By SPECIAL GUEST Lexa Lusty (Dallas, TX)
This article was originally printed in Pin Curl Magazine.
|Lexa Lusty by Oblivion Images|
It’s tax time. The time of year you act like all those burlesque shows, DJ gigs, and emcee spots were just for fun. No need to report anything, right? Many people think that as long as they are receiving cash or not receiving a W-2 or 1099 they are not responsible for filing the taxes owed on that income. This is untrue. Filing your taxes isn’t just about obeying the law or contributing to the fiscal health of our country. It isn’t something to fear and avoid either .Let’s take a look how and what you need to file, and, of course, those exciting questions about what you can write off.
First, let’s determine if you have a business or a hobby. The IRS requires you to report all income regardless of the classification! Uncle Sam considers the following when determining if you are in it for fun or if you have a business:
- Do you spend enough time and energy into the activity to indicate an intention to make a profit?
- Do you rely on income from the activity?
- Have you changed methods of operation to improve profitability? Did you build a website to promote yourself? Did you take classes to learn new skills or refine the ones you have?
- Did you make a profit in any three of five consecutive tax years?
If you answered “No” to all of these questions, then you probably have a hobby and a tax problem. Unfortunately, hobby losses are limited to the amount of the reported hobby income and if you don’t itemize then you can’t write-off any of the expenses unless your adjusted gross income is less than $16,000. If your adjusted gross income is less than $16,000, then you probably have more things to worry about than taxes- like trying to put food on the table. I know. Don’t kill the messenger!
If your adjusted gross income is greater than $16,000 and you itemize then you can deduct the hobby related expenses up to your hobby income but, they are subject to a 2% floor of your adjusted gross income. For example, if your adjusted gross income is $50,000 then you must have miscellaneous deductions greater than $1,000 ($50,000 x .02). The first 2% of miscellaneous deductions don’t count so to speak.
If you answered” Yes” to the last question, then you definitely have a business. Sole proprietors report the income and expenses of their business on Schedule C of the 1040.
Finally, you’ll need to keep receipts for your expenses in the event that you are ever audited. It’s also a good idea so you don’t have to guess how much you’ve spent in the last year. Being audited is not as scary as it sounds when you have receipts to support your case. To do it right the first time, let’s take a look at some common expenses that you might incur. You might be surprised what the law allows and doesn’t.
Yes, you can write off the business portion of the following on Schedule C:
- Photo shoots
- Business cards
- Accounting fees
- Amounts spent on exercise (i.e. gym memberships and class fees)
- Cell phone bills
- Agent commissions
- Rent for storage
- Mileage or Actual Auto Expenses
- Computers & Equipment
- Interest on credit card charges related to business expenses
- Festival Fees
- Legal & Professional Fees
- Office Expenses
- Office Supplies
No, you cannot write off:
- Clothing that is adaptable to everyday wear
- Cosmetic surgery
- Interest on your credit card related to non-business expenses
- Manicures, pedicures and other personal care expenses
Be careful with:
- Lunches that have a business purpose – Yes you can write them of, but not if it is lunch with coworkers or considered a meal for yourself while working late. It’s good to write on the receipt what was discussed and who was present.
- Bar Tabs/Entertainment. These have to pass the Directly-Related Test. These are deductible (up to the 50% Meals & Entertainment limit) if the *main purpose* of the entertainment/meeting was to conduct business, you did engage in business during the meeting, and you expected to receive income or some other business benefit in the future.
For the most complete resource of allowable deductions and assistance in navigating your return, it is a good idea to consider the use of a tax professional especially considering their fees are deductible. Feel free to contact me for a referral at firstname.lastname@example.org.
By day, Lexa Lusty has worked as an accountant since 2007, has prepared taxes for all business types and has experience in operations management, internal audit, and fraud.
This material does not constitute tax, legal or accounting advice and Lexa Lusty is not in the business of offering such advice. It was not intended or written for use and cannot be used by any taxpayer for the purpose of avoiding any IRS penalty. Anyone interested in these topics should seek advice based on his or her particular circumstances from independent professional advisers.