In a recent fiscal year our US Government internal revenue refunded $292,313,139,000.
Why not get your share?
Few of us look forward to tax time but what if you were well saturated when April 15 rolls in? Those who worry most are self-employed – that’s what IRS considers making your own job. Internal Revenue doesn’t mind constantly changing rules that can create a minefield of potential trouble no matter who you work for.
There is a pretty sure way to keep or get back every dollar due you next year. Start now by beginning good record keeping based on reliable information.
1. Learn what you need to know: IRS Services don’t create tax laws, that comes from those folks in D.C. we voted for. IRS actually tries to help taxpayers comb through that often tangled mass of confusion small businesses/self-employed people struggle with. I speak with IRS often due to the nature of my business and I’ll vouch for quite a few IRS agents.
2. Business or Hobby: Home productivity raises this question more often then it should but that’s the reality of government. Many hobbies begin pastime commerce, sell a few items they fabricated, that later turns into a profitable venture. If you reasonably expect to earn a profit, you have more than a hobby, it’s a business. Activity income is taxable no matter what you term it. You can’t claim the loss is a hobby. IRS presumes your activity to be a business if it makes a profit during at least three of the last five tax years, that including the current year.
3. Pay self employment tax: If your net earnings from self-employment will be $400 or more (unless the tax regs change soon) you must pay SE tax and file Schedule SE (Form 1040). Self-employment tax (SE tax) is a social security and Medicare tax primarily for people who work as self employed. SE tax contributes to your coverage under the social security self employed system. Social security coverage is designed to provide retirement benefits, disability benefits, survivor benefits, and Medicare hospital insurance benefits.
4. Expense Deductions: You can deduct business expenses on your income tax return. These expenses are deemed current operating costs incurred by running your business. To be deductible, a business expense must be both ordinary and necessary. Ordinary expenses are those considered common and accepted in your professional field. This may be travel costs, office equipment, and other items helpful or appropriate for your profession. If you attend a Work Shop, that fits that description. Expense need not be an indispensably necessity in order to be considered reasonable. Fees paid to raise you professional skills are deductible.
5. Competent Tax Professionals: An excellent choice when it comes to tax filing, is getting someone who knows the rules, the current rules. Most people do not have time or expertise to keep up with changing tax laws. CPAs stay abreast of deductions, rule changes, and therefore less likely to make tax filing mistakes. If you don’t already have someone, ask other people who they use. Accountant fees are tax deductible for small- or home-based business owners using Schedule C or C-EZ. You as the taxpayer are responsible for all information on the 1040, no matter who prepared it.
6. Home Offices make Great Deductions: Call your endeavor a profitable Hobby or a Business; you can claim a portion of home as a home office if that area is exclusively and often used for the project. Exclusively means the area isn’t a part time guest room. Regularly means it is used for the on-going project you claim. If the office meets this criteria, deduct it as well as part of utility costs it requires. For more information see IRS Publication 587, Business Use of Your Home, available at http://www.IRS.gov or by calling 800-TAX-FORM (800-829-3676).
7. Receipts: Maintain records of expenses. Keep all receipts so you don’t forget about deductible expenses. Deduct that second computer, those business meeting meals, all the things that cost over the year just in the unlikely event an auditor will want proof of expenditures. If you get into a real bind most banks can bail you out with records of credit and debit or same-as-cash payments. Keep receipts for at least three years. Caution- Citizens who file fraudulent returns or do not file at all are to retain records forever. (It says so on IRS publication #552.)
8. Avoid Red Flags: IRS says only 1% of tax returns get audited. Many people downsized during the recession and decided to take the plunge by starting their own business. Little do some realize that owning a small business assumes general risks that come with business ownership. It makes you an IRS target. Many taxpayers do run personal losses through their businesses. To be safe, self-employed business owners should be prepared to prove the business has been established to make money rather then as a repository to cover a car lease and your cell phone bills.
9. Be Open About Income: The IRS says American citizens are taxed on all their worldwide income, whether a person lives inside or outside the U.S. Their foreign income rule applies regardless of whether or not a person receives a Form W-2, Wage and Tax Statement, or a Form 1099. Travel writers especially take note.
10. Royalties count: A common mistake taxpayers make on returns is the tendency to try and separate royalty income by putting it into Schedule E, Rents and Royalties. The royalties become part of gross income of a business, and are added in with other income (e.g., first NASR, advances) on your Schedule C, Profit or Loss from Business.”
11. Watch Current Tax Laws: Tax laws change anally. For more information check with IRS website www.irs.gov or telephone them toll free at: 800-829-3676 and request publications such as # 334 (Tax Guide for Small Businesses), #535 (Business Expenses), #583 (Starting a Business and Keeping Records) and #552 (Record keeping for Individuals).
12. Do Your Own Taxes: If you decide to and that works out well for many, get the Newsblaze Tax book. Better to go into tax filing armed with all the best Information you can get.