Self employed tax deductions

[aaronc879]

I know there are a few Accountant types on this forum and i'm hoping someone can help with this. Some other people who do clinical research studies have a different idea of what's deductible than what I have been led to believe and i'm wondering who is right. I was told I couldn't deduct internet costs or cell phone costs because they would cost the same with or without the business use but others deduct 1/2 the cost even though they are not needed often for work. Other people are claiming per diem for every day they go to a clinic or stay in a clinic. Some have well over 100 days or per diem. I thought I couldn't claim per diem if I was staying in a clinic and being provided free food during my stay but other claim per diem every day for a study that could last weeks. I also don't claim it for out patient visits where I only am away from home for around 5-6 hours but other people claim it any time they go over 50 miles from home. I can't find any info online that I can understand. Nothing seems definitive. I'm paying hundreds more per year in taxes than they are even though my income is very low. Am I a fool or are they risking a very bad time if they get audited?

 

[disneysteve]

I have always deducted a portion of internet costs because I needed the internet to do the work whether it was medical research surveys or online sales on ebay. My CPA was totally onboard with that. If you are doing work that requires internet access, you can deduct some of that expense.

 

[aaronc879]

I have always deducted a portion of internet costs because I needed the internet to do the work whether it was medical research surveys or online sales on ebay. My CPA was totally onboard with that. If you are doing work that requires internet access, you can deduct some of that expense.

The work itself doesn't require internet use but finding the work requires internet use. In reality it's maybe 1% of my total internet use. Some people claim 50% and I don't understand how that can be ok. I pay $960 a year on internet so 50% is $480. At 33% tax including FICA, Federal, and State that is $160 saved which is a decent amount for someone who only makes around $15-20K/yr. It just doesn't seem legit though. Same with my phone. I have a Tracfone and pay as I go so the minutes used to call a clinic do cost me money but we're talking a few dollars a year. Some people claim half of a thousand dollar phone and half of a thousand dollars in cell service. Doesn't seem right.

 

[disneysteve]

The work itself doesn't require internet use but finding the work requires internet use. In reality it's maybe 1% of my total internet use. Some people claim 50% and I don't understand how that can be ok. I pay $960 a year on internet so 50% is $480. At 33% tax including FICA, Federal, and State that is $160 saved which is a decent amount for someone who only makes around $15-20K/yr. It just doesn't seem legit though. Same with my phone. I have a Tracfone and pay as I go so the minutes used to call a clinic do cost me money but we're talking a few dollars a year. Some people claim half of a thousand dollar phone and half of a thousand dollars in cell service. Doesn't seem right.

I agree that seems inappropriate. The deduction needs to realistically reflect the expense and be defensible in an audit.


In my case, I was spending a couple of hours a week doing online surveys and another few hours doing online sales. I think I claimed 10 or 15% of my internet expense. Maybe 20% when I was selling more regularly.

 

[SecondCor521]

I am neither an accountant nor a CPA. However, I am in my third year as a certified tax preparer for the AARP Foundation Tax Aide program.

The general rule for deduction of self employment expenses is that they are ordinary and necessary. Expenses are ordinary if other people doing the same thing as you are generally incur the same kinds of expenses. Expenses are necessary, obviously, if you need them to accomplish the business; if you could reasonably get by without the expenses then they are not necessary.

Expenses can be pro-rated between personal and business use using any reasonable method, and can be estimated.

Expenses that are reimbursed are not deductible.

Commuting expenses - getting to and from a workplace - are not deductible. Travel between work locations is deductible - so if you got up, drove to a clinic, then went to a hospital nearby for a blood draw, then back to the clinic, the mileage from the clinic to the hospital to the clinic would be deductible at the business mileage rate.

You can find the instructions for Schedule C here: https://www.irs.gov/pub/irs-pdf/i1040sc.pdf

As to your specific questions:

Your internet and phone costs necessary to do the studies would be deductible on a pro-rated basis. I'd probably put them on Schedule C line 25.

I don't think the per diem idea is legitimate. But if you had to travel to a distant clinic for a study that was two days long, and it would be unreasonable for you to commute (like if it was 8 hours away by car), then you could deduct an overnight hotel and 50% of any additional out of pocket meals. See Schedule C lines 24a and 24b.

Yes, if your acquaintances get audited they are probably in trouble. Certainly their tax return would be adjusted and they'd be required to pay the additional taxes. They may also owe interest and penalties. I think if it looked flagrantly dishonest and involved a lot of money, the auditor would also likely audit all the other open tax years as well. They might also suffer stress and inconvenience associated with the audit, and maybe an expert's time and cost to represent them if they chose that option.

But I think there certainly is a middle ground that is far less than what they're doing but seems reasonable and fair to you. Certainly $9.60 of internet service (1% of $960) sounds like it would be deductible, for example. If you incur OOP travel costs like hotels for distant trials I'd also look at those.

 

[aaronc879]

Commuting expenses - getting to and from a workplace - are not deductible. Travel between work locations is deductible - so if you got up, drove to a clinic, then went to a hospital nearby for a blood draw, then back to the clinic, the mileage from the clinic to the hospital to the clinic would be deductible at the business mileage rate.

That's interesting. Everyone that i'm aware of who does studies and files as self employed deducts their mileage. The closest clinic to me is around 100 miles away and I will visit that clinic 22 times this year. I will deduct over 4000 miles. My accountant has no problem with that. Others deduct well over 10,000 miles a year while others deduct thousands on plane tickets to clinics all over the country. I have done studies in Florida and Texas in previous years and claimed the mileage roundtrip from Wisconsin each time as instructed by my accountant. Seems like sooo much grey area.

 

[ivinsfan]

aaron879


you get 1099s for this income...so you would pay SS tax at the full rate on the net money?



I don't know who your accountant is or what you pay him but having a 3rd party between you and the IRS is usually good thing. I'd go with what the accountant is telling you.

 

[aaronc879]

aaron879


you get 1099s for this income...so you would pay SS tax at the full rate on the net money?


I don't know who your accountant is or what you pay him but having a 3rd party between you and the IRS is usually good thing. I'd go with what the accountant is telling you.

Problem is different peoples accountants tell them different things.

 

[ivinsfan]

Problem is different peoples accountants tell them different things.

Should have said your accountant....from my experience accountants won't do deductions they think are bogus..so if you want to take more deductions you probably need to find a different one.

 

[SecondCor521]

That's interesting. Everyone that i'm aware of who does studies and files as self employed deducts their mileage. The closest clinic to me is around 100 miles away and I will visit that clinic 22 times this year. I will deduct over 4000 miles. My accountant has no problem with that. Others deduct well over 10,000 miles a year while others deduct thousands on plane tickets to clinics all over the country. I have done studies in Florida and Texas in previous years and claimed the mileage roundtrip from Wisconsin each time as instructed by my accountant. Seems like sooo much grey area.

The basic commuting rule I cited is accurate. But the reason it seems like there is gray area is that the full and complete set of rules is quite complicated and depends on the facts and circumstances. I (should) always recommend people go to the horse's mouth. For travel expenses, see Pub 463: https://www.irs.gov/publications/p463. The basic commuting rule is shown in Figure B, by the way.

In your case, if you're traveling to multiple different locations for these trials, you may fall under the "temporary work location" section of the rules; if you do, then what you and your accountant are doing is just fine. Here's a link directly to that section: https://www.irs.gov/publications/p463#en_US_2020_publink100033914

 

[SecondCor521]

you get 1099s for this income...so you would pay SS tax at the full rate on the net money?

Yes, he should be paying SE tax on his net income via Schedule SE. However, he should also be getting an adjustment (essentially a subtraction) for 1/2 of the SE taxes on his Schedule 1.

And his net income / SE taxes would result in earnings history and ultimately increase his SS benefit later on assuming he eventually hits the 40 required quarters of earnings, which I think he probably will.

 

[aaronc879]

Yes, he should be paying SE tax on his net income via Schedule SE. However, he should also be getting an adjustment (essentially a subtraction) for 1/2 of the SE taxes on his Schedule 1.

And his net income / SE taxes would result in earnings history and ultimately increase his SS benefit later on assuming he eventually hits the 40 required quarters of earnings, which I think he probably will.

Yeah, I hit the 40 quarters before I left my full time job at age 31.

 

[cathy63]

Problem is different peoples accountants tell them different things.

The problem is that there is no "right" answer to your questions. There are many gray areas in the tax code, and you are in the middle of one. Until someone with the same business you're in gets audited, or gets a private letter ruling answering some of these questions, there is no way to know exactly how the IRS is going to interpret the law. Some accountants and taxpayers are very aggressive about taking every deduction they can imagine, hoping that either they never get audited or that the IRS takes a very lenient view if they do. These people might find themselves owing extra tax and penalties at some point. Others are more conservative and would rather play it safe so their clients don't end up owing money to the IRS in the future, but they also might end up paying more tax than they really owe.

I think that your accountant has concluded that your primary place of business is your home, and the clinics you visit are temporary work locations, therefore your mileage is business travel rather than commuting and is deductible.

Internet and phone costs -- as others have said, you have to pro-rate these services. However, some people argue that it shouldn't just be based on the number of minutes you spend on business calls vs personal calls. If you need to have your phone turned on so that you can receive a business call, then that entire time might be considered business use, even if the call only takes a couple of minutes once you get it. Also if you are spending time at a hospital for business purposes and using the phone to entertain yourself while you're there, then you might count that time as business use.

Per diem is complicated. Self-employed individuals can claim the GSA per diem rates for M&IE (Meals and Incidental Expenses) only, not for lodging. I am not sure how much of the rules are codified by the IRS for everyone vs by DoD and other government departments for their own employees; but I would think that if you were following the same rules government employees use, then you'd probably be o.k. in an audit. The rules I had to follow as a government contractor were:
- travel has to be 50 miles from your primary work location
- if a meal is provided on one of the middle days of a multi-day trip, you subtract that meal from your expense claim. The amount to subtract varies by meal and location and you can look it up at gsa.gov/perdiem. For Wash DC, per diem for M&IE is currently $18/$20/$36/$5 for B/L/D/IE. So, if you stay in a hotel that provides "free" breakfast, you subtract $18 per day. However, if there's no meal provided and you choose not to buy your own (i.e. you voluntarily skip breakfast and nobody offered you a free one), you do get to claim the $18.
- there are special rules for the first and last day of travel. You always get 75% of the per diem and you don't subtract provided meals on those days.

I suspect that some of your colleagues are stretching their claims beyond what the IRS would find to be reasonable, but also that you may be able to claim more than you are and not have it disallowed by the IRS should they ever look at your return.

 

[DayDreaming]

IRS Publication 535 is pretty clear on deducting phone use as a business expense:

Telephone.
https://www.irs.gov/publications/p535 You can’t deduct the cost of basic local telephone service (including any taxes) for the first telephone line you have in your home, even if you have an office in your home. However, charges for business long-distance phone calls on that line, as well as the cost of a second line into your home used exclusively for business, are deductible business expenses.
​

 

[aaronc879]

IRS Publication 535 is pretty clear on deducting phone use as a business expense:

Telephone.
https://www.irs.gov/publications/p535 You can’t deduct the cost of basic local telephone service (including any taxes) for the first telephone line you have in your home, even if you have an office in your home. However, charges for business long-distance phone calls on that line, as well as the cost of a second line into your home used exclusively for business, are deductible business expenses.
​

The language in that seems very outdated. Almost no one uses landlines for phone anymore. It doesn't cost more to make long distance calls either.

 

[disneysteve]

The language in that seems very outdated. Almost no one uses landlines for phone anymore. It doesn't cost more to make long distance calls either.

Not only that, but the concept of a "second line" is outdated. I can use various apps on my smartphone to make calls from a "second line" so as not to reveal my actual phone number. We use those apps at work when we are calling patients from our personal phones.


If you regularly use your personal cell phone for work purposes (and aren't reimbursed) then there is likely a deduction to be had.

 

[Aerides]

Problem is different peoples accountants tell them different things.

Or...different people hear what they want to from their accountants, and repeat their own self-serving mis-remembered interpretations to justify what they are doing, and probably got it wrong. If it doesn't sound right it's probably not.

Whether or not they'll ever get in trouble for it is another thing.

 

[ivinsfan]

Or...different people hear what they want to from their accountants, and repeat their own self-serving mis-remembered interpretations to justify what they are doing, and probably got it wrong. If it doesn't sound right it's probably not.

Whether or not they'll ever get in trouble for it is another thing.

Actually in almost 50 years of owning a business I find that accountants have very different comfort levels. You would think the rules are the rules but the devil is in the details.



We've never made our various accountants deduct anything, we've always said is this deductible and followed their instructions.


An in law relative does taxes, we don't use them because they are family. His motto was that he never wanted his clients to hear from the IRA ever, because the accountant didn't want the hassle. I don't want an accountant like that because they default to paying the highest amount of taxes.


I'm not cheating but I want every possible deduction on my taxes.

 

[disneysteve]

Actually in almost 50 years of owning a business I find that accountants have very different comfort levels. You would think the rules are the rules but the devil is in the details.

Absolutely. The tax code is insanely complicated and even the very best accountants don't all agree on how to interpret all of the rules and regulations. You will commonly get 3 different answers if you ask 3 different accountants.

 

[Sunset]

It is complex and grey lots of times.

However, not claiming expenses is cheating yourself as the IRS will NOT help you to claim expenses if you forget.

Does it seem "right" an executive can fly first class and deduct the $6,000 cost, while some other self employed fellow flies coach for $200 on the same plane and deducts the $200.

As long as it's somewhat reasonable, and you have an explanation for the deduction, I mostly take the deduction.


If a person is a pretty low earner on the self employment scale, the gov't is unlikely to even bother to audit. Reason being the really high earners will pay a higher rate and cheat a lot more money than some poor slob possibly could.

 

[Sunset]

I've had a few discussions with the tax folks, most are reasonable and just want to have things done properly.

Once I was subject to tax and penalties as I had done something they considered illegal or NOT allowed for a couple of years.
I wrote them a nice letter explaining I didn't follow their rules because their rules were: complex, confusing, hard to find, and they didn't provide notice of the rule change.
I pointed out in detail why these rules were basically an entrapment for some taxpayers.
I did close down my tax shelter to limit the damage to the years they had flagged as I thought I was pretty screwed.

They agreed and removed the penalties AND taxes. Proof they do care sometimes