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This Week in the Tax Office…
Did you open an LLC or start a side hustle in the last few years? It’s tax time , do you know
what you should be saving to bring your tax preparer or accountant?
It seems as though A Lot of people were starting side hustles during the years of the pandemic. Now 3 years in, those who became serious about a side business are facing new tax implications.
A side business can be rewarding, but depending on how you approached setting up your business it can also be costing you a lot of money at tax time.
If you opened an LLC and you live in California for instance, you have to pay $800 every year, even if you lost money! For those people who were trying to find a new way to lower their tax bill this seems to have had quite the opposite effect they were looking for. If you are not making any money and you opened an LLC you should consider dissolution. (closing the LLC) This doesn’t mean you have to stop the activity of having a business. Chances are you were just not ready for that next step of having a corporation. It also cost more money for tax preparation when you have a corporation.
A side business can easily be on your tax return without a corporate status on a Form Schedule C. (There are some caveats here: for instance taking a loss over more than 3 years at the same business could be considered a hobby business by the IRS. There are other scenarios to be aware of and you should do your due diligence as you would with any company you are starting.)
Another problem my own clients are having is knowing what to keep track of in order to actually get those deductions. The most simple solution is to google or ask your tax preparer to give you a list of deductions based on what you are doing for a side business. If you are driving for Uber you are not going to have all the same deductions as a mobile pet groomer, although you may share some common deductions such as a cell phone or mileage.
Now that you have figured out which deductions apply to your business, the most important thing is record keeping.
Record keeping is IRS currency.
I use a ziplock bag on my desk at home and put every receipt I get from buying supplies in that one place. (Receipts seem to have disappearing ink, so if this is the main part of your expenses I would also recommend snapping a pic of these receipts with your phone and saving them in a digital folder.) If I order online I screen shot the confirmation and save it in my photos. Those photos should then go into a digital folder marked with a year and saved preferably to the cloud. (This is because you can lose your own data pretty easily, I have learned from experience.)
If you drive you should keep a mileage log, and as with most things there’s an App for that! If you are not using a digital app then I suggest a small calendar or date book. That way it’s less writing. Write down where you start and where you stop, every stop. You can write down your mileage on your odometer (starting mileage and the new mileage with each stop) or you can calculate the totals later using a map function. You should also get regular servicing on your vehicle because this creates another record of how your mileage changes.
The reason for all of this record keeping is so that you are prepared IF the IRS ever asks you to prove what you are saying. I say this because unless you are paying a bookkeeper and/an accountant to keep track and tally all of your expenses it is your responsibility to keep track, categorize, and add up totals of you income and deductions. This is what you present to your tax preparer or have handy when doing your own. (It is also your responsibility to prove all of these expenses if necessary, it is not your tax preparer, accountant, or bookkeeper’s responsibility for your tax return. Ultimately you are the one who is responsible for the accuracy of your tax return and paying the taxes!)
Tip: If you are doing your own taxes, I suggest printing out a blank Schedule C or having a copy of last years Schedule C from your tax return if you had a business. This is going to give you a breakdown of the categories that are available so you can sort your expenses accordingly.
A tax preparer will know what categories the expenses go into, although they may charge you an extra fee.
This is of course just some of the information you should know, and as I tell everyone, there is no way to know all of the tax laws! You only need to know what applies to you and your tax situation. Reach out if you have a subject you'd like to see in the next This Week in the Tax Office blog!
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A Quick Guide to Tax Season
These are important dates to remember.
For Individuals; (just a quick fyi: this means family too, individual is as opposed to a business return) April 15 of every year is considered the Last filing date. Generally you can think of February 1 of every year as the First filing date. These dates aren’t set in stone anymore. We have added holidays, and if there is a pandemic, (who would’ve thought, huh?) and now that the IRS (Internal Revenue Service) does almost all tax return filings electronically, the start date is when they are ready for that influx of electronic information. So the beginning and ending dates may change. That’s why it’s a good rule of thumb to use February 1 as the start and always April 15 as the final day to file your individual tax return.
Individual Extensions have to be filed by April 15.
October 15 is the last day to file your individual tax return if you filed an extension.
An extension is an extension to file not to pay! This means you should only file an extension if you know you get a refund. You can file an extension if you know that you will owe but you have to make a good faith payment with the extension in the amount you think you will owe.
Here is a tip; if you know you owe every year you should file your taxes on the first day so you have time to gather the money.
For Corporations (this is not a side business, this is a separate entity that has filed titles of incorporation) the first Filing Date is going to be the same as an individual return, however the last Filing Date is March 15 and the last day to file a corporate return with an extension is September 15.
These dates won’t apply to most individuals. Just knowing these dates and having them set in stone in your mind will relieve some of the stress with taxes. These dates were common knowledge, but somehow they have become unknown in our younger developing society. Let’s take control and get to know our own tax returns so we can make the best decisions for ourselves and our families.
© This Week in the Tax Office
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