Tax Time Checklist For the Self-Employed

March 21st, 2010

It’s tax time for many small business owners and I wanted to post a list of tax items that every self-employed taxpayer needs to review prior to filing their taxes. Before I begin, I have to state that this post is not meant to serve as professional tax advice and that working with a professional tax preparer is still the recommended method for most people. However, it never hurts to go into a meeting with your tax preparer by being, well, prepared. Without further ado, here is the checklist:

  • Make sure you put together a log for business use of mileage using your personal vehicle. If you do a lot of travel for business, this is a great opportunity to reduce your taxes. Also, keep track of your tolls when you travelled for business meetings. These can really add up if you do a lot of driving. It might be helpful to use software that keeps a record of your business mileage and tolls, such as Quicken Home and Business.
  • Take a look at the getting a home office deduction by reading IRS Publication 587. There are opportunities to claim a home office deduction even if you have a satellite office, as long as you conduct most of your administrative duties at the home office location. Please read Publication 587 carefully to see what you qualify for.
  • If you travel out of town for business, you may know that you can deduct 50% of the actual cost of your meals while you are out of town. However, there is a less well-known option to deduct your meals using Per Diem figures based on the city you are traveling to. Instead of having to keep receipts of all your meals, you can simply go to the GSA Per Diem Rate website and look up the rates for the city you are staying in. Once you have those figures, you can use them to calculate your total meal deduction. You still can only deduct 50% of the per diem amount. However, this may be more useful if you are not a big spender on meals. The GSA rates can be generous at times and it is possible to save a lot more in taxes and not worry about keeping records of every meal you ate if you use the Per Diem method. Tax professional Wayne Davies breaks it down very nicely in this article.
  • If you use your personal cell phone, home telephone or home internet for business use on a part-time basis, you may be able to deduct a portion of your total phone. There is a lot of confusion around how exactly this can be done, so I strongly urge you to talk to a tax professional about how to go about doing this.
  • Most self-employed retirement plans do not let you make contributions after the end of the tax year. However, if you have a SEP IRA as your retirement plan, you have until April 15th of this year to make a contribution to your SEP IRA for tax year 2009. This could be a great opportunity to reduce your tax liability for tax year 2009 and to add to your retirement nest egg at the same time. For more on SEP IRAs and other company retirement plans, take a look at IRS Publication 560.

Lastly, don’t forget to keep as detailed records as possible of all of your business expenses. The keys to keeping good records are:

  • Use a business credit card to make purchases for your business.
  • Use software such as Quicken Home and Business or Quickbooks to categorize and keep track of business expenses.
  • Save as many receipts as possible. It might be worth it to use a scanner to scan in any business receipts that are not electronic to begin with. This way, you never have to worry about losing them in the future.
  • Stay as paperless as possible to keep your records electronic as much as possible. This is not necessarily a tax-saving tip for this tax year, but it can really help your case for taking specific deductions if you were audited in the future. Using scanners and organizing your business expense documents properly can save you time, energy, and legal costs during an audit.

Tax time can sometimes be cause for anxiety for many small business owners. However, if you are resourceful and educate yourself on your ability to deduct the costs you incur in operating your business, you will be in excellent position to save on taxes and reduce your exposure to tax issues in the future.

  • Using software like Quicken Home and Business and

2010 – The Year of the Roth

January 20th, 2010

According to the Chinese Zodiac calendar, 2010 is the year of the Tiger. If there was ever such a thing as a personal finance zodiac, however, 2010 would definitely be the Year of the Roth. That’s because in 2010 there are new rules governing Roth IRA conversions that will enable high-income individuals to participate in a Roth IRA when they were not previousy allowed to do so. To learn about the basics of how a Roth IRA works, take a look at Investopedia’s Guide to Roth IRAs. So let’s take a look at what all the chatter is about and why 2010 is a special year for all of you fans of the Roth IRA.

The major rule change focuses on Roth IRA conversions. A Roth IRA conversion is done by taking a Traditional IRA and permanently turning it into a Roth IRA. When you do this, you will have to include the amount converted as income on your tax return. This means that you will pay taxes on the conversion amount at your highest tax bracket in the year you make the conversion. A Roth IRA is a great vehicle for many reasons. Unfortunately, many “high income” wage earners (as defined by the IRS) were not able to participate in the Roth IRA due to income limits.

In 2009 and in prior years, if you made over $100,000, regardless of whether your filing status was single or married filing jointly, you were not able to convert a Traditional IRA to a Roth IRA. On top of that, if you made over $120,000 (single) or $176,000 (married filing jointly) in 2009, you would not be able to make any new contributions to a Roth IRA either. In other words, those high income taxpayers would be shut out of the Roth game entirely. Then along came 2010, and the rules have changed.

Specifically, the income limit on Roth IRA conversions has been eliminated in 2010. This means that if you have a Traditional IRA or a previous employer’s old 401k plan sitting around, you can convert them to a Roth IRA. (Note: You must rollover your old 401k plan to a Traditional IRA before converting to a Roth IRA). Now you might say that, well, that’s great that I can convert existing traditional IRAs to Roth IRAs. But what about being able to contribute new funds to a Roth IRA? Unfortunately, the income limit still applies to new contributions, but that doesn’t mean you can’t work around it. Essentially, you can make a non-deductible IRA contribution to a Traditional IRA for the current tax year and then convert it to a Roth IRA the following tax year. Since most of you have until April 15th to file your taxes and make IRA contributions for the prior tax year, you can essentially make a prior-year non-deductible IRA contribution between January and April of this year and quickly turn around and convert your non-deductible IRA to a Roth IRA. In other words, now all of us can participate in a Roth IRA if that is something that works for us.

If all of that wasn’t enough to make 2010 the Year of the Roth, there is a one-time special for all of you Roth converters. The IRS, for 2010 only, will allow you to include 50% of the taxable portion of your 2010 conversion amount in 2011 and 50% in 2012. That means that if you convert $100,000 Traditional IRA to a Roth IRA in 2010, for example, you can exclude that conversion amount as part of your income in 2010, and include $50,000 of the conversion on your 2011 tax return and the remaining $50,000 on your 2012 tax return. In other words, you will not have to pay taxes on the conversion until 2012 (for tax year 2011) and 2013 (for tax year 2012). It’s as if you were getting an interest-free loan on the taxes for your conversion amount. This does not apply for conversions in future years, so step right up and get your Roth conversion today!

If you are asking yourself how you can determine if a Roth IRA is good for you, I suggest you contact a financial planner or a tax professional. I will be happy to cover the different situations that dictate whether a Roth is right for you in another post. Generally speaking, I think a Roth IRA is a great vehicle to save on taxes in retirement and should at least be looked into as part of your financial planning strategy. Comments are welcome and feel free to contact me with any questions you may have.

Malay Vasavda, CFP(R), MBA

Welcome To Malay Vasavda’s First Wealth Strategies Blog

January 18th, 2010

I am a Fee-Only Certified Financial Planner and the principal of Quantum Financial Management, a wealth management firm located in Chicago, IL. Iwill be posting blogs on this website on a regular basis covering a variety of topics regarding personal finance. We welcome your suggestions for areas to be covered in future posts. Suggestions can be emailed to info@quantumfinancial.com. Our first blog will discuss Roth IRA conversions and why there is so much discussion about them in the press recently. Comments are welcome.