The following is presented for educational purposes and does not constitute legal advice. The statements are my own and not those of my employer or Craft Industry Alliance.
January 1st has come and gone, which means tax time is rapidly approaching. While the media has been full of stories about recent tax legislation, those changes to the federal tax code apply only to the 2018 tax year — which means that the existing rules still apply to your 2017 return, due (for most small business filers) Tuesday, April 17, 2018.
Start out right
Most business owners know to gather paper receipts, invoices, and financial records, but don’t forget virtual “documents”: emails or PDFs that reflect online payments, images of checks (you may have to download these or order copies from your bank), statements from Paypal or other online payment apps, credit card statements, and the like. Print and save a copy of all online documents in case you need to refer to them later. Collect all tax forms that were mailed to you, including 1099s (freelancers are no doubt familiar with Form 1099-Misc, which reflects compensation earned as an independent contractor) and W-2s (if you earned wages as an employee).
File the correct form
Different types of business returns must be filed on different forms, depending on the business’s corporate structure. For example, if your business is a d/b/a (sole proprietorship), you’ll file your business expenses and deductions as a Schedule C along with your personal tax return. If your business is a corporation, you’ll need to file a separate form with an earlier due date. Limited liability companies (LLCs) may need to file a Schedule C or the corporate form, depending on certain factors. A tax professional can help you if you aren’t certain which form to use; many tax platforms, such as TurboTax, will walk you through a series of questions to help you select the proper form.
If your business is relatively new, you may be able to deduct some or all of the expenses you incurred to get your business started – for example, fees to a real estate agent to find space, attorney fees for registering a trademark or forming a corporate entity, fees paid to contractors for renovations, the cost of fixtures, shelves, signs, and POS terminals. These start-up costs cannot be deducted in one lump sum in Year 1. There are caps on what you can deduct, so best to consult a professional or use tax software to determine how much you can deduct, and how much you must amortize.
Home office help
If you operate your small business out of a home office or studio, expenses relating to your home office or studio may be deductible. Qualifying expenses include rent, the cost of repairs, utilities, and more. Sounds like a great deal, right? It can be—but make sure you meet all IRS requirements. To qualify, the home office or studio space must be used exclusively for the business on a regular basis. That means if a spare room is used as an office and to entertain a guest or two over the holidays, it doesn’t qualify. There are two alternative ways to calculate a home office deduction; one involves deducting actual expenses (calculating what percentage of expenses are attributable to the business), and the other involves taking a simplified rate based on the square footage used for business purposes.
Auto expenses. If you have a car, van or truck that you use for the business, tax regulations allow you to deduct related expenses in various ways. When it comes to operating costs, like gas, repairs and maintenance, you can either deduct your actual expenses or a standard reimbursement rate. To use the standard rate, calculate the number of miles driven for business use and multiply by the fixed amount set by the IRS (find it on the IRS website). If you opt for the standard rate, you cannot also deduct actual expenses like gas, registration costs or repairs. Alternatively you can deduct some or all of your actual expenses incurred in operating the car for business purposes. You’ll have to figure out what you spent on things like gas, registration, maintenance and repairs, insurance, and depreciation, then deduct only the portion of those expenses attributable to the business. Under either method, you can also deduct parking and tolls
If you hire freelance designers, technical editors, or sample makers to produce patterns or samples for your business, the fees you pay these independent contractors are a deductible expense. Any supplies you give them for the projects also qualify as a deductible expense. Did you hire a graphic designer to create a new logo? A painter to freshen up the shop? A website developer to create or update a website? All of these fees are business expenses, too.
Go through your calendar or social media accounts to remind yourself of potential expenses. Did you purchase meals or cover a hotel room for a visiting teacher? Provide refreshments for a sewing circle or other shop event? Buy a colleague a drink so you can discuss business? Meals and entertainment costs qualify as deductible business expenses if you are discussing business issues although the IRS currently limits those deductions to 50% of the actual cost. When you travel to a fiber festival for business purposes, or attend a beading conference for business purposes, your travel expenses—transportation, meals, hotel room, and the like—qualify as business expenses, again, subject to the IRS-mandated 50% cap.
Check your financial records very carefully for additional business expenses you may have overlooked. For example, if you use credit cards or a bank line of credit to purchase business assets or supplies, or to pay an operating expense, the interest and fees you pay to the lender are deductible. (Just remember, if you also use the credit cards or lines of credit for personal use, you’ll have to allocate the interest and fees proportionally between the two types of use, personal versus business.) Even a bad debt can qualify as a deductible business expense. If you order inventory from a vendor which then never delivers, and you can’t get a refund, you can at least deduct the loss as a business expense. If a customer pays with a bad check and doesn’t make good for the purchase, again, you can deduct the loss as a business expense. Remember, that only the loss of tangible goods and not services can be deducted, so make sure all your class participants pay in cash up front!
They add up
Don’t miss other miscellaneous expenses which may qualify as deductible business expenses:
- Business association dues (e.g., your Craft Industry Association membership)
- The cost of advertising (e.g., print or online advertising, the cost of printing postcards or business cards)
- Business-related magazines, videos, or books
- The cost of tangible goods donated as prizes to generate publicity and goodwill (if you are donating to a nonprofit organization, deduct the amount as a charitable donation rather than a business expense, however)
- Office supplies
- Funds used for petty cash
- Online computer services related to your business (such as a web host), as well as business-related software (e.g., quilt designing software, or Adobe InDesign)
- Postage and other shipping costs
- Marketing research
Every little bit helps, and these relatively small deductions can add up quite nicely when your return is done.
The tax code changes every year, and nearly every potential tax deduction has certain limitations, requirements, or caps. If in doubt, consult a tax attorney or a qualified accountant to give you specific advice tailored to your individual business. (Then make sure you keep the receipt so you can deduct those fees as a business expense during the next tax year!) The IRS’s website also contains a great deal of information aimed at the small business owner (www.irs.gov).
 Partnerships that use Form 1065 and S corporations that use Form 1120S must file by March 15, 2018.
Carol J. Sulcoski is an attorney by day and a knitting author, designer and dyer by night. Her latest book is “Yarn Substitution Made Easy” (Lark Crafts 2019). She lives outside Philadelphia with her three nearly grown-up children and a fluffy orange cat.