Friday, March 13, 2009

This Weekend: Getting Taxes Done

Photo Credit: The Connie Taylor Group

Tomorrow afternoon I will be meeting with my accountant to get my taxes done. I don't envy my accountant. Not only will he have to plow through all of the paperwork associated with my day job as a reporter at the Denver Post, but he will also have to work through everything associated with my photography business.

"You've got to be able to show that this is a real business and not just a glorified hobby," he said to me. If a business reports a net profit in at least 3 out of 5 years, it is presumed to be a for-profit business. If a business reports a net loss in more than 2 out of 5 years, it is presumed to be a not-for-profit hobby. That puts the burden of proof on me!

Photo credit: OC Weekly

One of the best things I did last year was to make my company an LLC and open a separate bank account and federal tax identification number (separate from my social security number). According to NOLO, a limited liability company (LLC) is not a separate tax entity like a corporation; instead, it is what the IRS calls a "pass-through entity," like a partnership or sole proprietorship. All of the profits and losses of the LLC "pass through" the business to the LLC owners (called members), who report this information on their personal tax returns. The LLC itself does not pay federal income taxes, but some states impose an annual tax on LLCs.

Since I am an LLC single-owner, the IRS treats one-member LLCs as sole proprietorships for tax purposes. This means that the LLC itself does not pay taxes and does not have to file a return with the IRS. However, as the sole owner of my LLC, I must report all profits (or losses) of the LLC on Schedule C and submit it with my 1040 tax return. I will be sure to take notes during the income tax session and blog about the results here.

I also followed directions my accountant gave me to stay organized: Keep paperwork separated into three large envelopes to sort expenses and receipts, income and documents needed to file taxes, such as mortgage statements, mileage reports, etc.I think this process will be easier in 2009 since I started using Quicken as a personal finance program, plus I don't have nearly as many expenses now as I did when I was starting the business buying equipment and paying for classes.

Photo credit

Some of the expenses to consider are according to are:

Advertising – this includes business cards and web-marketing
Insurance – for life, property & casualty, or business insurance. Do not include health insurance under this category.
Other interest – credit card or loan interest, such as interest paid on your computer loan.
Legal and professional services – such as fees your accountant will charge
Office expense – anything other than routine supplies.
Rent or lease other business property – rent paid on a writer's studio, for example
Repairs and maintenance – repairing your computer, for example
Supplies – routine office supplies like paper, toner, pens, pencils, notepads, etc.
Travel – the cost of traveling to a convention, meeting, or business trip
Meals and entertainment – the cost of business meals, but be careful not to go overboard
Utilities –electricity, gas
Other expenses – such as Dues & Subscriptions, Web development, and Business telephone expenses.

I have also spent money on educational and resource books for my craft, a website, high-speed Internet connection, a computer, various software programs, and maintaining a small home office where I do my editing and photo processing. Then there are all the magazines I've subscribed too, including Professional Photographer, Layers and Photoshop User. Whew, I'm tired just thinking about it. I guess that's why my Tax Guy gets the big bucks!


Jesika said...

Me being a 1st year student,is very much unaware of this tax and its related details. These informations helps me to know little on tax but like to know more on it,can you post more blogs with more informations on tax?

Sheba Wheeler said...

Hello Jesika, thanks for commenting on my blog. Since this post ran, I have written a few others related to income tax returns, so make sure to check them out. I am not an expert for sure, but I am learning just as you. If you have any questions, I would suggest you ask your CPA for help because laws and practices can be different based on where you live and work.

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