Tax Tips for Independent Contractors
by Mark Van Benschoten, CPA
The key to filing complete income tax returns is organization. In addition to identifying sources of income reported on form 1099-MISC, permanent books or records should be kept which show gross income, deductions and credits. Complete records should be supported by sales slips, invoices, deposit slips, receipts, canceled checks, and financial statements. Adequate documentation, such as deposit slips with the source noted and cancelled checks matched to invoices or receipts, is an integral part of complete records. All records supporting income and business expenses should be kept for at least the later of three years from the date the tax return is due or the date filed.
Allowable Business Expenses
Some of the allowable business expenses reportable on Form 1040 Schedule C include supplies or signs, advertising, automobile expenses, parking fees and tolls, commissions and fees, employee benefit programs, proprietor’s health insurance, other insurance, legal and professional fees, office expense, vehicle and machinery rent, repairs and maintenance, taxes, licenses, travel, meals and entertainment, utilities and wages paid to others. Although documentation, such as invoices, is required for all business expenses, some business expenses require additional consideration and documentation.
Computer used for business
A computer used exclusively for business purposes can also generate an allowable business expense. Documentation, such as a receipt, will be needed to support the date of acquisition and the cost. The computer is considered listed property depreciated over a period of five years. The depreciation expense becomes an allowable business expense.
Automobile Expenses
For automobile expenses, two different methods can be used to determine the allowable business expense. One method is the actual cost method in which the business-use percentage multiplied by the actual cost of running the vehicle is considered an allowable business expense. When this method is used, documentation is needed to support gasoline, oil, repairs, insurance and taxes. Information to support the date the vehicle was placed in service is also required. If the automobile is leased, the fair market value of the leased vehicle will need to be noted. The second method is the standard mileage method. Under this method, a standard mileage rate, which is 34.5 cents per business mile for 2001 and 36.5 cents per business mile for 2002, is used to calculate the deduction. This rate includes all vehicle costs except business parking and tolls, the business percentage of interest paid on a vehicle loan, and the business percentage of personal property taxes paid on the vehicle. No matter what method is used, a log supporting the business miles of the vehicle is required to calculate the business use of the vehicle. Consideration is also given to whether or not another vehicle is available for use during off duty hours and for personal use.
Working from home
For individuals that work from home, mortgage interest or rent attributed to the space used could be deductible, but the space must be exclusively used as an office. If there is a crib or other non-business type items in the room, the expenses related to the room could be disallowed. To determine the portion of mortgage interest, rent, and other expenses allowable as a business expense, the square footage of the home used exclusively for business is compared to the total square footage of the home. The square footage of the business space should be determined by measuring it. Other expenses that could be deductible include real estates taxes, insurance, utilities, and repairs and maintenance made to the specific room used for business.
Travel, meals, etc.
Travel, meals, and entertainment expense documentation is required to include more than the date, time, location, and amount of the expense. The nature of the business transacted and the names of those in attendance, for meals and entertainment, should be documented on the receipt. A charge on a credit card statement is not considered adequate documentation and could be disallowed.
Business communication
For telephones, cellular phones, and pagers used in a business, additional consideration is needed to determine whether or not the expense is allowable. If business is transacted from the home, a separate telephone line should be used for business calls. When a second line is not utilized, a detailed statement with the business calls noted will be needed to support the expense. Cellular phones and pagers not used exclusively for business will also need to be supported with detailed invoices from the service provider and the business portion of the expenses noted.
Other tax savings tips
Some additional tips for saving taxes exist. Consider contributing to a SEP, SIMPLE, or Keogh instead of an IRA to increase the deductible contribution amount. Donate money to charities in exchange for advertisement in order to use the contribution as a business deduction. Conduct some business while on vacation and turn nondeductible vacation expenses into deductible business travel expenses.
In conclusion, keeping complete records and documentation can assist in maximizing your allowable business expenses. This is an overview of business expenses available on Form 1040 Schedule C for independent contractors and other self-employed individuals. You should discuss tax deductions with your personal tax advisor.
