How to maximize tax deduction for small businesses?

[drwisemoney]

Dear All,

 

I have a few various (small) sources of 1099 income including tutoring, book royalties, and Dr. Wise Money blog (still in the deep red in terms of net profit, but I find it rewarding and fun as a hobby and way to connect).

 

For those who are 1099/business owners, could you please share your best tax deduction ideas?

 

I'm thinking the following,

• Set up a home office since most of my 1099 work is done at home (blogging, tutoring on skype, etc.) & I can definitely make a dedicated space in my home


• Educational expenses such as conferences & retreats for myself and collaborators/blog contributors


• Invite my website contributors (sister "wise money shopper," daughter "mini wise money", etc.) to conferences, work meetings over meals & entertainment, etc.


• Travel expenses for me & my blog contributors


• child care expenses for my child when I'm at work (sometimes rendered by my dad)

 

Also, aside from the item I can deduct against my profit from all my 1099 work (mostly in education & consultation in medicine & personal finance), what are the general requirements for IRS documentations?

Are receipts + meeting agenda sufficient?

 

[jfoxcpacfp]

Ordinary and necessary is the bright line for deductibility. Child care expenses wouldn't qualify. Once you are making a profit, however, you will qualify for the dependent care tax credit.

Not sure about the "necessary" element of travel expenses for blog/website contributors. Is there a reason for them to travel with you?

Be cautious about meals and entertainment. Certainly necessary when you travel for business or have a working lunch. The documentation is different for these expenses: you are not required to have a receipt for any expense under $75 but you are required to document time, place and business purpose of meal. I tell clients to keep the receipt regardless of the amount and jot this information on the back.

You should also not refer to your blog as a hobby unless that is your true intent. Either you are doing this to make money (losses deductible) or you are engaging in a hobby (losses not deductible). The determination of whether you have a hobby or business is subjective with the exception that the IRS cannot deem your business a hobby if you have a profit in 3 consecutive years out of the last 5.

Keep a mileage log in your vehicle to jot down every trip. The IRS requires that you keep "contemporaneous" records plus it's easier to track every deductible mile if you note trips as you go along. A calendar will do just fine and calculate the miles driven when you prepare your taxes.

You should seriously consider working with a CPA for personalized advice.

[drwisemoney]

This is super helpful, thank you so much.

I'm not getting a CPA yet because I have limited financial means as PGY2, but when I do, I will be contacting you.

 

Is there a reason for them to travel with you? Yes, such as for educational enrichment, to make us better bloggers/tutors, etc. conferences, or retreat with meetings to regroup/educate ourselves.

 

You are right, I should not call my blog a hobby from IRS perspective. Thank you!

 

 

[jfoxcpacfp]

You're welcome and glad to help. I just found this substantiation list when researching for an article and thought you might want to see. Let me know if you have any more qu's.

[JBNV123]

Hi, I just realized I might be able to deduct my expenses for my Internal Medicine Board exam fees (ABIM). I was working on filing an amendment and came to a point where I realized I needed some advice. I work at an organization for which I receive a K-1. I am trying to figure out if i "materially participate." I did not work 500 hours last year (2015 , for which i am attempting to file an amendment) for this group , but I am wondering if I qualify for material participation based on the "any 3 years in a personal service activity" criteria. I can't quite understand the implications, I was a resident for the preceding few years - so worked far more than 500 hours in this same activity (as a physician of course), but not for the same organization for which I received the K-1.

Does this qualify me ?

I think if it does I would be able to claim this expense of the exam as a loss.

 

Thank You!

James

 

From an IRS website:

 

Any 3 Years in a Personal Service Activity

If a taxpayer materially participated for any three prior taxable years in a personal service activity the current year income or loss will be treated as non-passive.  It does not matter whether those three prior taxable years were consecutive.

Personal service activity means services performed in:

• The fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, or consulting; OR,


• Any other trade or business in which capital is not a material income-producing factor.

[Future Proof MD]

jfoxcpacfp wrote:

You’re welcome and glad to help. I just found this substantiation list when researching for an article and thought you might want to see. Let me know if you have any more qu’s.

Click to expand...

Thanks Johanna! this is really helpful.

[Future Proof MD]

drwisemoney wrote:

Dear All,

 

I have a few various (small) sources of 1099 income including tutoring, book royalties, and Dr. Wise Money blog (still in the deep red in terms of net profit, but I find it rewarding and fun as a hobby and way to connect).

 

For those who are 1099/business owners, could you please share your best tax deduction ideas?

 

I’m thinking the following,

• Set up a home office since most of my 1099 work is done at home (blogging, tutoring on skype, etc.) & I can definitely make a dedicated space in my home


• Educational expenses such as conferences & retreats for myself and collaborators/blog contributors


• Invite my website contributors (sister “wise money shopper,” daughter “mini wise money”, etc.) to conferences, work meetings over meals & entertainment, etc.


• Travel expenses for me & my blog contributors


• child care expenses for my child when I’m at work (sometimes rendered by my dad)

 

Also, aside from the item I can deduct against my profit from all my 1099 work (mostly in education & consultation in medicine & personal finance), what are the general requirements for IRS documentations?

Are receipts + meeting agenda sufficient?

 

Click to expand...

@DWM, where are you going for retreats and conferences for your blog?  I only knew about FinCon.  Are there any others you would recommend?

[jfoxcpacfp]

jfoxcpacfp wrote:

Hi, I just realized I might be able to deduct my expenses for my Internal Medicine Board exam fees (ABIM). I was working on filing an amendment and came to a point where I realized I needed some advice. I work at an organization for which I receive a K-1. I am trying to figure out if i “materially participate.” I did not work 500 hours last year (2015 , for which i am attempting to file an amendment) for this group , but I am wondering if I qualify for material participation based on the “any 3 years in a personal service activity” criteria. I can’t quite understand the implications, I was a resident for the preceding few years – so worked far more than 500 hours in this same activity (as a physician of course), but not for the same organization for which I received the K-1. Does this qualify me ? I think if it does I would be able to claim this expense of the exam as a loss.

Click to expand...

Yes, you materially participate. This rule was not enacted for people in your situation. The pertinent issue is whether your boards are deductible. If they are to qualify you to practice medicine (i.e. first time), they are not deductible. Otherwise, they should be.

Now the problem is how to deduct them since you receive a K1. It is possible. We deduct additional expenses such as this on page 2 of schedule E in section 2. I think a lot of HIPs (High Income Professionals) who have unreimbursed expenses from nonpassive K1 participation miss this.

[JBNV123]

Thank you so much for your response , I guess I didn't see this come in earlier - I just noticed it . I guess for the Abim exam - it was the first exam - but I guess I'm unsure how to classify it with regards to necessity for the job - I guess technically one doesn't need the internal medicine boards to practice ( I know some in my group are not board certified currently) however it is generally felt to be desireable. Some of this stuff is getting pretty complicated ...

Thanks again for your help.

James

[DMFA]

Initial licensing exams (USMLE, COMLEX) aren't deductible. Specialty boards *should* be.

[Caligirl]

Reviving this post:

Aren't gifts to Colleagues and/or Employees also deductible as a 1099 filer?

I'd like to know because I realize all the holiday/birthday gift giving can add up! Thanks!

[jfoxcpacfp]

Caligirl wrote:

Reviving this post:

Aren’t gifts to Colleagues and/or Employees also deductible as a 1099 filer?

I’d like to know because I realize all the holiday/birthday gift giving can add up! Thanks!

Click to expand...

You can deduct up to $25 of business gifts per person. I know, it's stingy, and the limitation hasn't changed for years.