independent contractor?

Contractors and subcontractors, for example, who follow an independent trade, business, or profession in which they offer their services to the public are generally not employees. However, whether such people are employees or independent contractors depends on the facts and circumstances of each case. The right to direct and control the workers really is key in determining the proper worker classification, and evidence falls into three categories: Behavioral control: does the company control or have the right to control what the worker does and how the worker does his or her job? Financial control: are the business aspects of the worker’s job controlled by the payer? This would include criteria like how the worker is paid, whether the expenses are reimbursed, and who provides tools and supplies. Relationship of the parties: are there written contracts or employee benefits, including for example fringe benefits, insurance, or vacation pay? Will the relationship continue, and is the work performed a key aspect of the business?

 

Factors to Determine Employee of Independent Contractor

There is quite a lot we can say about behavioral control. The key issues for behavioral control are instructions and training. Types of instructions includes things like how, when, where to do the work, what tools or equipment to use, what workers to hire or to assist with the work, where to purchase supplies and services, what work must be performed by a specified individual, what order or sequence to follow when performing the work. Degree of instruction means that the more detailed the instruction, the more control the business exercises over the worker. More detailed instructions indicate that the worker is an employee. Less detailed instructions reflect less control, indicating that the worker is more likely an independent contractor.

 

What are some of the other factors in determining whether the worker is an employee versus independent contractor?

The next factor is training. Training means explaining detailed methods and procedures to be used in performing a task. If the business provides the worker with training on how to do the job, this indicates that the business wants the job done in a particular way. This is solid evidence that the worker is an employee. Periodic or ongoing training about procedures and methods is even stronger evidence of an employee/employee relationship. However, if a former employee who had terminated employment is rehired by the company to perform substantially similar duties, training would not typically be required. Therefore, training or the lack of training in this circumstance is not indicative of the worker being an independent contractor.

 

Controlling Independent Contractors

When looking at behavioral control, the key fact to consider is whether the business retains the right to control the worker and the details of how the services are performed, regardless of whether the business actually exercises that right. Here’s an example. An electrician agrees to install wiring in a new warehouse under construction. Upon arriving at the warehouse, the electrician is given the building plans showing where the wiring is to be installed and advised that the wiring must be completed within five days. In this example, the directives concern what is to be done rather than how it is to be done, and is consistent with independent contractor status. Here’s another example, which points more to the worker being an employee. An electrician works for a general contractor. The warehouse owner hires the general contractor and the general contractor tells the electrician what wiring has to be done, gives specific instructions on installation regarding the wiring, provides the tools to use, and dictates the order in which the wiring is to be installed. In this example, these are specific instructions on how the work is to be performed. This is consistent with employee status.

Financial Control of Employees

The second category is financial control. Financial control refers to whether the business has the right to control the financial aspects of the worker’s job. Let’s talk about several different ways a business exercises financial control. First, there’s investment. An independent contractor often has a significant investment in the equipment he or she uses in working for someone else. However, in many occupational industries, such as construction, workers spend hundreds of dollars on the tools and equipment they use and are still considered to be employees. There are no precise dollar limits that must be met in order to have a significant investment. Furthermore, a significant investment is not necessary for independent contractor status, as some types of work simply do not require large expenditures. Next are expenses. Employers are more likely to reimburse employees for their job expenses, while businesses usually do not reimburse independent contractors for expenses. However, employees may also incur expenses that are not reimbursed.

A school teacher is an employee. She buys erasers, posters, and other minor supplies throughout the year, and she is not reimbursed for these expenses. Minor expenses incurred by an employee are not indicative of an independent contractor relationship. The opportunity to make a profit or loss is another important factor. If a worker has a significant investment in the tools and equipment used, and if the worker has unreimbursed expenses, the worker has a greater opportunity to lose money; that is to say, their expenses will exceed their income from the work. For example, the electrician we mentioned a moment ago, might agree to wire a warehouse for a set price. That electrician stands to make a profit or bear a loss depending on the electrician’s skill in bidding the job. Having the possibility of incurring a loss or turning a profit indicates that the worker is an independent contractor. Another indication of financial control would be who provides the insurance coverage, including workers compensation insurance.

If a worker covers their own insurance, the relationship is probably that of an independent contractor. If the business provides the insurance coverage, the relationship would more likely be an employee relationship. A final point here concerning profit and loss is that you should consider who is responsible for correcting a mistake on the job. If the business is responsible for correcting and paying for the mistake, the relationship is probably an employee relationship. If the worker is responsible for correcting and paying for the costs to rectify an error or mistake, the worker is more likely to be an independent contractor. While we’re talking about the category of financial control, we also want to consider the availability of the services. Are the workers’ services available to the general public?

Who is an Independent Contractor?

Independent contractors often advertise, maintain a visible business location or presence, and are available to the relevant market. Also, an independent contractor is generally free to seek out other business opportunities. Finally, the method of payment must be considered. What method of payment does the worker receive? Are they paid by the job or by the hour? Hourly, weekly, or similar basis for payment in return for services or labor generally is evidence of an employer/employee relationship. A flat fee is generally evidence of an independent contractor, especially if the worker incurs the expenses of performing the services. Again, just as with behavior control factors, in the financial control category, there is no one factor that takes precedence over the others. It is a matter of looking at the whole relationship and seeing where the preponderance of evidence lies.

Let’s start by taking a look at some of the elements which may be present in the relationship between the two parties. Is there a written contract? Although a contract may state that the worker is an employee or an independent contractor, this is not sufficient to determine a worker’s status. The IRS is not required to follow contracts stating that the worker is an independent contractor responsible for paying his or her own self-employment tax. How the parties work together determines whether the worker is an employee or an independent contractor.

 

Businesses should consider whether there are employee-type benefits provided

Businesses should consider whether there are employee-type benefits provided. Employee benefits could include things like insurance, pension plans, paid vacations, and sick days and disability insurance. Businesses generally do not grant these fringe benefits to independent contractors. However, the lack of these type of benefits does not necessarily mean the worker is an independent contractor. Other questions are how permanent is the relationship? If you hire a worker with the expectation that the relationship will continue indefinitely rather than for a specific project or period, this is generally considered evidence that the intent was to create an employer/employee relationship.

Are the services provided a crucial activity of the business? If a worker provides services that are a key aspect of your regular business activity, it is more likely that you will have the right to direct and control his or her activities. For example, if a law firm hires an attorney it is likely that it will present the attorney’s work as their own and would have the right to control or direct that work. This would indicate an employer/employee relationship.

 

How to treat seasonal or part-time workers?

We often get questions from business owners about how to treat seasonal or part-time workers. For each worker you will need to look at all of the factors we have just discussed and see whether they indicate an employee or an independent contractor status. The length of time the worker performs services for you is not a standalone factor in determining his or her status. A worker can be an employee even if he or she only performs a few hours of services. It is important to remember that businesses must weigh the factors under all three categories of evidence when determining whether a worker is an employee or independent contractor. Some factors may indicate that the worker is an employee while other factors may indicate that the worker is an independent contractor. There is no set number of criteria that makes the worker an employee or an independent contractor. No one factor stands alone in making this determination. Also, factors which are relevant in one situation, may not be relevant in another. The key is to review the entire relationship, consider the degree or extent of all the factors in the right to direct and control, and finally, to document each of the factors used in coming up with the determination.

 

IRS Publication 1779, Independent Contractor or Employee

There is a host of useful information about worker classification available. There is the IRS Publication 1779, Independent Contractor or Employee; Publication 15A, Employer’s Supplemental Tax Guide; and IRS podcast and training materials available on the IRS website, www.irs.gov. As we end the worker classification part of the presentation we would like to pose our first question for the audience. Which of these are important factors in determining proper worker status?

When making a worker classification determination, the business should consider all aspects of the work relationship and make the decision based on all the factors. The business should not simply rely on one or two factors that may indicate the worker is an employee or an independent contractor. And finally, answer D is incorrect. It does not matter whether a worker is permanent or seasonal. The right to direct and control the worker is a key factor while considering the overall relationship.

 

Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax

A worker or firm may file Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax. The Form SS-8 is filed to request a determination of the status of a worker under the common law rules for purposes of federal employment taxes and income tax withholding. Additionally, the IRS developed Form 8919, Uncollected Social Security and Medicare Tax on Wages, to simplify the process for employees to report their share of uncollected social security and Medicare taxes due on their compensation when their employers have misclassified them as independent contractors. Additional information can be found in the instructions for Form 8919.

If you hire a security guard for an event, is he considered an employee or a contractor?

If you hire a security guard for an event, is he considered an employee or a contractor?

 

That’s a difficult question to answer without some very specific facts. The determination as to whether a worker is an independent contractor or an employee is whether the business has the right to direct and control a worker. And there are many factors that go into it; but we basically break the factors down into three categories of evidence, which are behavioral control, financial control, and relationship with the parties.

Factors the Affect Independent Contractor Status

There are many questions that go into that, such as for behavioral control, whether the business directs the worker as to what time they need to show up; whether they need to wear a uniform; and whether they are required to submit reports; and basically how the worker performs his services. For financial control, that will depend upon the method of payment and whether the worker has the ability to show a profit or loss from performing those services. And when we look at the last part, the relationship of the parties, we look at things like what was the intent of the parties? Did they both have the same understanding as to whether the worker was an independent contractor or employee, whether the business is providing benefits, if there was a contract between them? So there is no simple answer to that. The only way to make that determination is to go through the various factors. And when you look at the various factors, some factors will point toward independent contractor status; and some factors will probably point toward employee status. But you have to look at the overall result of looking at that to determine whether the business has the right to direct and control. And one of the significant factors that you look at when making a determination as to whether a business has the right to direct and control is whether that worker is an integral part of the payer’s business. Because obviously, the more important that worker is to that business, the more likely it is that that business will direct and control that worker as to what services they perform.

Is a Security Guard an Employee or Contractor?

But if a business isn’t sure whether a worker is an independent contractor or employee, we do have a form. Businesses can write to the IRS; it’s Form SS-8. It basically walks through a series of questions which are directed toward the right to direct and control. And the business can complete that and receive what’s called a Determination Letter from the IRS, in which we will then tell you whether we believe that the worker is an employee or independent contractor.

 

Filing Form SS-8

If the owner of the business is confused and they go and they look through the criteria and they still cannot decide if this person is an employee or a contractor, then the SS-8 can be completed, sent into the IRS; and we’ll give them a response to help them out in that situation about the determination.

 

Determining Worker Status with Form SS-8

It’s really a good service to have. And businesses can use it. And in addition, individuals can use it also. So individuals who are treated either as – in most cases what we see is individuals who are treated as independent contractors who believe they may be employees can write in for the same determination and get a Determination Letter from the IRS as to whether they really, truly are an independent contractor or whether the business should be treating them as an employee.

 

 

Self Employed Form 1040 and Schedule C or Schedule C-EZ

Overview of Small Business Tax Issues for Self- Employed

If you are in business for yourself or you carry on a trade or business as a sole proprietor or you’re an independent contractor, you generally would consider yourself self-employed; and you would file Schedule C or C-EZ with your Form 1040.Here are a few things the IRS wants you to know about self-employment.Self-employment can include work in addition to your regular full-time business activities, such as part-time work you do at home or in addition to your regular job.

What is Self-Employment Tax?

If you are self-employed, you generally have to pay self-employment tax. Self-employment tax is Social Security and Medicare.It’s similar to the Social Security and Medicare taxes withheld from the pay of most wage earners. You figure self-employment tax yourself, using a Form 1040 Schedule SE. Also, you can deduct half of your self-employment tax in figuring your adjusted gross income. And if you’re self-employed, you generally have to make estimated tax payments. This applies even if you also have a full-time or part-time job and your employer withholds taxes from your wages.

What are Estimated Taxes?

Estimated tax is the method used to pay tax on income that is not subject to withholding. If you don’t make quarterly tax payments, you may be penalized for underpayment at the end of the tax year. You can deduct the costs of operating your business.

What Business Expenses?

These costs are known as business expenses. Assets you will use in your business for more than one year, such as buildings or furniture, are things you’ll have to depreciate. Assets with a life of a year or less, such as office supplies, are not depreciated but are deductible in the year you purchase them. To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your field of business. A necessary expense is one that is helpful and appropriate for your business. In addition, you must be able to substantiate your expenses. Therefore, it’s important to keep good records. And finally, for information, see the Small Business and Self-Employed Tax Center on www.irs.gov. Generally, you are self-employed if any one of the following apply to you.

 

Schedule C or Schedule C-EZ

To file your annual Federal tax return Form 1040, you will need to use Schedule C or Schedule C-EZ to report your income or loss from a business you operated or profession you practiced as a sole proprietor. Also, be sure to include any income reported to you as a self-employed person on Form 1099-MISC. Small businesses and statutory employees with expenses of $5,000 or less may be able to file Schedule C-EZ instead of Schedule C. To report your Social Security and Medicare taxes, file Schedule SE (Form 1040), Self-Employment Tax.

Calculate Social Security and Medicare taxes Due

Use the net income or loss from Schedule C or the net income from Schedule C-EZ to calculate the amount of Social Security and Medicare taxes due for the year. The instructions for the Schedule SE will be helpful in filling out the form.

Schedule C-EZ instead of Schedule C

You may use Schedule C-EZ instead of Schedule C only if you had business expenses of $5,000 or less; used a cash method of accounting; did not have an inventory at any time during the year; did not have a net loss from your business; had only one business as either a sole proprietor, qualified joint venture, or statutory employee; and you had no employees, no depreciation or amortization of business expenses, you do not deduct expenses for business use of a home, and no prior-year un-allowed passive activity losses. Over time, a sole proprietorship may have to switch from Schedule C-EZ to the Schedule C. This is usually an indication that the business has grown and now has more expenses, inventory, employees, et cetera.Use Form 1040 (Schedule C) to report income or loss from a business you operated or a profession you practiced as a sole proprietor.

What does the IRS Consider a Business?

An activity qualifies as a business if your primary purpose for engaging in the activity is for income or profit, and you are involved in the activity with continuity or regularity. Also use Schedule C to report gross receipts and expenses of your sole proprietorship, as well as certain miscellaneous income shown on Form 1099-MISC. Since most businesses start off as sole proprietor, we’re using Form 1040 (Schedule C) in our examples.Calculating a profit or loss from business is divided into five parts. Parts 1, 2, and 3 use terms such as gross receipts, net profit or loss, net sales, cost of goods sold, and gross profit. Parts 4 and 5 ask for information about your vehicle and other expenses. In the next few slides, I’ll explain these terms. Let’s begin with net profit or loss. To figure estimated taxes and to report income earned from your business, you must figure your net profit or loss.

What is Self-Employment Net Profit?

Net profit is the amount on which you pay tax. If you operated at a loss, enter the amount in parentheses. The basic way to determine profit or loss is the same for each type of business organization. You’ll use this formula: Gross income less expenses equals net profit or loss. Net profit is the amount by which the gross profit is more than the business expenses for the same period. A net loss is where the cost of goods sold and business expenses are more than the gross receipts. If your Schedule C shows a profit, enter the amount on both Form 1040 and Schedule SE.

Net Loss on Form 1040 Schedule SE

If you have a net loss and all of your investment is at risk, enter the loss on both Form 1040 and Schedule SE.If you have a loss and some of your investment is not at risk, in most cases you must complete Form 6198, At-Risk Limitations, to figure your allowable loss. The At-Risk Rules may limit the amount of loss you can claim.

What are Considered Gross Receipts?

Next we’ll discuss gross receipts, returns, and allowances and net sales. Gross receipts or sales are the income that a business receives from the sale of its products or services. Take a look at this basic formula: Gross receipts less returns and allowances equal net sales. Individuals that don’t make or buy products for resale as part of their business don’t have returns or allowances to deduct on gross sales.

What is Cost of Goods Sold?

Now for the next term, cost of goods sold. Cost of goods sold is the cost to a business to buy or make the products being sold. It’s easy to figure the cost of goods sold if you sell all your merchandise during the year; however, some of your sales will probably be from inventory that you carried over from earlier years, and you will probably have an inventory left unsold at the end of the year. Note, some companies that provide services, such as lawn care, web design, et cetera, do not have inventories and don’t need to compute the cost of goods sold amount. Here’s another formula for you.

Calculating Cost of Goods Sold

To figure the cost of goods sold, start with the cost of the inventory on hand at the beginning of the year. Add the cost of additional goods purchased or manufactured during the year. Be sure to subtract the cost of any merchandise withdrawn for personal use, such as food a grocer may take home or gasoline a garage owner may give to relatives. The result is the cost of items available for sale during the year. Then subtract the value of your inventory at the end of the year. Your cost of goods sold is the remainder. Some businesses may choose to keep a continuous or automated inventory system. But no matter how you choose to track it, you need to keep good beginning and year-end inventory records. Now I’m going to figure gross profit. Here comes the final formula we’re discussing today. Beginning with gross receipts, subtract your sales, returns, and allowances and the cost of goods sold to determine gross profit.

What expenses can Service Companies Deduct?

Again,we note that sole proprietorships that are service companies don’t need to deduct the cost of goods sold to complete their gross profit.Let’s go into more detail about common business expense deductions. We’ll start with travel, transportation, and entertainment.These deductions are common to all types of businesses. We’ll take a look at each type. Travel expenses are the ordinary and necessary expenses for traveling overnight away from home in the course of your trade or business. These expenses include the cost of public transportation, operating and maintaining your car, meals, lodging, and other related expenses.

Deducting Transportation Costs

You can deduct the actual cost of meals or use a standard per-diem rate. See Publication 463 for the latest per-diem rates and detailed information about your travel expenses. Transportation expenses are the ordinary and necessary expenses of getting from one workplace to another in the course of your business or profession while you are not away from home. Commuting expenses are not deductible.Exactly what are commuting expenses? You cannot deduct the cost of taking a bus, trolley, subway, or taxi, or of driving a car between your home and your main or regular place of work. These costs are personal commuting expenses. You cannot deduct commuting expenses no matter how far your home is away from your regular place of work. You cannot deduct commuting expenses even if you work during the commuting trip.For example, you sometimes use your cell phone to make business calls while commuting to and from work. Sometimes business associates ride with you to and from work, and you have a business discussion in the car.These activities do not change the trip from personal to business.

You cannot deduct your commuting expenses.

You cannot deduct your commuting expenses. If you use a car for business only, you may base your deduction on the full cost of operating it. If you use the car for both personal and business purposes, you must divide your expenses between those uses on the basis of mileage to compute a business percentage. Do not include commuting to and from work as business mileage. You may take a deduction for your actual business expenses for the car or use a standard mileage rate. Standard mileage means multiplying your business mileage by a standard rate. For this year’s rate, check the IRS website.

Using Standard Mileage Deduction

However, to use the standard mileage rate on a vehicle after the first year of business use, you must have used the standard mileage rate for the first year. In later years, you can alternate between standard mileage and actual expenses. This alternating option is not available to you if you claimed actual expenses in the first year of business use. Actual business expenses include gas, oil, repairs, insurance, depreciation, tires, and license plates. Under either method, parking fees and tolls are deductible. See Publication 463, Travel, Entertainment, Gift and Car Expenses, for more information on using standard mileage rates and the use of a car in your business.Business entertainment expenses are deductible only if they are ordinaryand necessary expenses of carrying on your trade or business. To deduct these expenses, you must maintain receipts and records. This includes taking clients to lunch. Publication 463 explains the 50% limit on business meal expenses.

 

When Must Self-Employed File Taxes and Get EIN

When does a self-employed individual files taxes?

You have to file an income tax return if your net earnings from self-employment were $400 or more. If your net earnings from self-employment were less than $400, you still have to file an income tax return if you meet any other filing requirements listed in the Form 1040 instructions. So what if you work for somebody else and you’re also self-employed. If, in addition to your self-employment income you receive wages, then subtract those wages from your total income to figure out how much self-employment income is subject to the taxes.

What is Schedule SE?

If you have income subject to self-employment tax, figure the tax on Schedule SE. If you have more than one business, use one Schedule SE and combine the profits and losses from all of your businesses.

What is a Federal employer identification number or EIN?

As a business owner, you may be required to get a Federal employer identification number, commonly referred to as the EIN. The EIN identifies tax returns filed with the IRS. If you don’t have an EIN, you need to get one if you pay wages to employees, have a self-employed retirement plan, operate your business as a corporation or partnership, or are required to file any of these tax returns: employment, excise, judiciary, or alcohol, tobacco and firearms. The fastest and easiest way to get an EIN is online at www.irs.gov. Type EIN in the Search box.

Applying for an EIN Number on IRS Wesbite

The EIN is issued immediately once the application information is validated. EIN can also be obtained by mailing or faxing Form SS-4, the Application for Employer Identification Number. See the form instructions for details.

When you don’t need an EIN?

If you don’t need an EIN, generally you use your Social Security number as your taxpayer identification number. You must put this number on each of your individual tax forms, such as Form 1040 and its Schedules. If you must have an EIN, include it along with your Social Security number on your Schedule C or C-EZ.

 

Choosing a Small Business Structure Sole Propreitorship

When starting a business, you must determine your business structure. In this webinar, we’re focusing on sole proprietorship.If you are a one-person business, you are automatically classified as a sole proprietor for Federal tax purposes unless you file Form 8832, Entity Classification Election, to request a different classification.

 

What is considered a business by the IRS?

You carry on a trade or business as a sole proprietor or an independent contractor, and you are otherwise in business for yourself including a part-time business. A sole proprietor is someone who owns an unincorporated business by him or herself. People such as doctors, daycare providers, mechanics, and contractors who are in an independent trade, business, or profession in which they offer their services to the general public are generally considered independent contractors.However, whether these people are independent contractor or employees depends on the facts in each case.

 

Who is an independent contractor?

The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the results of the work and not what will be done and how it will be done. The earnings of a person who is working as an independent contractor are subject to self-employment tax.A trade or business in which you participate on a regular, continuous basis with the intent of making a profit is generally an activity. The facts and circumstances of each case determine whether or not an activity is a trade or a business. Regular activities and transactions that produce income are important elements. You do not need to actually make a profit to be in a trade or business, as long as you have a profit motive. You do need, however, to make ongoing efforts to be profitable. You do not have to carry on regular, full-time business activities to be self-employed.Having a part-time business in addition to your regular job may be considered self-employment.

 

Example of Independent Contractor

For example, you are employed full-time as an engineer at the local plant; and you fix televisions and radios during the weekend. You have your own shop, equipment, and tools. You get your customers from advertising and word of mouth. You are considered to be self-employed as the owner of a part-time repair shop.

 

What is a sole proprietorship for IRS Tax Purposes?

A sole proprietorship is an unincorporated business owned by one person. It is the simplest type of business organization. The business does not exist apart from the owner. As the business owner, you assume risk of the business to extend to all of your assets, even if you don’t use your personal assets in the business. Usually the ability to finance the business, known as capital, is limited to the amount the owner can come up with. This may limit the expansion of the business when new capital is required. Common cause of failure of sole proprietors is the lack of capital. The exception to a sole proprietorship being a one-person business is a qualified joint venture; that’s next.

 

What is an IRS qualified joint venture?

What is a qualified joint venture? It’s when both spouses have an equal say in the affairs of the business, provide substantially equal services to the business, and contribute capital to the business. This used to be called a partnership.Now spouses can elect to be treated as a qualified joint venture. A qualified joint venture is a joint venture involving the conduct of a trade or business if the only members of the joint venture are husband and wife,and both spouses materially participate in the trade or business and both spouses elect to have the provision apply.

 

What is material participation in the qualified joint venture?

Materially, participation means working on a regular, continuous, and substantial basis in the business. In a qualified joint venture, all items of income, gains, loss, deduction, and credit are divided between the spouses in accordance with their respective interests in the venture. Each spouse takes into account his or her respective share of these items as the sole proprietor. For the purposes of determining net earnings from self-employment, each spouse’s share of income or loss from a joint venture is taken into account, just as it is for Federal income tax purposes. This generally does not increase the total tax on a return, but it does give each spouse credit for Social Security earnings on which retirement benefits are based.

 

Spouses on Form 1040 with business

Spouses make the election on a jointly filed Form 1040 by dividing all items of income, gain, loss, deduction, and credit between them in accordance with each spouse’s respective interest in the joint venture.Each spouse files a separate Schedule C and Schedule SE with the Form 1040. A business owned and operated by the spouses through a limited liability company does not qualify for the election. Only businesses that are owned and operated by spouses as co-owners qualify for the election. If all this sounds too complicated for you, consider finding a tax preparer to assist you in fling your Federal tax return. However, you are legally responsible for what’s on your own tax returns even if they’re prepared by someone else.

Record keeping and Receipts Needed for Self-Employed for IRS

What Record keeping and Receipts must self-employed individuals keeps for the IRS?

The next topic we need to discuss is recordkeeping. You must keep receipts, sales slips, invoices, bank deposit slips, canceled checks and other documents.These documents, either electronic or paper files, can substantiate items of income, deductions, and credits. Keeping these records will help you pay only the tax you owe. Unless you have records showing the sources of your receipts, you may not be able to prove that some are non-business or non-taxable.

 

Keeping Records and Receipts for IRS – Record Retention

You need good records to monitor the progress of your business. Good records can show whether your business is improving, which items are selling, or what changes you need to make.Good records can increase the likelihood of business success. You may forget expenses when you prepare your tax returns unless you record them when you pay them. You need good records to prepare accurate financial statements, such as profit and loss statements and balance sheets. These statements can help you in dealing with your bank and creditors to establish your earnings from self-employment. Your records should show the amount of earnings reportable for self-employment tax purposes. If the IRS audits your income tax return, you may be asked to support the entries on your return with sales slips, invoices, receipts, bank deposit slips, canceled checks, and other documents.

 

What support is needed to deduct expenses for IRS?

These items of support are necessary for you to have adequate and complete records. Visit the IRS Video Portal at www.irsvideo.gov and check out the series, Your Guide to an IRS Audit. This series of videos takes you through the steps of an audit from notification to closing. Also be sure to safeguard your records to prevent theft or loss due to natural disaster. In case of a disaster, planning is an important part of safeguarding your records. Being able to access your records will help you resume business operations more quickly. Take advantage of paperless recordkeeping, including filing your returns and paying your taxes electronically.

 

Downloading Bank Statements to IRS

Many people retrieve bank statements and other documents online, an excellent way to secure financial records. However, we encourage you to download your bank statements on a regular basis. Be sure to back up your electronic files and store them in a safe and secure location.

Bank Statements and the IRS

You can periodically copy them onto a CD, flash drive, or other electronic storage device and send it to a trusted person in another location for safekeeping in case your normal computer backup systems aredestroyed. Also, many retail stores sell computer software packages that you can use for recordkeeping. You should also document valuables and business equipment. One option is to photograph or video the contents of your home and business, especially items of great value.

 

IRS Disaster Loss Workbooks for individuals, Publication 584

You should store this documentation with someone outside your geographic area to reduce risk. The IRS has Disaster Loss Workbooks for individuals, Publication 584 and Business Publication 584-B, that can help you compile a room-by-room list of your belongings and business equipment.This will help you recall and improve the market value for items in insurance and casualty loss claims if needed. How quickly you get back to business after a disaster often depends on emergency planning today.Start planning now to improve the likelihood that your business will survive and recover.

Computing a net operating loss for an individual

Speaking broadly, you may be able to benefit by carrying what is called a “net operating loss” (NOL) into a different year-a year in which you have taxable income-and taking a deduction for it against that different year’s income. This would be known as taking a net operating loss deduction (NOL deduction). In general, the loss can be carried back 2 years and forward for up to 20 years to “seek out” taxable income against which it will be deducted. However, most taxpayers can elect a three-, four-, or five-year carryback period (instead of two years) for 2008 and 2009 NOLs.

 

How to Calculate Net Operating Loss (NOL) for Individual (non-business NOL)

In determining what your NOL is, however, you don’t simply use your negative taxable income off your tax return. Several modifications must be made. These include the following:

(1) You cannot use your personal or dependency exemptions.
(2) You cannot use any NOL from a different year.
(3) “Nonbusiness” capital losses (those arising outside of your trade or business, or your employment) can only be used against “nonbusiness” capital gains. Excess capital losses cannot increase your NOL.
(4) “Nonbusiness” deductions (e.g., charitable donations, deductible medical expenses, mortgage interest, alimony, etc.) can only be used against “nonbusiness” income (interest, dividends, etc.).

(5) Finally, “business” capital losses can only be used against “business” capital gains, except that if you still have nonbusiness capital gains after netting nonbusiness capital losses and excess nonbusiness deductions against them, you can use your business capital losses against them.

 

Obviously, the above computations can grow quite complex, depending upon your particular circumstances.

 

Personal Net-Operating Loss Calculation

Ted has a loss of $20,000 from his business operations for the year. He also has (i) nonbusiness capital gains of $9,000 and nonbusiness capital losses of $4,000, and (ii) nonbusiness income of $13,000 and nonbusiness deductions of $14,000 (not including personal or dependency exemptions). He has no business capital gains or losses. Ned’s “starting point” for his NOL is his $20,000 business loss. His capital losses reduce his capital gains to $5,000 ($9,000 # $4,000).

 

Nonbusiness deductions wipe out his nonbusiness income

His nonbusiness deductions wipe out his nonbusiness income ($14,000 # $13,000) leaving him with $1,000 “excess” nonbusiness deductions. Ted can use the $1,000 excess nonbusiness deductions to further reduce his capital gains to $4,000. However, the $4,000 of capital gains do reduce Ted’s NOL from $20,000 to $16,000. The final result: Ted incurs a $16,000 NOL for the tax year. (Note: Ted’s taxable income will show a larger loss because of the modification rules, e.g., his taxable income includes his personal exemption. Only the $16,000 NOL, however, can be carried to other years for use as an NOL deduction.)