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Ways Through the Maze: A Tax Guide for Indies

#21: March 13, 2010

Dear Indies,

So many of you are scrambling to get your tax returns completed. I have two items to bring to your attention right away. Both because of the volume of questions I have received on the topic.
 
Although they are on different topics -- tax prep programs and reimbursements -- you can see how they are related.
 
So here's my alert to you.
 
Best,
June
 
June Walker

June Walker -- photo by Chip Simons
Consultant to Indies 
June's Blog
Be A Confident Indie
The Confident Indie: Five Easy Steps
A SERIES FOR SELF-EMPLOYEDS
 
Five Easy Steps
Recordkeeping  for 2010
 
Includes Worksheets
 for Your 2009 Tax Return
 
This is a downloadable PDF.
62 Pages
 +
13 Side-view Pages
of Additional Information
 
Includes 7 Worksheets  
    
Introductory Price $19.00
   
$5.00 Discount for Maze Subscribers
Your price $14.00
  
Link here to purchase. Your password is maze. 

That's "maze" all lowercase. 
 
What's an Indie?
Whether you call yourself a
1099 Worker
Sole Proprietor
Freelancer
Subcontractor
Free Agent
or
Self-employed
 you are an
independent professional.

The IRS classifies you as an independent contractor.

I call you an indie.
Please tell your colleagues and fellow indies about 
Ways Through the Maze
Join The Mailing List 
 

Software Cannot Replace Experience

First let me give you excerpts from two emails I received this past week:
 
From Andy in Texas:
I have two 1099-MISC for contract work that I did for two separate companies. When I plugged my info into turbo tax it spit out a schedule C-ez and lumped my income for both companies into 1 schedule C-ez. Is this right?
June says: No way to know without more info from Andy about Andy. 

From Brett in Alabama:
My wife is a professor at a university. She helps write national exam questions for optometry students. She does not receive any form of pay for this. They do reimburse her $900 for travel expenses. The actual expenses were $1200. They sent her a 1099-misc ... I am using H&R Block's tax program to do our taxes but there is nothing in the program to explain where to deduct that expense as a consultant ... It wants her to do a schedule C for self employed. That would be incorrect. Any Ideas where to annotate this?
June says: You can't argue with a software program. It "wants" to be right when it's wrong.


And this one from last year on my blog:

Hi June,

I am a clinical and consulting psychologist who has been a sole proprietor for over 20 years.

I've started working on my taxes and have a question.

Earlier this year I spent $1,062 to purchase the latest version of a psychological test that I use regularly in my practice. I had thought that it would be considered an "office supply" and that I could write off the entire amount as a supply expense. But in using TurboTax, it asked me about a depreciable asset. It seems that by definition (something that has a life of more than a year but will become obsolete eventually) this test is not an office supply, it's a depreciable asset. In the end, TurboTax told me that it was a "special" depreciable asset that I could take a one-time deduction for, of only $561! How do I legally handle this - asset or supply?

Thanks,
Dr. Mark
Fairfax Station, VA


Dear Dr. Mark,


Let me give you an analogy.
 
Let's say I've been feeling really stressed and depressed. Suicidal actually. I bought this software program Mind-Mend. Says it has taken 20+ years of psychiatric experience and rolled it up into this software program. There are 10 steps to avoiding stress. One step says do 15 minutes of meditation each day. Another step has me stand on my head for 10 minutes so that my circulation increases. My gym instructor says I should not stand on my head because of an old army injury. I am confused, how should I handle this?


As a doctor you might tell me that stress and suicidal tendencies call for different levels of treatment as well as different levels of urgency in that treatment and that I should speak with a professional. You might also say that there is no way that 20 years' professional medical experience could be put into a software program and elicit the same success rate as weekly visits with a therapist when treating something as complex as suicidal tendencies.  

This is a roundabout way of making the point that I have made on my blog many times before: A software program written for the simple world of employees cannot replace a tax pro experienced with indie tax situations. Here are some more of my posts on this topic.

Software is a supplies expense in almost all circumstances.


Best,
June

Reimbursed Expenses Included on 1099

Hi June,

I just discovered your site today.. am I glad!!

I have been an independent consultant since Oct 2006.

I received a 1099 which includes all my reimbursed expenses. My question has to do with the meals deductions: in using Turbo tax, it appears that only 50% of my meals are deductible. That would mean that 50% of meals becomes ordinary taxable income.

Am I wrong?

Claudia
San Mateo, CA



Dear Claudia,

It is not you who are wrong. Turbo Tax is wrong.


When an indie is reimbursed for expenses and those reimbursements are included on a 1099, the indie may deduct all the reimbursed expenses.

Reimbursed meal & entertainment expenses are not subject to the 50% reduction. I put them on the "Other Expenses" line on the Schedule C and label them "Expenses included in 1099 income above."

The person or company who reimbursed you is subject to the 50% reduction. They often try to get around that by including the reimbursement on a 1099 to an unsuspecting or unknowing indie.

The regulation sounds this way in tax jargon: A nonemployee service provider (e.g., an independent contractor) that provides the required substantiation to and is reimbursed by the service-recipient for meal and entertainment expenses incurred on the latter's behalf isn't subject to the percentage reduction rule. The rule applies to the service-recipient, who can deduct only 50% of the reimbursement.

For those of you wanting to argue this with your tax pro: This is IRS Code Section 274(n)(2)(A) and Notice 87-23.

You see. I told you all I read a lot of those thousands of pages of tax code!!

Cheers,
June
 
 
Read more about reimbursed expenses here.