Don’t get too excited. It’s not a huge tax break – but it’s not a bad one either. A bill that was rushed through recently passed in Congress, known as The Worker, Homeownership and Business Assistance Act of 2009, will allow businesses to apply losses retroactively.
The bill, which was tacked onto the homebuyer’s credit extension/expansion, would allow businesses which suffered losses in 2008 or 2009 to retroactively apply those losses to any five years prior to 2008. Known as a “net-operating loss carryback” or “NOL carryback”, those losses could previously only be carried back for two years. It’s an expansion of the NOL provisions under the American Recovery and Reinvestment Act (ARRA).
There are some restrictions. The one that’s been getting the most press bars businesses which have accepted TARP money from utilizing the expanded NOL carryback. That is, of course, so that Congress appears to be taking a hard-line against those businesses (all while allowing them to engage in the same kinds of risky behaviors as before).
The expansion is estimated to cost just over $10 billion over 10 years. The homebuyer’s credit is estimated to cost about $10 billion over 10 months.
Is it just me, or does this feel very “Old MacDonald” all of the sudden?
Here, $10 billion, there $10 billion, everywhere $10 billion…
Following up on my earlier post about the IRS taxation of cell phones, I’m curious to know what the average cell phone bill is for my readers. The cost of the phone service will be a consideration for purposes of taxation – I’m guessing the cost of the phone will be included, as well.
JD Powers claims that this amount is about $77/month. How accurate is that? Take the poll!
I previously blogged how to cut your 2008 individual income tax bill. I could hear the comments as I was writing: what about my business? Well, never fear! Following are some last minute suggestions to help save on your 2008 tax bill.
But first, a word of caution: Just as with individual tax considerations, there are a lot of phase-outs, caps and other restrictions that may apply for businesses. This is further complicated by the structure of your business – are you a sole proprietor? LLC? Partnership? S corporation? C corporation? There are significant differences in tax structure that will limit (or expand) your tax-trimming options.
The best course of action is to always check with your tax professional for more information.
- Pay your outstanding bills. Business expenses paid for calendar year taxpayers by the end of the calendar year are deductible. So pay this week instead of the next. This includes utility expenses, rental expenses and other accounts payable.
- Don’t be an aggressive bill collector – this week. If you can wait a couple of days before seeking payment on receivables, do. This doesn’t mean that checks which you’ve already received can be deferred. It can’t. But if you can wait to be paid in January, you won’t have to report that income until 2010.
- Buy a new desk – or other office furniture. In 2008, you may be able to deduct 100% of expenses for furniture instead of depreciating it.
- Pick up those new tech toys you’ve been ogling. Suggestions include the iPhone, Blackberry, Fujitsu scanners and my personal favorite I’ve yet to buy: the new MacBook. Tech toys can make your work life more productive. And you can save at tax time to boot!
- Pay your January rent. See tip #1.
- Order new tax and accounting software. You’re going to use it in a few months, why not pay for it now and deduct the cost for 2008?
- Reorder business cards and letterhead. It’s deductible. You know you’ll need it. And if you’ve ordered before, you already know how much it costs. Why not pay for it when you order?
- Buy a new car for the business. You can write off a new car – either as a deduction or depreciated expense – for 2008.
- Throw a year end party. What a great perk! It’s a wonderful morale booster for staff. And it’s tax deductible. A true win-win!
- Pay professional dues – such as license and bar dues – now. Most professional organizations start sending out reminders now. Take advantage of them.
- Sign up for that advertising service (Yellow Pages, etc.) you’ve been putting off. Advertising related to your business is deductible as a miscellaneous expense.
- Improve your web site. Your web site is your calling card. It’s the first impression that many folks have of your business. Does it send the message that you want? Updating or improving your site is deductible.
- Pay year end bonuses now. Don’t wait until the first week of January. Cut the checks now.
- Donate to charity. Cash, check or credit card payments made by the end of the year to a qualified charitable organization may result in a charitably deduction. Get a receipt!
- Buy calendars and calendaring systems now. Sure, you can get great deals by buying in 2009 – but think of how much more you can save in 2008 by claiming it as a tax break?
- Upgrade your electronic phone directory or have other maintenance work done.Office improvements are deductible. If there’s something that’s been bugging you – make the call today, not next week.
- Buy plane or rail tickets now. If you know you have a trip coming up – a planned conference or client visit, for example – why not book it now?
- Buy pre-paid Wi-Fi cards. If you travel often and find yourself scrambling for connectivity, why not be prepared? You can buy pre-paid Wi-Fi cards from T-Mobile and other providers in increments of $10 and $20 and pay now rather than later (and thus, get the deduction now). Most reputable providers do not have cards that expire for at least a year.
- Sign up for “coffee of the month” or other delivery services. I love these kinds of services. As a small business owner, I often find that I forget to order the little things that matter in an office, like coffee. If you pay upfront for a quarter or year of deliveries, you’re all set. No more last minute rushing about – and you get the tax deduction.
- Prepay postage. We swear by our Dymo postage printer. Unlike annoying services like Pitney Bowes (don’t get me started), you can frontload your Dymo/Endicia account with one click of the mouse. At our office, postage is one of our most significant expenses. Charging up the postage account is cost efficient and there’s no stamps to store.
- Prepay for professional services that bill on a project basis. Many professional service providers – from lawyers to IT consultants to PR firms – will pitch based on a set fee. Pay as much as you can upfront to maximize your 2008 deduction. Be careful and read the small print.
- Order office supplies. Pens and paper don’t go bad. Assuming you have the storage space, why not make an extra order? An added bonus? Most office supply companies are running great specials right now.
- Hire a tax professional. This is simply one of the best investments that you can make. Yeah, it sounds self-serving, but I’m totally serious. It may not save you money immediately – but it will in the long run.
Of course, don’t let the tax tail wag the dog. Only spend money that you have. Don’t throw money that you don’t have away just to save on taxes. Be smart and don’t overextend your business.
And I’m sure there are lots of other good tips out there. Tell us how you save in your small business!
Like any good lawyer, I need to add a disclaimer: Unfortunately, it is impossible to give comprehensive tax advice over the internet, no matter how well researched or written. Before relying on any information given on this site, contact a tax professional to discuss your particular situation.
At my BlogHer session on blogging and tax, I raised the issue of hobby loss rules. This is an incredibly important matter not only for bloggers but others who work in small or home businesses. Just ask Brenda Konchar.
Brenda Konchar, a Mary Kay Cosmetics representative, reported her Mary Kay activity as business income; the IRS disagreed. Konchar took her case to the Tax Court and lost.
So what? What does it mean?
Here’s the scoop. If you earn income in the pursuit of a hobby, you can offset the income with deductions. You cannot claim deductions that exceed your income – there’s no loss for a hobby.
However, if you earn income in the pursuit of a business, you can not only offset the income with deductions, you can carry any losses forward. This can be huge for new businesses.
Brenda Konchar had deductions which exceeded her income and reported net business losses for the years 1996 through 1998. The IRS disallowed the losses, claiming that Konchar’s activities constituted a hobby. As a backup, the IRS claimed that even if she were operating a business, her expenses were not properly business expenses.
The Regs offer a number of factors to consider when determining whether a taxpayer is engaging in a business or a hobby.
The most important test is the profit motive. The IRS considers that you are engaging in a business when it is your intention to make money. You should be able to demonstrate that you have made a profit for at least three of the last five tax years.
Of course, it isn’t a given that all legitimate businesses will make a profit. So the IRS gives you another bite at the apple. They consider a number of factors, including:
1, Whether you run your business as a business. Sounds simple, right? This includes keeping good records and promoting your business.
2, How much time and effort you expend in the activity. It should go without saying that only spending minimal time and effort on your business sends a message that you’re not so serious about it.
3, Your level of expertise. How much do you know about your business?
4, Your track record. What kind of success or failure have you had in other similar endeavors?
5, Your financial picture. A bona fide business is generally something that a taxpayer relies upon to make a living.
6, Whether you continue to change your business practices in order to make money. When things aren’t going so well in business, business owners switch gears. As your financial picture changes, your business practices should, too.
7, The nature of your losses. All start up businesses expect a few bumps at the beginning. However, continuous losses that may be within your control to change would not be acceptable in a bona fide business.
8, Whether you expect the value of your business to grow. This includes accumulating appreciating assets.
9, How much fun you’re having. Oh yeah, the IRS looks at whether you enjoy yourself. There’s nothing wrong with liking what you do – but if you like it to the exclusion of working at it, you’re going to raise some eyebrows.
So where did Brenda Konchar go wrong? She didn’t operate her Mary Kay activities like a business. She didn’t effectively promote the business – she didn’t even have business cards – and most of her customers were family and friends. She mixed her business assets with her personal assets. She lost money year after year and made no substantial steps to make changes. As a result, her business losses were disallowed.
Here’s the lesson to be learned: if you’re going to operate a business, treat it like a business.
But there’s another lesson to be learned, too. Every endeavor doesn’t have to be a business. If you enjoy selling Tupperware or Mary Kay to friends and family, if you like blogging because you just like putting your thoughts “out there”, if you sell an occasional craft item simply because it feels good, keep on doing things the way you’re doing them. While it’s important to treat a real business like a business, you don’t have to ramp up your hobby activities if your heart isn’t in it.
Remember, the tax tail shouldn’t wag the dog. Choose your path and the tax consequences will follow, not the other way around.
For an interesting perspective on the franchise side of Mary Kay Cosmetics, check out Sean’s series.
