1. Most of us keep track of business lunches like this. What portion is deductible? Is there anything we need to do except write the name of the person we were with and topic of conversation?
IRS Publication 17 (2013)
You can deduct 50% of business-related meal and entertainment expenses for entertaining a client, customer, or employee. This can include taxes and tips, cover charges, rent for a space to host a dinner, and amounts paid for parking at a sports arena.
You must keep records that show:
- Cost of each separate expense
- Date of expense
- Name and address of location
- The business purpose or business benefit gained or expected to be gained.
2. When I drive to a business meeting or for-business function, can I deduct my mileage?
IRS Publication 17 (2013)
If you have no regular place of business and normally work within a metropolitan area, you can deduct mileage for:
- Transportation to work sites outside of that metropolitan area.
- Transportation expenses from leaving your first contact of the day to arriving at your last contact of the day.
If you have a home office, you can deduct mileage for:
- Traveling from your home office to a client or customers place of business for a meeting.
- Traveling from your home office to another temporary work location
If you work at a regular place of business, you can deduct mileage for:
- Getting from your workplace to another workplace
- Visiting clients or customers
- Going to a business meeting away from your regular work place
- Going from home to a temporary workplace
You can also deduct parking fees incurred at any of these locations you are traveling to.
3. Is it more advantageous to deduct mileage or a percentage for wear and tear on the car?
IRS Publication 17 (2013), Tax Desk Analysis ¶293,006, Tax Desk Analysis ¶293,008
The best way to determine which is best is to calculate each deduction and take the higher of the two. Below is a formula to calculate each one.
Standard Mileage (requires documentation of miles traveled for business):
(number of business miles traveled during the year) x .565 = $$deduction
Actual Expense (requires documentation of expense):
[(number of business miles traveled during the year)/(total miles traveled during the year)] x (total of car expenses for the year)= $deduction
A simplified comparison would be to divide your total car expenses for the year by your total miles traveled. If this number is less than $0.565 per mile, then it would be better to use the Standard Mileage. If this number is greater than $0.565 per mile, it would be better to use the Actual Expenses.
Expenses that can be included in the actual expense calculation are:
- Lease payments
- Registration fees
- Garage rent
- Possibly interest on your car loan if you are self-employed (IRS Publication 535, Chapter 4)
**Important Note: You can only elect to take the standard mileage rate if you took it in the first year that you claimed a deduction for the vehicle.
4. How much of my travel expenses can I deduct when traveling for work?
IRS Publication 17 (2013)
You are considered to be traveling from home if:
- Your duties require you to be away from the general area of your tax home for longer than an ordinary day’s work and
- You need to sleep or rest to meet the demands of your work while away
The following items are considered travel expenses:
- Transportation from your home to your business destination and back
- Transportation between airport and hotel/lodging
- Transportation between hotel/lodging and work location or business meeting places
- Baggage fees
- Shipping fees for work materials
- Business portion of car use or rental car costs
- Meals (50%)
- Dry cleaning and laundry
- Business calls, faxes, or other communications
- Tips incurred related to any of these expenses
If you made a trip primarily for business reasons and added personal side trips or activities, you cannot include costs incurred by these activities.
If the trip was primarily personal and included business activities, you can only deduct expenses directly related to the business. This does not include travel, lodging, meals, etc.
5. If you are self-employed, and you participate in a press trip where expenses are paid, what is the tax treatment for the expenses and for payment received for services?
- If expenses for a business trip are paid for by another party, these items will not be claimed as income or expenses by the contractor.
- If additional payment was received for the assignment, this will be claimed as income by the contractor.
- If the trip was not paid for, the contractor would claim the income from the assignment and the expenses for the trip.
6. If I receive a gift from a client, editor, colleague, etc., do I need to declare its value as income?
IRS Publication 950
Any cash or non-cash transfers from employers to employees are always considered compensation and thus must be included in income. As a result, if you’re a W-2 employee of a magazine, and your editor owns the magazine, any gift given to you by the editor must be included in your income.
Outside of the employee-employer relationship, the important factor in determining whether a gift should be included in income involves whether the gift was actually provided in exchange for services. For example, if you write an article for your colleague’s side-project blog for ostensibly no payment, but he buys you a gift basket for your efforts, the value of your gift basket is includible in your income. However, if you build a relationship with a client through various projects and he buys you a Christmas gift as a gesture unrelated to those projects, that gift is not includible in your income.
One good way to help avoid the IRS recharacterizing true gifts that were not provided in exchange for services as income is to formally invoice your clients whenever possible.
7. Can freelancers receive a deduction for services rendered for a nonprofit? If so, what is the deduction (i.e. How do they record this?)?
Tax Desk Analysis ¶332, 300
No, services performed for charitable purposes are not deductible.
Contributions of the rights to someone else’s services to a qualified non-profit organization can be deductible by the individual who paid for the services.
8. In 2013, I donated about 800 paperback and hardback copies of two books I have authored to a bona fide non-profit, the American Association for the Advancement of Science, which will use them in science education. I could do this because the publisher reverted all rights to me at my request so I can reissue these as self-published e-books, and generously gave me all their remaining warehoused copies for only the cost of shipping.
These are all brand-new, never used copies, with cover prices ranging from about $18 to $28. I assume that it would not fly for me to claim the full cover price or the price with any Amazon discount to calculate the value of the gift to take as a tax deduction. On the other hand, the books should be worth more as a gift than used copies, such as books from someone’s personal library.
Can Trevor offer me some guidelines in calculating a value of the gift that would be reasonable as an IRS deduction?
IRS Publication 526
You can only claim a deduction for the lesser of your basis in the property or the fair market value of the property, which is generally the amount you paid for the property. In this case, it seems that the basis would be the shipping cost paid for the books.
You must have a receipt for any contribution below $500. For a contribution between $500 and $5,000, you must have a written acknowledgement from the organization. For a donation over $5,000, you must have a qualified appraisal.
9. I’m interested in what costs associated with relocation may or may not be tax deductible, especially when you are a freelancer and work from a home office.
Internal Revenue Code §217, IRS Publication 521
To deduct moving expenses as a self-employed individual, you must meet 3 requirements:
- Move must have incurred within 1 year of the date you first begin your new work
- Your new work location must be 50 miles further from your previous home than your previous work location. In the case of a self-employed person working from home, this means the move must be at least 50 miles.
- You must work full time for at least 39 weeks during the first 12 months after your move and for at least 78 weeks during the first 24 months after your move.
You can deduct the cost of:
- Moving your household goods and personal effects, including in transit storage expenses
- Traveling expenses (including lodging but not meals) to new location.
You can report these expenses on a Form 3903.
10. If I am self-employed, and my family has one credit card that is also used for the business, can I still deduct business expenses that are incurred on the card?
This is not a problem as long as you can show that the expense was directly related to the business.
We would recommend avoiding this practice and maintain separate checking and credit card accounts for the business for ease of record-keeping.
11. Recommendation on maximizing SEP contributions?
Tax Desk Analysis ¶282,003, Tax Desk Analysis ¶282,307
The maximum allowable contribution to your SEP depends upon your business structure.
If you file a Schedule C, your maximum contribution is 20% of your net earnings from self-employment (before the SEP deduction itself) up to $51,000 (for 2013), which is equal to your net profit as reported on the Schedule C minus the deduction you take on Page 1 of your tax return for half of the self-employment tax that you pay.
If you file as an S corporation, your maximum contribution is 25% of the amount reported on Box 1 of your W-2 as wages up to $51,000 (for 2013), regardless of the amount that the S corporation earned in net income. For example, if your S corporation earns $200,000 in net income for the year, but you only paid yourself a W-2 salary of $10,000, your maximum SEP deduction for the year is only $2,500.
The most important tool in maximizing your SEP contribution is knowing that you can contribute the amount for a tax year at any point until the due date of the tax return for that year, including extensions. For example, you can make contributions to your SEP for 2013 up until March 15, 2014 (as an S corp) or April 15, 2014 (as a Schedule C filer) without an extension, and until September 15, 2014 (as an S corp) or October 15, 2014 (as a Schedule C filer) if an extension is properly filed.
These deadlines apply regardless of when the tax return is actually filed – so if you file for an extension, even if you file your return in February 2014 reporting a 2013 SEP contribution, you don’t actually need to make that contribution until September 2013 or October 2013.
It should also be noted that these rules only apply to SEP IRAs, and only to SEP IRAs when used alone – individual IRAs, 401(k)s, and other retirement plans have different limits and deadlines. Moreover, if you participate in multiple retirement plans (SEP IRA, 401(k), etc.) your maximum contribution to each plan may decrease depending upon your contributions to the other plans.
 To qualify as a home office, you must use part of your home regularly and exclusively as your principal place of business, as a place to meet or deal with clients in connection with your business, or have a separate structure for your business.