Writing Business: Simplified Home Office Deduction Option by Gary Hensley

On the first Monday of each month, Gary offers advice regarding the business side of writing.

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Photo: Gary Hensley spoke to members of the American Christian Fiction Writer Association–Indiana State Chapter in Ft. Wayne, IN on May 4, 2013.

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Beginning in tax year 2013 (returns filed in 2014), you may use a simplified option when figuring the deduction for business use of your home.

Highlights of the Simplified Option

  1. Standard deduction of $5 per square foot of home used for business (maximum 300 square feet).
  2. Allowable home-related itemized deductions claimed in full on Schedule A (such as mortgage interest and real estate taxes).
  3. No home depreciation deduction or later recapture of depreciation for the years the simplified option is used.

The simplified option does not change the criteria for who may claim a home office deduction.  It merely simplifies the calculation and recordkeeping requirements of the allowable deduction.

You may choose to use the simplified method or the regular method for any taxable year.  Once you have chosen a method for a taxable year, you cannot later change to the other method for that same year.

For a comparison of the regular method and the simplified method, you may refer to this IRS document and also to IRS Revenue Procedure 2013-13.

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Gary A. Hensley is a 35-year veteran in accounting, auditing, and federal taxation including employment as a Revenue Agent with the IRS (2005-2011). He has been a workshop instructor on the business side of writing. Publications include: Writer’s Digest, Christian Communicator, and Writers Journal. Gary writes at: www.taxsolutionsforwriters.com.

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Writing Business: “The IRS Meal Allowance; Part of your Tax-Reducing Arsenal” by Gary Hensley / **Giveaway Ticket Winner!

On the first Monday of each month, Gary offers advice regarding the business side of writing.

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Gary Hensley picOne of the most valuable tax-busting deductions seems to be hiding under the mushroom of business inexperience.  When I review this deduction at a writers’ workshop, ranging from novice to established writers, authors and illustrators, I find that only 2 or 3 have some awareness of this tax break.

I am talking about maximizing the IRS Meal Allowance.   The meal allowance becomes available when you incur meal costs while away from home (essentially, travel requiring overnight lodging) on business trips. If you eat sparingly, or only one basic meal a day, or are a perpetual ”snacker” during the day, you will like the idea of not having to keep records of meal costs coupled with the higher, no-questions-asked, meal allowance.

In the IRS tables, the allowance is referred to as the “M&IE” rate (meals and incidental expenses).  In addition to meals and tips for food servers, the allowance (M&IE rate) includes a limited number of “incidental” expenses such as fees and tips for porters, baggage carriers, hotel maids, or room stewards.  Self-employed individuals may claim the M&IE allowance. 

Meal Allowance on 2012 tax returns

For travel within the continental U.S., the standard meal allowance (M&IE) for 2012 is generally $46 per day; however, [flashing lights] higher rates apply in major cities and other high-cost locations (such as resort areas) designated by the government.  For example, in 2012, the M&IE rate for both Dallas, TX and San Francisco, CA is $71 per day (rate research guidance will be provided below).   The basic and high-cost-area meal rates are determined by the federal government’s General Services Administration (GSA) and the IRS allows taxpayers to use the applicable rates in figuring their meal allowance deduction.

You must keep a record (required anyway for all away-from-home business travel) of the time, place, and business purpose of the trips.  As long as you have this proof, [flashing lights] you may claim the allowance even if your actual costs are less than the allowance!  EXAMPLE:  suppose you were in Dallas on business for five full business days (excluding the arrival and departure days, discussed below) and you averaged spending only $35 per day for food, beverages and tips (totaling $175).  Your allowed deduction for those five full business days in Dallas would be $355 (5 X $71)!   In this example, you double your tax deduction by simply doing your meal allowance research and documenting the amounts in your travel journal.  If you frequently travel overnight on business, this approach, consistently applied throughout the year, will lower your tax due or increase your refund.

One quick note:  the meal allowance is prorated for the first and last day of a trip.  You may claim only 75% of the allowance for the days you depart and return.

Click here to read more from Gary’s website.

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Gary A. Hensley is a 35-year veteran in accounting, auditing, and federal taxation including employment as a Revenue Agent with the IRS (2005-2011). He has been a workshop instructor on the business side of writing. Publications include: Writer’s Digest, Christian Communicator, and Writers Journal. Gary writes at: www.taxsolutionsforwriters.com.

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**Denise Hisey is the winner of  our Giveaway ticket event!

Dessert at “An Evening with Jane Kirkpatrick.”  Kirkpatrick will speak on “Finding Home.” The event includes gourmet dessert and book signing. Friday, May 17 at 7-8 p.m. Part of the conference but available separately for $10 at the door. For more information: www.nwchristianwriters.org

Writing Business: Retirement Savings Equals Tax Savings Using SEP by Gary Hensley

On the first Monday of each month, Gary offers advice regarding the business side of writing.

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Gary Hensley picA Plan for Sole Proprietors to Reduce Income Tax

So, you have had a great year in the publishing world and even after maxing out your operating expenses, you are still showing a tidy profit.  What to do?  Consider reducing that profit further by funding your personal retirement account and taking a tax deduction for it.

Simplified Employee Pension (SEP)

SEPs provide a simplified method for you to make contributions to a retirement plan for yourself and your employees (if any).  Instead of setting up a profit-sharing or money purchase plan with a trust, you can adopt a SEP agreement and make contributions directly to a traditional individual retirement account or a traditional individual retirement annuity (SEP-IRA) set up for yourself and each eligible employee (if any).

More good news!  Suppose 2012 is a very profitable year, even after taking all available deductions.  You can actually set up the SEP plan after your tax year closes (in this case, calendar 2012) and fund it until the due date of your return (including extensions).   For calendar 2012 sole proprietors, the normal due date of your return would be April 15, 2013 but with an automatic 6-month extension (using Form 4868), you would have until October 15, 2013 to set up the SEP and fund it for 2012. This is one of the few opportunities to lower your tax bill after your tax year (in this case, 2012) has ended and still get the deduction on that year’s return (2012).

With an extension filed (only if you cannot create the SEP plan and fund it by the normal due date), you would have a total of 9 1/2 months after December 31, 2012 to create and fund the plan.  That’s a lot of flexibility!  Caution: Even after you take the SEP deduction on your return, if you still owe a balance due (based on other income such as wages, interest, dividends, etc.), that amount would need to be paid with the initial return or paid with the extension request to avoid late payment penalties and interest.  The extension only allows you an extra six months to set up the SEP plan and fund it.

A sole proprietor is treated as his or her own employer for retirement plan purposes.   For a self-employed person, compensation means ”earned income.”    Earned income is net earnings from self-employment from a business in which your services materially helped to produce the income.  Net earnings from self-employment is your gross income from your trade or business minus allowable business deductions (including the deductible portion of your self-employment tax, shown on page 1, line 27 of your Form 1040).

Other Interesting Points:

  • A SEP-IRA cannot be a Roth IRA.
  • Employer contributions to a SEP-IRA will not affect the amount an individual can contribute to a Roth or traditional IRA.
  • Unlike regular contributions to a traditional IRA, contributions under a SEP can be made to participants over age 70 1/2.  If you are self-employed, you can also make contributions for yourself even if you are over 70 1/2.

Contribution Limits

For 2012, contributions cannot exceed the lesser of 25% of the employee’s compensation or $50,000.  Special rules apply when figuring the maximum deductible contribution for the “owner-employee.”  Let me illustrate with an example.

EXAMPLE:  You are a sole proprietor with no employees.  The terms of your plan provide that you contribute 25% (.25) of your compensation to your plan.  Your net profit from line 31, Schedule C is $40,000.  Your deductible self-employment tax (taken on page 1, line 27 of Form 1040) is $2,825.  Subtract this amount from the $40,000 to get net earnings from self-employment of $37,175.  Next, you multiply this amount by 20% (yes, 20%, not 25%, see Footnote below) to get $7,435.  This is your maximum deductible contribution.  You would enter this amount on Form 1040, page 1, line 28 as an adjustment (reduction) to your income.   Although this adjustment goes on page 1 of the Form 1040, it does reduce the Schedule C profit of $40,000 which also gets reported on page 1 of Form 1040.   Notice that the deductible portion of your self-employment tax ($2,825) and the SEP contribution ($7,435) have reduced your $40,000 Schedule C profit down to $29,740.  This amount gets further reduced by your personal and dependency exemptions and your standard or itemized deductions before you actually reach taxable income, the amount used to determine your income tax due. You will still be required to pay self-employment taxes on the $40,000 on Schedule SE (approximately $4,913 for 2012). [See my earlier post on “Writers and the Self-Employment Tax“].

I know, for many of you in the early stages of your career, that any profit is a solid achievement.  However, this is a worthwhile strategy for all to consider once profitability is attained.   As a self-employed person, it is up to you to put funds away for your future.  This is a great way to do it while lowering your current income tax bill.  The sooner you start, the longer your retirement funds will have to compound.

Your bank, credit union or broker will be happy (eager) to help you set up your SEP-IRA plan with forms that comply with the IRS requirements.  You will complete the paperwork (a few pages) and open your SEP-IRA at that institution and be on your way!

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Helpful Resource:  Pages 22, 23 and 24 of IRS Publication 560 illustrate the deduction worksheet for those self-employed and also include a rate table conversion chart for the self-employed.

Footnote:  In order to arrive at a 25% contribution in the above example after the contribution is allowed as a deduction against your profit, it is necessary to do the following:  take the contribution percentage you want to use, such as 25% or .25, and divide it by 1.25, which then gives you the 20% figure to multiply the profit by before any SEP deduction.  In the above example, if you take the net earnings from self-employment, $37,175 and subtract the contribution of $7,435, you get $29,740.  Now, when you take that contribution of $7,435 and divide it by $29,740, you get 25%.  Therefore, you actually took a 25% contribution of your business profit after subtracting or allowing for the contribution.  As a self-employed person, this is your unique formula to arrive at the maximum deduction allowed.

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Gary A. Hensley is a 35-year veteran in accounting, auditing, and federal taxation including employment as a Revenue Agent with the IRS (2005-2011). He has been a workshop instructor on the business side of writing. Publications include: Writer’s Digest, Christian Communicator, and Writers Journal. Gary writes at: www.taxsolutionsforwriters.com.

Writing Business: Maximize Travel Deductions By Gary A. Hensley

On the first Monday of each month, Gary offers advice regarding the business side of writing.

Today’s post links to Gary’s recent guest post with Jerry Jenkins.

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Gary Hensley picMost writers pay too much tax on their writing income because they fail to deduct business travel expenses.

For 2012, for every business mile you drive for your work as a writer, the standard allowance is 55.5 cents per mile. (It doesn’t matter what the trip actually costs.)

Click here to read more of Gary’s guest post with Jerry Jenkins at Christian Writers Guild.

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Gary A. Hensley is a 35-year veteran in accounting, auditing, and federal taxation including employment as a Revenue Agent with the IRS (2005-2011). He has been a workshop instructor on the business side of writing. Publications include: Writer’s Digest, Christian Communicator, and Writers Journal. Gary writes at: www.taxsolutionsforwriters.com.

Writing Business: Self-Employed Professionals and Foreign Income – Part 1

On the first Monday of each month, Gary offers advice regarding the business side of writing.

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Reporting Foreign Income Required

Gary Hensley picIf you are a United States citizen with income from sources outside the United States (foreign income), you must report all such income on your tax return unless it is exempt by United States law. This is true whether you reside inside or outside the United States and whether or not you receive a Form W-2 (if an employee) or Form 1099 (self-employed) from the foreign payer. This applies to earned income (such as wages, commissions, professional fees and author royalties) and unearned income (such as interest, dividends, capital gains, pensions and rents).

The United States taxes the worldwide income of U.S. citizens, resident aliens and domestic corporations, without regard to whether the income arose from a transaction or activity originating outside its geographic borders.

Qualifying for the Foreign Earned Income Exclusion

If you are a U.S. citizen or a resident alien of the United States and you live abroad, you may qualify to exclude from income up to $92,900 (2011 amount) of your foreign earnings. In addition, you can exclude or deduct certain foreign housing amounts.

Requirements:

To claim the foreign earned income exclusion, you must meet all three of the following requirements:

  1. Your “tax home” must be in a foreign country.  More about your tax home below.
  2. You must have foreign earned income.
  3. You must be one of the following:
  • A U.S. citizen who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year.
  • A U.S. resident alien who is a citizen or national of a country with which the United States has an income tax treaty in effect and who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year.
  • A U.S. citizen or a U.S. resident alien who is “physically present” in a foreign country or countries for at least 330 full days during any period of 12 consecutive months.

“Tax Home” in a Foreign Country

To qualify for the foreign earned income exclusion, your tax home must be in a foreign country throughout your period of bona fide residence or physical presence abroad (terms explained below). Your tax home is the general area of your main place of business or employment regardless of where you maintain your family home. Your tax home is the place where you are permanently or indefinitely engaged to work as an employee or self-employed individual (which could be the office in your home).

You are not considered to have a tax home in a foreign country for any period in which your abode (“abode” has been variously defined as one’s home, habitation, residence, domicile, or place of dwelling) is in the United States. However, your abode is not necessarily in the United States while you are temporarily in the United States. Your abode is also not necessarily in the United States merely because you maintain a dwelling in the United States, whether or not your spouse or dependents use the dwelling.

What is a “Foreign Country?”

A foreign country includes any territory under the sovereignty of a government other than that of the United States.  Residence or presence in a U.S. possession (American Samoa, Guam, Mariana Islands) does not qualify you for the foreign earned income exclusion. You may, however, qualify for an exclusion of your possession income on your U.S. return.  Residents of Puerto Rico and the U.S. Virgin Islands cannot claim the foreign earned income exclusion or the foreign housing exclusion.

On March 4th, we will review the bona fide residence and physical presence tests (you must meet one) in Part 2 of this subject.

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Gary A. Hensley is a 35-year veteran in accounting, auditing, and federal taxation including employment as a Revenue Agent with the IRS (2005-2011). He has been a workshop instructor on the business side of writing. Publications include: Writer’s Digest, Christian Communicator, and Writers Journal. Gary writes at: www.taxsolutionsforwriters.com.

Writing Business: Writers and Charitable Contributions by Gary Hensley

On the first Monday of each month, Gary offers advice regarding the business side of writing.

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Gary Hensley picI know what you’re thinking.  People should be giving you money to support your writing endeavors.   However, for those that can give to charity, I want to clarify how that is handled when you are self-employed in the publishing arena.

First, you need to know that donations of your time and effort to any charity are not deductible.  Next, if you are an unincorporated business, using Schedule C at the end of the year as a sole proprietor, you cannot claim a deduction on Schedule C for any cash or property contributed to a charity (even if you wrote the check out of your business account).  A donation to a charity out of your business checking account functions as a nondeductible owner’s draw.

However, you can take the donations from your business account and your personal accounts (including donations via credit card) and combine them and take the entire amount on Schedule A – Itemized Deductions on the charitable contributions line.  Charitable donations from your business account are not deductible business expenses but they are included as part of your overall charitable giving on Schedule A.

When your business donates to a worthy cause, with cash or property (for example, a used computer), it not only helps the community (local, national, or international) but, if donated in the business name, also gives your business added visibility and good public relations.

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Gary A. Hensley is a 35-year veteran in accounting, auditing, and federal taxation including employment as a Revenue Agent with the IRS (2005-2011). He has been a workshop instructor on the business side of writing. Publications include: Writer’s Digest, Christian Communicator, and Writers Journal. Gary writes at: www.taxsolutionsforwriters.com.

Writing Business: Expenses for Writers: Dues and Subscriptions by Gary Hensley

On the first Monday of each month, Gary offers advice regarding the business side of writing.

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Gary Hensley picSelf-employed writers, illustrators, editors, researchers and others in the publishing world are allowed to deduct the expenses related to their income-generating business activity on Schedule C. Two of these expense categories are dues and subscriptions.

Dues to local, state and national professional organizations are deductible on Schedule C.  For instance, I am a member of the National Association of Independent Writers and Editors (NAIWE) and I take a deduction for my membership fee. Dues to the chamber of commerce, business leagues, trade associations, and civic organizations are also deductible.

Subscriptions to business and professional publications are deductible. However, if you are on the cash basis (which most of you are) and prepay subscriptions for longer than one year (you buy and pay for a three-year subscription to a trade paper or magazine this year), you should deduct the amount for one year in the current year and an allocable portion of the subscription cost in each succeeding year.

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Gary A. Hensley is a 35-year veteran in accounting, auditing, and federal taxation including employment as a Revenue Agent with the IRS (2005-2011). He has been a workshop instructor on the business side of writing. Publications include: Writer’s Digest, Christian Communicator, and Writers Journal. Gary writes at: www.taxsolutionsforwriters.com.