Side Business Tax Deductions

[kudy]

I know people are hesitant to give tax advice over the internet, but I am curious if what I am planning to do on my taxes this year sounds legit... I understand I should probably talk to an accountant to be sure, but I thought I'd ask here first!

I do some web development on the side (a few thousand dollars per year), and I plan to file the income from this work as a sole proprietorship. I am planning to deduct the following expenses against this income:

• half of my home Internet cost ($26/month)
• half of my cell phone cost ($15/month)
• all of my web server cost ($29/month)
• all of my laptop computer purchase ($730)

I think it's a fair assessment that these costs are incurred in order to work at home and earn this side income, so it seems I should have no qualms deducting them? I don't plan to use the "home office" deduction, because I can't honestly say that I dedicate 100% of my office to this work. So, does anyone know or have experience with whether these deductions are going to raise red flags?

[Greg]

It sounds ok to me, but I would be careful to file the income (you said "sole proprietorship") as it is licensed.  Assuming you have a business license, I think you'll need your EIN for filing.  If it's an unlicensed business you probably will just want to include it as "other income" and leave off the deductions. 

Your planned deductions sound familiar.  You can also claim fuel and vehicle use %.  You may be able to claim home office use as a percentage as well.  I also claim advertising, peer business association fees, licensing and insurance fees, that sort of thing.  The laptop will depreciate, but you will still be able to claim portions of that purchase in the future.

It's been a while since I worked on that since I use turbotax and it makes many of these calculations for me after verifying the numbers.

[Cpa Cat]

You don't need an EIN to use Schedule C. You need no formalities whatsoever for Sch C. You could be Sally the 16 year old babysitter and still be entitled to business deductions.

I highly recommend you use the simplified method for any mileage or home office deduction (you can Google it - as promised, it is simple).

Take a look at Section 179 for your computer.

The IRS does not disclose exactly what algorithms it uses to detect "red flags." And it would be unethical for a CPA to offer any advice based on your likelihood of being audited. As such, I can only advise you that if you are deducting 50% of your cellphone/internet, then (roughly) 50% of that usage should be for business purposes.

Your deductions are very commonplace. You should not be worried about taking legitimate business deductions.

[Greg]

You don't need an EIN to use Schedule C. You need no formalities whatsoever for Sch C. You could be Sally the 16 year old babysitter and still be entitled to business deductions.

My Schedule C has a place for entering the EIN of the related business, so I assumed it is required.  Obviously I'm no CPA!

[Cpa Cat]

You don't need an EIN to use Schedule C. You need no formalities whatsoever for Sch C. You could be Sally the 16 year old babysitter and still be entitled to business deductions.

My Schedule C has a place for entering the EIN of the related business, so I assumed it is required.  Obviously I'm no CPA!

If you have one, you put it on there. If you don't, you leave it blank.

[Spondulix]

Are any clients paying you over $600 a year? Not to condone tax evasion, but even my accountant will sometimes give me the "I didn't see that page" if it's very little side income relatively ($600 is the limit where they have to send you a 1099.)

I've worked with a couple accountants who have said that home use should be related to the percentage of use. So if you're making $30k a year and saying you use your phone 50% to make $3k, that could come up as a red flag.

You may want to look into the tax rules regarding hobby vs business, too. Unless you're looking to expand your business, you may be qualifying more as a hobby at this point.

[TerriM]

Those look fine to me.  I've deducted computers and printers and office supplies for web-work, and frankly, as long as you can argue for it, I doubt you'll have a problem.  None of that looks amiss to me. 

Also, if you're not making very much, it doesn't make much sense for them to come after you.  If you're deducting things left and right, they would.  I think home-office deduction (i.e. mortgage), is more a red flag--they may come and visit and make sure you're really following the IRS rules to a T for that.