Beefing up Tax Deductions in a Questionable Economy

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Tax Information With A Mother's Touch

Published by Eva Rosenberg, MBA, EA

Beefing Up Tax Deductions
in a Questionable Economy
By: Eva Rosenberg, MBA, EA

So many of your friends are unemployed right now. Between the DotComBombs and 9-11, you can't be positive of your financial position six months from now. Let's face it, even if your clients don't cancel contracts, they are cutting back on any unnecessary expenses.

So, what's the easiest way to raise some quick money? Your tax return. This is the year to get it done early AND to get the refund you're not used to getting.

How are you going to accomplish this?

After all, the tax laws haven't changed significantly with respect to consultants and the self-employed. The big, new, beautiful R.E.L.I.E.F. Act in 2001 was all about families, marriage, estates and pensions. There were no business provisions, except the self-employed health insurance. It will be fully deductible in 2002 (See: U.S. Senate Committee Report, “R.E.L.I.E.F. Act”).

You already know that several years ago, IRS removed certain dues as marketing (business) deductions - things like country clubs, health clubs, etc.

First, I am going to reveal a little secret to you.

Just to be safe, before we go for those big deductions, you really want to know what to watch out for in the event of an audit. Did you know that IRS publishes the guidelines that they give to their auditors. And IRS has developed some in-depth guidelines for various industries.

I am going to give you access to the rule book most relevant to your industry

Business Consultants

Now, forgetting the new, let's go to the old.

First, let's look at THINGS YOU CANNOT DEDUCT:

Your wedding, bar mitzvah, confirmation, etc. IRS knows you would have thrown that party anyway.

Gifts - They are still limited to $25 per PERSON, per YEAR. (Couples in business together count as one person)

Business suits and outfits. And cleaning them. I know, they can be expensive. And they are required by your company/industry, etc. Unless it's a formally designated uniform ... and everyone in your position must wear it ... forget it.

Now, here's the meat you've been waiting for - the expenses that will get you that big refund - now!

DEDUCTIONS YOU SHOULD KNOW ABOUT

CASH EXPENSES - These are often the most overlooked expenses. Since we live in an electronic society, using credit cards and checks for most things, many freelancers treat cash like petty cash. They disrespect it. Hardly anyone, unless pushed, keeps track of the things they pay for using cash.

For instance, valet parking, parking meters, pay phones (for those who don't have cell phones), gasoline, tips, newspapers or magazines, coffee or snacks with clients.

I had one client think back and reconstruct his out of pocket cash costs - listing out the kinds of the things he uses cash for each day (for a month). He found hundreds of dollars. So he was motivated to do two things

(a) write out the rest of the year, and
(b) start keeping records from then on.

He found a couple of thousand dollars, or more, by the time we were done.

TRAVEL - plan your trip properly, and you can turn just about any trip into a marketing, prospecting or research trip, legitimately.

I was able to get a two-month long research trip to the Orient and Hawaii accepted. With her, notes, photos and trip diary, we could prove her business intent for this $8,000 trip.

Incidentally, one of the side-effects of the planning to turn a personal trip into a deductible one? You may actually get new business from it. What a concept!

BIDDING ON JOBS/PROJECTS - Quite often, you have some serious up-front costs when you make proposals. There might be some printing, some development, lots of entertainment, even gifts. And you don't always land that client. Hardly anyone has a 100% close rate.

GIFTS - Since gifts are barely deductible, you have three alternatives

1) To the $25, you can add the cost of wrapping, shipping, and engraving. If you REALLLY stretch it, you could argue that tax is not part of the gift. So, when you do your bookkeeping, it might be worthwhile to keep that receipt handy and enter the cost as a breakdown. Record the gift at $25.00, then, engraving as a printing cost, wrapping is office expense, sales taxes are taxes, and shipping/delivery is shipping. This can triple your gift expense deduction.

2) De minimis gifts - these are the promotional items that you create with your company's logo. If you pick out really good things (Gold Cross Pens, Briefcases, silk golf shirts, etc.) slap your logo on them and present them to most of your client base, you have transformed a gift to 'advertising' or 'promotion.'

3) Instead of a 'gift', give entertainment. two tickets to a hot play or the best restaurant in town. Granted, you are supposed to be in attendance, too. But, wouldn't you enjoy the experience? This is only a nominal improvement in the deduction, though. Since meals and entertainment are only 50% deductible. But you'll end up with much more than $25 as a gift for a great client.

(Note: This law really needs to be updated! $25 barely pays for the delivery.)

SUPPLIES FOR TRADE SHOWS, PHOTO SHOOTS OR RESEARCH - Sometimes you have to get some pretty unusual things for your ads or booths. Sometimes, they look like personal expenses. Use your imagination and DOCUMENT, DOCUMENT, DOCUMENT the business use.

BUSINESS SUITS AND OUTFITS - And cleaning them. I know. I said you couldn't deduct them. But don't you want to? Looking good is costly. Let's see how to go about it, shall we?

(a) Create a uniform for everyone in your company. Remember Century 21? If those jackets hadn't been so ugly, it would have been a good idea. Define/design a specific style or look. Have several garments made up (or buy several with the same look). Slap on a nice embroidered patch with your logo - and voila! Your wardrobe is deductible. Be SURE to take photos of you and other staff ALL wearing these garments.

(b) Create a specific look for marketing purposes. Don't use it for your personal life. Seriously. Keep this look separate and apart. Make it an interesting costume - some with panache.

Both of these suggestions are also excellent branding tools. You will always be recognizable - especially at meetings, trade shows etc. Also, it makes it much easier to develop a wardrobe for interviews and speaking engagements. Did you notice, the tips I've just given you will help you do more than prepare your 2001 tax return. They're really good ways to change your thinking about record keeping for the current year. Use these ideas to keep your 2002 taxes much lower.

© 2001, Eva Rosenberg
Print and Internet Publication rights granted to Working Today

Bio

Eva Rosenberg, your TaxMama, has taken the most dreaded topic, taxes, and turned it into fun. Aside from saving people amazing sums of money on their taxes, she has also created a brand recognition unique in the tax industry. Can you think of another tax company that gives you a warm, fuzzy feeling? Imagine what she can do for your business. TaxMama's site: http://taxmama.com

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