Our guest speaker was Harold Shapiro, CPA, whose company, QuickSource, specializes in helping small businesses set up and maintain their books, do their taxes, and so on.

Note: Some of the figures cited in these notes are approximates that represent the speaker's best recollection at the time; we recommend verifying them with your accountant or the IRS.

What's deductible

The deduction must be “ordinary, necessary, not lavish or extravagant.” Take subscriptions. You may deduct anything that contributes directly to your earning a living. If you take only the Seattle Times, that probably wouldn't be deductible, since most people take a daily paper. If, however, you take lots of papers and magazines, and you can argue they are part of doing your job, then you can probably deduct them.  

The most important thing with deductions is “records, records, records.” Keep good records, and keep them all the way through the year.  Don’t wait until the end of the year – write everything down at the time.

Travel expenses

If you travel for your work, you can claim a per diem expense rather than keeping track of your actual expenses and keeping all your receipts (lodging, meals, etc.). You can claim something like $135/day for an expensive city (e.g., San Francisco) and something like $85/day for less expensive ones.  The per diem covers lodging and meals; cabs and other transportation costs would be a separate expense. You do, however, have to be able to prove you traveled to said location.  Keep a diary or log, such as “on 1/12/99, met with Rose de Viterbo to discuss writing an article on healing miracles.”

Mr. Shapiro did not think travel as "background" or "to help you present yourself as a well-educated person" would be deductible.

What if you take a trip and spend three days working and two days visiting friends?

In the United States, Canada and Mexico, you can deduct the entire cost of the travel to get there (plane, car, or train fare). If you are traveling outside these three locations, you can deduct only 60% of the airfare. In either case, with respect to other expenses (lodging, meals, etc.), you can deduct those for the days on which you actually worked (not on the days you saw friends). Again, keep records at the time.

Proving you're a business

Mr. Shapiro discussed the necessity of showing you are a serious businessperson. Some things that help show this include having a business license and showing a profit. If you show a loss for several years running, your expenses may no longer be deductible because the IRS will consider what you are doing to be a hobby, not a business. Another way to show you are serious is to have a separate bank account for your business.

Home office deduction

If you rent, whatever percentage of the space you use solely for business, you can deduct that same percentage of your rent, utilities, repairs, e.g., if you have 1,000 square feet and use 20% for your home office, then you can deduct 20% of all your apartment expenses. Mr. Shapiro said that while some feel that taking the home office deduction is a red flag for an audit, he does not agree. None of his clients who take that deduction have ever been audited.

However, if you own your home, the home office deduction may not be worth the trouble or the relatively small amount of money you save each year (Mr. Shapiro estimated $420/year on an average good-sized house), because when you sell the house, your home office is considered business property, and the profit on it turns into income that you will have to pay taxes on. Another limitation for the homeowner: If your business operates at a loss, you can’t take the home office deduction.

Pension plans

There are several kinds: basic IRA, Roth IRA, SEP IRA, and the Keogh plan. With a Basic IRA or a Roth IRA, you can contribute a maximum of $2,000 per year per individual ($4,000 a year for a married couple). The SEP IRA and Keogh plan are different. With the SEP, you can save up to 13% of your profit, up to $30,000/year; and you must have set up the account by December 31. Roth and Basic IRAs can be set up as late as April 15, or later if you file an extension.

Quarterly estimated taxes

If you make below a certain income, you don’t have to pay quarterly estimated taxes to the IRS, but that threshold is pretty low (call Mr. Shapiro if you want to know what it is; he couldn’t recall it for sure at the meeting; it might be as low as $400/year). The IRS has a worksheet for figuring out what your tax bill will be next year. Basically, to avoid penalties, you have to pay either 100% of the tax you owed last year, or 90% of what your actual tax bill turns out to be in the current year. The IRS expects you to pay ¼ of that sum every three months in four equal payments. If you can't pay the same amount each time because your income goes up and down, you have to explain that to the IRS (there's a form to fill out).

If you have a "regular job" in addition to freelancing, you won't have to pay estimated taxes if you have enough withheld from your regular salary.

One member offered a suggestion on how to make sure you will have enough money to cover the estimated tax payment each quarter. She has set up a separate bank account and puts 28% of every payment she receives into that account.

Discussion of penalties for not paying your quarterly/yearly taxes on time. For missing a yearly tax deadline, the penalty is 5%/month up to 25%. If you miss a quarterly payment, the penalty is ¾%.

Incorporation

Discussion of different ways to do business: as an LLC, a corporation, or a sole proprietor (which is what most of us are). At least one of our members has incorporated.

1)     LLC stands for limited liability company. It establishes a wall between your business and your personal assets; that is, if you are sued by a client, you can’t have your house or personal property taken. There is an individual LLC and a partnership LLC. The benefit of the partnership LLC is that income can be allocated to one partner; money taken out and put in is not a taxable event.

2)     A corporation has the same limited liability, but if you take your money out and put it in, it’s a taxable event.

3)     A sole proprietor has no limited liability, but you can put your money in and take it out and it’s not a taxable transaction.

Discussion of S corporations vs. C corporations that was frankly beyond the comprehension of your scribe.

It doesn’t cost much to incorporate: just $175 for the filing fee and long, long, long form. If you have a lawyer do it, it will cost $400 and up.

Health insurance

You can deduct 60% of your health insurance costs.

Depreciation

You can deduct up to $19,500 worth of capital expenses the first year (without bothering with depreciation).

If you'd rather spread it out, computers may be depreciated over five years. Cars can be depreciated over seven years.

If you buy the item by October 1, you can claim a half-year deduction. 

If the object cost $200 or less (e.g., a printer), Mr. Shapiro recommended just treating it as an ordinary business expense.

If your computer is used by others (say, your child plays Jumpstart Baby), you should reduce the deduction you claim by the percentage the child uses the computer. That is, if your child uses the computer 10% of the time, you can claim only 90%.

Auto expenses

Commuting from your home to an office outside the home is not deductible, but if you have a home office, then all your business trips are a business expense. You can track all expenses individually (gas, insurance, repairs, etc.) or just claim 32.5 cents/mile. Note that, however you do it, you must do it that way for the life of your car. 

If you are a corporation, your corporation can own the car and every penny of the expenses for the car will be deductible.

You can deduct a bus pass if it's used for business.

State B&O taxes

First you need to file for a Washington state business license. Then, depending on your income, the state will send you requests to file monthly, quarterly or yearly tax returns. Our category is "Services." If you don’t make much ($15,000? $24,000?) you won’t have to pay any taxes, but you’ll have to file.

Mr. Shapiro noted that the state and the IRS do check a certain (unknown) number of returns to compare the figures given for income and make sure they're the same.

City of Seattle taxes

First you need to file for a City of Seattle business license. Then you'll get a form once a year on which you report your income. If you gross $50,000 or less, you won't have to pay any taxes. However, if you make $50,001, then you'll owe taxes on ALL $50,001, not just the dollar that put you over.

Mr. Shapiro said Guild members with follow-up questions are welcome to call him at no charge at his office in Bellevue: (425) 981-5022.

—Notes taken by Laura Dushkes with a few additions from Sherri Schultz

See more meeting notes