I want to tackle this problem by myself and without a CPA because I feel like its pretty straight forward.
Day Job, single, no properties, very straightforward tax return. (just a W2)
Did some side work and got this:
1099: $5,200 (SCHEDULE C)
Expenses: $2921 (break down total below)
Meals and entertainment (50%): $450 ($900 entire year)
Supplies: $430.00
Travel: $327
Depreciation and section 179 (Computer considered as property): $1355
Depreciation and Section 179 (Nexus one phone): $259
Mileage: 200 total miles (about 100 dollars)
Ok so my question is, these are all legitimate expenses that I have digged up. I just have 2 questions:
1. MY H&R Block mentioned that instead of the Depreciation schedule for my laptop, I can just deduct the entire cost basis for my laptop the first year (as long as I don’t deduct it again next tax year). However, I won’t make any income for 2012 on this consulting gig. Will I have to pay back some of this depreciation?
2. Is my Income-Expense Ratio too high? I didn’t include phone bill (I feel like I didn’t use it enough to justify making it an expense), did not include part of my rent (again, I use my room mostly for personal use). However I feel like if I really dig deeper into my statements, I can dig up $2k more in expenses. However I don’t want to trigger an audit for high Income-Expense Ratio.
Thanks so much!
Update:yes I am using the laptop and phone 100% for business.
Answers & Comments
Verified answer
It is not impossible, but you will have a hard time convincing the IRS you only use the phone and laptop for the business - one that makes only $100 a week all year or conversely, $1,000 a week for 5 weeks - when you have no official office, and the phone and laptop are always in your possession, even at your house.
Definitely take the complete expense write-offs. Depreciation is a mess to deal with.
{no, you do not have to pay back any of the depreciation*.}
You need solid proof to establish meals and entertainment expense.
Mileage needs to be well documented. too.
* the IRS could come back in the future and have you rework all the numbers if they determine that this is just a hobby of yours {i e, you aren't making a profit, and are not putting enough effort into it to make a profit,,,,)
I hope your business succeeds, but yes, the IRS will be watching closely.
1
1.) Office expense would be considered pens, paper, etc. Do not include rent--there is a separate line for that. It is the necessary expenses to run the office. You may, however, depending on the dollar amount, show under other expenses ie telephone, postage since IRS looks at total dollars in a category if its excessive and might question it. The more detailed, the better. 2.) Supplies are those cost in running the business. Let's say you do janitorial work. You need broom, mops, dust rags, etc. to do your work. 3.) Equipment are the larger ticket items, like scrubbers, vacuum cleaners. Items, on the most part can be in existance for more than one year. In your example, if you do paperwork in your office and have a stereo system, you can deduct the stereo system only if it is useful to your business. For example, when you put a person on hold, the music you are listening to is on the telephone. or, if you are advertising on the radio, you want to listen for your ad. 4-5) Employees are those individuals that you withhold taxes for, pay unemployment taxes, provide benefits. You pay them a salary or by the hour and they submit a timesheet. Contractors, you do not withhold taxes (specifically-social security-and unless the IRS requires backup withholding for them). Contractors are paid by the job or hourly and they submit an invoice for payment. Hope this helps. Good luck.
If the laptop and phone are used for anything else besides the business they are not deductible expenses.
I'm guessing for a job where you earned $5200, you did not purchase a brand new laptop and phone = so these are not deductible.