- A large number of people each year are unpleasantly surprised to discover they are self-employed when their tax preparer asks them for "business expenses" related to the 1099 income they have to report. This is obviously a bad time to make such a discovery, since most of the expense receipts have not been kept throughout the year. The easiest way to know you are self-employed for tax purposes is to note whether your "employer" has withheld taxes from your paycheck. If no FICA or Medicare tax has been withheld, you are almost certainly self-employed.
- Keep receipts for all work-related expenses, even if you are not sure whether they are deductible. Also keep receipts for purchases made by credit card and attach them to the credit card statement when it is received: a $100 charge made at Office Depot could be for office supplies, depreciable equipment or candy. You'll need to properly categorize each expense at tax time. Write "paid by check #XXXX" on receipts that correspond to a check so that you won't accidentally take the deduction twice at tax time.
-
Most legitimate business expenses are deductible on the Schedule C you will use at tax time. If you need an item for business use, the IRS will allow it. The types of deductions most people get into trouble with are travel and entertainment expenses, which often are personal expenses camouflaged as business expenses. Travel to a legitimate business convention, meals and lodging while traveling, and taking someone out for dinner to try to win his business are all considered valid business expenses. Meeting your spouse for lunch or grabbing a burger as a matter of convenience are the types of deductions the IRS will disallow in an audit. A week in Hawaii or Rome without a valid business purpose is also likely to be frowned upon by the IRS.
All travel and entertainment expenses should have a written justification attached to the receipts, including travel dates, conferences attended and business purpose. Taking five minutes to do this immediately after returning home could save you thousands of dollars in disallowed expenses and penalties when you are audited two years later and can't remember the details. - Big-ticket items such as computer software or furniture and equipment with a useful life of more than one year may need to be deducted on Form 4562, Depreciation and Amortization. These are known as capital expenses. The IRS has established a useful life for each type of property, from farm equipment to automobiles. If you purchase a "five-year property" according to its lists, the IRS wants you to deduct a portion of that purchase on your tax returns over a five-year period. You may opt to use the provisions of IRS Code Section 179 to deduct the entire cost in the year of purchase by using the Section 179 Expense part of Form 4562. Download IRS Publications 334 and 535 for detailed information about what deductions are allowed and which forms you'll need to use to claim them.
