Monthly Archives: August 2016
I was struggling to decide a topic to blog about this week, so I took to Twitter to help me out. After all, Twitter is the best way to see what everyone is currently talking about in the world. You can follow us on Twitter at @HammernikTax. I did a simple search for the word “tax” on Twitter. Here are the main topics currently being discussed involving the word tax.
Donald Trump’s Tax Return
This is not a political blog, so I will not be discussing politics, however, this is relevant to our industry. The main topic of discussion revolves around Donald Trump not yet releasing his tax return. It seems like everywhere you go, your tax return is wanted to evaluate your current financial situation. Examples of this include: buying a car, buying a house…and running for president.
However, a tax return may not always tell the whole story. Our job as tax consultants is to devise strategic plans for our clients to reduce the amount of income they are showing on their tax returns. For instance, we may suggest a client defers more money to their 401K to reduce their taxable income. The tax return will now show that they are making less money, when in reality, they are making the same amount but are “hiding” some of it. So while it seems that we are often judged on the numbers on our tax returns, the tax return is just a sneak peek into the whole story. On that note, you have a little over 3 months left to do your own tax planning to create your own story. That is where the strategic plans on our part come into play. If you think you need to move some things around before the year is over, contact our office ASAP.
Are Contributions To Political Campaigns Tax Deductible?
(Don’t mind the Cubs Profile Picture)
What do you know, Twitter is all about politics right now. The simple answer to this…NO. While you are free to donate your money to a political movement that you believe in, it will not benefit you on your tax return. In order to be tax deductible, contributions must be made to a qualified charitable organization. If you are unsure if the organization qualifies, ask them, or use this IRS Tool.
Federal Student Tax Scam
The Internal Revenue Service issued a warning to taxpayers about bogus phone calls from IRS impersonators demanding payment for a non-existent tax, the “Federal Student Tax.”
Even though the tax deadline has come and gone, scammers continue to use varied strategies to trick people, in this case students. In this newest twist, they try to convince people to wire money immediately to the scammer. If the victim does not fall quickly enough for this fake “federal student tax”, the scammer threatens to report the student to the police.
“These scams and schemes continue to evolve nationwide, and now they’re trying to trick students,” said IRS Commissioner John Koskinen. “Taxpayers should remain vigilant and not fall prey to these aggressive calls demanding immediate payment of a tax supposedly owed.”
This is just another tactic being used by scammers. We have probably all heard of or received of these phone calls, this is just a different target towards college students. REMEMBER: The IRS will never call or e-mail you.
Complaints About Olympic Athletes Taxed On Medals
As I mentioned in an earlier post, Olympic athletes are taxed on both their winnings AND the value of the medal that they receive. There is much banter on Twitter from people complaining that the IRS needs to change this rule. However, it is important to remember that the IRS does not make the tax law….Congress does!
By the way Ryan Lochte & Co. will not be able to deduct their legal expenses for their debacle against their earnings 🙂
Twitter is the first place I go to for updated news. It has become the first source that reporters go to…it is instant news. I enjoyed seeing what people were talking about regarding the word “tax”, I think I may have to do this more often!
Until next time,
Nicholas Hammernik, EA
Earlier in the week, our Facebook account posted a really interesting article from Forbes about the Olympics and taxation. You can view that article here: Facebook Article . By the way, if you are not already following us on Facebook, please give us a “like”!
The article references how Olympic athletes are taxed and how it depends on if they treat their participation as a business or as a hobby. The IRS has strict rules to distinguish what is a hobby and what is a business. They regularly monitor Schedule C’s that are submitted to verify that they are indeed a business activity.
So, What Does The IRS Consider A Hobby Vs. A Business?
Per the IRS tax code, here are some things to consider when determining if you are participating in a business or a hobby:
Does the time and effort put into the activity indicate an intention to make a profit?
Does the taxpayer depend on income from the activity?
If there are losses, are they due to circumstances beyond the taxpayer’s control or did they occur in the start-up phase of the business?
Has the taxpayer changed methods of operation to improve profitability?
Does the taxpayer or his/her advisors have the knowledge needed to carry on the activity as a successful business?
Has the taxpayer made a profit in similar activities in the past?
Does the activity make a profit in some years?
Can the taxpayer expect to make a profit in the future from the appreciation of assets used in the activity?
As a rule of thumb, the IRS considers an activity is being carried on for profit if it makes a profit during at least three of the last five tax years, including the current year — at least two of the last seven years for activities that consist primarily of breeding, showing, training or racing horses.
What Is The Difference In Taxation Between A Business And A Hobby?
If you determine that your activity is a business, then you will report all of your income and expenses involved on the Schedule C. On the other hand, if your activity is considered a hobby, you will report your income as “Other Income” and your expenses will only be deductible along with your other itemized deductions on the Schedule A.
Business vs. Hobby is a section of the tax code that the IRS audits frequently, and for good reason. Incorrect deductions of hobby expenses account for a portion of the overstated adjustments, deductions, exemptions and credits that add up to $30 billion per year in unpaid taxes, according to IRS estimates.
We help business owners in Milwaukee, Waukesha, Brookfield, New Berlin, Wauwatosa with business tax return preparation and tax planning.
If you are currently doing any side projects, or are considering starting one up, please contact your tax guy at Hammernik & Associates to determine if it is a business or a hobby. Your tax planning strategy may depend on it!
Until next time,
Nicholas Hammernik, EA
This is the final installment in my analysis of the rapidly growing shared economy. So far, we have outlined the popular transportation and home rental segments, which can be viewed here:
Today, we will analyze the taxation for those who sell their talent online.
How is Etsy.com Taxed?
Etsy tax? No, this is not a new tax the government has decided to implement. This has to deal with the taxation of those who sell on the popular website Etsy.com. Etsy is an online marketplace for the general public to buy and sell handcrafted items. Sellers on Etsy range from the casual crafter that wants to make some money off of their hobby, to the businesses that use Etsy as a supplement marketplace to their own website or storefront.
The main cogs of Etsy include jewelry, clothing, and accessories, most of which are handcrafted by the sellers. The sellers will receive a 1099 for their total amount of sales for the year. We help people in Milwaukee and Waukesha counties that sell on Etsy with tax preparation and tax planning.
What kind of expenses can you deduct?
The main expenses involved with selling on Etsy are the Cost of Goods Sold. The Cost of Goods Sold are going to be the materials purchased which are needed to produce the product. Also, equipment needed to produce your product can be deducted as well. Sewing machines, computer software, and other large machinery would be considered equipment.
Another expense to take into account is the Home Office Deduction. If you have a designated room in your home that is used exclusively for running your Etsy business, then you can deduct this as an expense. There are two ways you can do this. The first option is the Simplified Method, which gives you a $5 deduction per square foot of the room. The other option is the traditional method. With the traditional method, you compute the percentage of square feet the office is in comparison to the entire home. This percentage is used to deduct a portion of you real estate taxes, mortgage interest and utility bills.
Mileage: Any miles driven to gather supplies and materials can be deducted using the standard IRS mileage rate.
What about Fiverr? … What is Fiverr?
Fiverr.com is a website that can help consumers pretty much with anything. It is a gold mine for business owners, and we have personally used services on Fiverr a few times. Services include: graphic design, writing, video editing, music & audio, programming. and advertising. The sellers on Fiverr utilize their talent in these categories to produce a product based on the buyer’s order. It is a pretty cool concept, and I suggest you check it out if you ever need help with anything you don’t want to waste your own time on.
The taxation of Fiver sellers is similar to those on Etsy. However, they may not incur as many direct expenses. Their main expenses are going to comprise of equipment and the home office. In most cases, there are not many supplies or materials needed because they are using their expertise to produce a final product.
Both Etsy and Fiverr members may incur processing fees from the website. These fees are also deductible as expenses.
What have we learned about the Shared Economy?
The shared economy is a highly successful business model that is being carried over into many different sectors and industries. The main concept is that the Business lets us, the general population, do their work for them. They benefit off of the processing fees and advertising space, but rely on the citizens of the world to produce for their business.
The important thing to remember for all of those that are “working” for these companies is that you are not their employee, you are your own business! It may be your full time gig, or just something you do to supplement your income, but you are a business owner. You are no longer treated by the IRS as an employee and you will be taxed differently. It is important for you to know how to keep records of your business and stay compliant with the IRS tax code.
If you are currently involved in the shared economy, or if you want to make some extra money and join the shared economy, please contact your tax consultant to learn more of what you need to do.
Have a great weekend!
Nicholas Hammernik, EA