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The rule of thumb goes like this:
Is it something you would do anyway? If the answer is yes, you can’t deduct it. If the answer is no, you can.
The tax code says “no matter how bizarre…” as long as a deduction is usual, ordinary, appropriate, helpful, and necessary to that business, Congress permits the deduction. So…I’d have trouble supporting the purchase of tiger food or resin or peanuts. But a Circus wouldn’t.
Define Deduction
The act of subtracting an expense from taxable income.
How can I get a Deduction?
By keeping a log. A book in which you write down facts such as mileage, odometer reading, destination, clients or customers’ names. Put items and expense across the top of a dispursement sheet with the date and where the money was spent down left edge. Income and expenses are kept track of by the month. Then, every year, the categories (12 of them) are added up. And there are the deductions. What is a Disbursement?
Here is a typical disbursement form for an auto mechanic broken
Please continue reading Deductions are different for each business
My Advice: Start with a Sole Proprietorship. When the payroll taxes (Social Security, Medicare) become cumbersome, move to an S-Corporation.
Sole Proprietorship
Advantages: Ease of getting in and getting out. “I’m in business.” gets you in. “I’m done.” gets you out.
Disadvantages: Every net dollar in US Taxes is taxed twice (Social Security 15.3%) AND Federal Income Tax at whatever rate you’re at. This shouldn’t be a problem when you’re earning $12,000 a year. But at $90,000 you might want to limit that social security tax. Can’t limit it in a Sole Proprietorship which is reported on a schedule C.
C-Corporation
Every US corporation starts out under subchapter C of the Federal Tax Code. Corporations are incorporated in a state. You do not want to be a C-corporation. Too limiting, to structured. A C-corp is like a cardboard box. Income goes in, deductions go in. They are netted out and can only be pulled out by you as wages or (taxable) dividends. Too complicated, cumbersome and expensive to dissolve.
S-Corporation
Advantages: My Mom’s very favorite. You incorporate
Please continue reading Which business model suits you
Question: I have a niece in Peru who wants to live and study in the U.S. I have no children and love her very much. If my husband and I pay for her education and expenses here – and let her live with us while studying, can we deduct it?
Answer: Possibly. If she is here under an exchange student program, you may deduct, as a charitable contribution, up to $50 a month. However, if she is no one else’s dpendent, lives with you all year, has gross income of less than $3,800.00, and you provide more than half of her total support than you can take her as your dependent. You will want to be very careful to calculate the total support correctly. If she receives public assistance, it may count toward her “income”.
My personal advice: Take her into your home. You won’t regret the year with her. Sounds like she’s very special. Deduction or no deduction, this chance may not come again.
Question: I have three children with my divorced husband. He pays a small child support for them of $200 each per month but I have to provide everything else for them and it is a lot. He says that because he pays child support the law says he gets to take them as a deduction on his taxes, not me. Is this true? They live with me.
Answer: Nope. You get them. 1.) They are your natural children 2.) They live with you and spent more than 183 nights under your roof 3.) You pay more than half their support 4.) They are under the age of 19.(or age 24 if a student) 5.) They do not file a joint return with anyone else 6.) They are American citizens, resident aliens, or Mexican or Canadian Nationals.
Hint: File as early in the year as possible. IRS often awards the dependency to the taxpayer who files first. It is possible to reverse a dependency on a tax return; but it is very difficult.
Question: Last July during a very heavy rainstorm, the gutters and drains near my house overflowed. My house was damaged and I don’t have any flood insurance. Is damage like that to my house a deduction?
Answer: Probably not. You might be thinking of a casualty loss. A casualty loss must be “sudden, unexpected, and unusual.” IRS loves to cite an example of termite damage as none of those three elements. Since you knew your drainspouts and gutters were not clear and since it is not unusual for cluttered gutters to not work properly in a heavy rainstorm, our advice is: you do not have a deduction for a casualty loss.
Question: Recently on a trip to Columbia all of my luggage including some valuable family items were lost by the airline. The airline says I am only entitled to $500 reimbursement – is it possible to make this a tax deduction of some sort?
Answer: Perhaps. Here are some of the rules about a casualty loss: it must be a sudden, unexpected or unusual. The loss must be taken in the year you discovered the loss (not the year insurance reimbursed you — or turned you down).
If your suitcase was full of business equipment and samples, you would have one kind of loss. If your luggage contained personal items such as toiletries, jewelry, clothing, and shoes you will have another kind of loss.
You might encounter two kinds of problems:
a.) Remembering all that the luggage contained, and the luggage itself. (You’ll need a list)
b.) Placing a value on each item. You will say when you got it, how you got it, and the fair market value of the item on the day you lost it. So, let’s take a few things that might have been lost:
1.) 3 new sweaters –bought this month at L.L. Bean $49.95 each.
Please continue reading I lost my luggage – can it be a tax deduction (casualty losses)
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