Look At Me, I’m a Sole Proprietorship!

2005 has come and gone, and it’s about time to worry about income taxes again. I had various 1099 income in 2005 from consulting, this blog, and freelancing activities. I’m very green to all of this self-employment stuff, so it’s all a bit overwhelming. Apparently, by default, I am in business as a sole proprietorship. Because I am running a business, I can get tax deductions from business expenses. This will help alleviate the 50% self-employment tax-bite I was pondering earlier. But my recordkeeping was so shabby I won’t get everything I could have. For example, I can deduct the cost of webhosting for this blog, but not any of the mileage driven to my consulting gigs.

I plan on being much more organized this year. For example, all mileage that I drive for freelancing will be logged carefully on a clipboard in my car. Also, I plan on opening business checking accounts to track self-employment income and business credit cards to track expenses.

Comments

  1. The really interesting side of deductible business expenses is whether you can set up part of your home to be ‘solely’ for business. Then you can (I believe, I am not a tax lawyer) deduct its percent of your home from your utilities and the cost of keeping it up.

  2. Anonymous says:

    How about deducting part of your monthly broadband bill??

  3. Brian Katke says:

    Congratulations on your new endeavors. speaking from experience, it’s well worth it. Also, if you can remember the dates you did your consulting, you can just use mapquest for the miles and deduct them for the write off.

    Hope that helps.

    Best of luck again!

  4. Oh yeah, there are a TON of deductions that I want to take. But I want to tread lightly as well. I know some CPAs, and home-office deductions are IRS audit red flags. So I want documentation for everything.

    I am going to re-arrange my current home office so it is work-only. I’m going to set up two computers, one for home use, and one for work only. I’m even working on how to convert personal property to business property and deduct the fair-market-value of that equipment, like my office furniture.

  5. Thanks for the idea Brian! Now I’ll have to dig up the addresses, which might be hard. If I have a business card, and the Yahoo Maps printout, that should work I think.

    48.5 cents a mile deduction for the end of 2005 baby! (44.5 for 2006)

  6. Congrats man! Oh where to begin..
    *****
    Home office deduction=if you can, then take it. Just make sure it’s ONLY for business. In an entrepeneurship class I took, the teacher told us this guy had to send in proof to the IRS of the room he used for the home office deduction due to an audit. He took a pic of the room, sent it in, and was REJECTED. Why? In the lower corner of the picture was a dog dish! It might have been a “boogeyman” take but it was hilarious and the point was clear.
    *****
    get a GOOD CPA/accountant. It will be worth every dime
    *********
    keep…..track….of…ev.er.y.thing

    I said that slow on purpose :-)

  7. Definitely take the home business expenses. Here is some basic information with links to relevant IRS publications. Well worth the time to learn as much as you can about it.

  8. Jon, FYI, the 48.5-cent rate is for 9/1/05 to 12/31/05 only (went up due to Hurricane Katrina). Prior to that for 2005, it’s 40.5 cents per mile!

    The bad news is nowadays saving the receipt alone is not enough. It must be descriptive also (that’s why when the IRS changed the rules regarding car donation in 2005, it made a really big deal). Anyway, say if it’s a meal and entertainment receipt, the IRS may ask you for purpose of the meal, whom you had the meal or entertainment with, and what business you discussed, etc.

    But the good news is so long as all your deductions are well-documented, organized and NOT excessive compared to your consulting income, you’ll be alright even if you get audited.

    Also, if majority of your earned income comes from W-2′s, your chance of getting audited is actually quite low. After all, you are not deemed worthy enough to generate revenue for the IRS.

    ANON, deducting part of your broadband bill for your home office should be alright for most sole proprietorships. If you see clients at home, perhaps you may even justify deducting part of your maid bill also (a little stretching though)! However, I wouldn’t recommend deducting ANY of your gardening bill! LOL

  9. Don Marek says:

    I wish the creator of this blog well in his business endeavor, but come on people!

    Some of the posters above are so excited that the IRS Bureaucratic Gestapo with the direction of the bipartisan dictatorship in the northeastern US “lets us” keep a bit more of our private property if we “document” it to some arbitrary ever changing standard.

    Forbe’s Magazine does a wonderful job each month documenting these abuses. Though the examples posted are mostly much wealthier individuals, I’m sure the sensitivity is not much better for us peons at the lowers rungs of socioeconomic status and probably worse since many cannot afford legal assistance.

    No wonder I pay more than I should for many things whether the store or service is privately owned or a corporation.

    I attended a small business class one evening a couple of years ago and was depressed to learn that the federal, state, and local government probably consume easily 30% to 40% of my revenue and that is before I pay any hired help.

    It seems to me that the blogger would be better off starting on an off the books the E-bay business and be much wealthier. I see no reason for individuals to be honest about taxation when all levels of government are riddled with waste and theft (Social Security and Medicare tax come to mind).

    Wake up people!!!!

  10. One “reason for individuals to be honest about taxation” is that you can lose your shirt (read: go bankrupt) if you’re audited, or even go to jail.

    An off-the books E-bay business? Well, first you need to make money w/ an e-bay business – which isn’t anything to sneeze at. Second, you need to make sure you leave no trace of anything. So you couldn’t accept Paypal – only money orders. Don’t dare accept personal checks as those must be cashed, etc. You could only deal in cash – period – with an internet business? Come on…

  11. I have worked for myself for 5 years. I started an S-Corp back then.

    I have NEVER claimed a home office, and I have never been audited. DO NOT CLAIM A HOME OFFICE. You’re asking for trouble. Just bump up your expenses in another area to cover that amount.

    Sole Proprietorships are also red flags. I do not advocate forming a corporation until you absolutely have to, but if you’re going to claim deductions, a corporation is the best way. Make money “on the side” as a hobby until you’re making so much you have to incorporate.

    Forming a corporation is very easy in most states (see mycorporation.com). An accountant who is “entrepeneur friendly” is also a VERY WISE MOVE and TOTALLY WORTH IT. Also, USE QUICKEN to track expenses. I cannot emphasize these items enough.

  12. Don’t worry about claiming the home office deduction. My wife and I have had two sole proprietorships and in both cases we claimed a home office. Never heard a peep from the IRS. We kept the room limited to the business only.

    We also deducted part of the utilities and property taxees.

    The biggest pain was when we sold the house. Because we had depreciated that portion of the house, we had to deal with the depreciation.

  13. I know this comment is late to the topic but Franklin Covey sells envelopes that you can put into a binder, for project expenses; I keep one above my visor and put all my gas, meals and whatever business receipts; I record mileage and make comments; You can add this up each month or (gasp), wait until tax time and add them up! Mapquest also now has a comment box you can put notes into, prior to printing off; whenever I go to an appointment, I put down the name, business purpose and then print if off; The map, I then fold up, and put into the envelope for monthly tracking; Also a good idea, is to create a separate account for your cellular phone for all business; sometimes if you’re not considered a business by the cellular provider, you can set up your bill to read Joe Smith, c/o Smith Enterprises and then if you have mutiple lines, don’t label them, except for “Smith Enterprises” as the user. Great Blog..thanks to Business Week for the great article about what you’re doing! BJ

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