Tax Information

7/21/97, From Carol Reese, creese@peachnet.campus.mci.net

This is information I have gleaned from the IRS and several other sources as well as my personal experience. It is almost definitely not complete and may contain errors. However, it should give you a basis for asking questions and leads on obtain ing further information.

TAX NUMBER: If you don't have to have a business license, don't have to collect sales or other taxes, and don't have employees, you probably won't need a separate one from your SS#.

BUSINESS LICENSES: Check with your local government. Some require them and some do not. It often depends on whether you need to collect sales or other local taxes and on whether you have people coming to your home to do business.

INTERNAL REVENUE SERVICE:

PUBLICATIONS: The IRS will send you these free. Call 1�800�TAX�FORM (1�800�829�3676) to order between 8 and 5 weekdays and 9 and 3 Saturdays. You can also get many of the most commonly used ones at local libraries. And you can download many from their website at: � (#(#K However, be aware that many you will need are very large (200�300 pages) and you probably would not want to print them.

PUBLICATIONS TO GET:
17 � Your Federal Income Tax � Tax Guide for Individuals
334 � Tax Guide for Small Businesses
505 � Tax Withholding and Estimated Tax
533 � Self�Employment Tax
587 � Business Use of Your Home
917 � Business Use of a Car (if you pick�up and deliver)
946 � How to Depreciate Property

Don't worry if what you get is not for the current year. Most of the information changes little and when you order, they will send you the current stuff and then send you up�to�date stuff later if you request it.

HOW TO USE THE PUBLICATIONS: First, read them. This is not really interesting, so skip over stuff you already know or that does not apply to you. You can always go back and read it later if you need to. This will give you an overview. Next, make a list of what you need to keep tr ack of in the way of expenses, income, etc. Look at the listings on the Schedule C for some ideas here. If you have questions about anything, call the numbers in the publications for clarification. I have found the people who do this to be very helpful . � Basically, you have to pay your portion of the Social Security and Medicare taxes as well as the Employer's portion, so you pay twice what you do if you are employed by another business. However, you get to use the Employer's portion as a tax deduction w hich reduces your taxable income. So if you gross the same amount you did at another job, you will net less but also pay less income tax.

PAYING ESTIMATED TAXES: When I called about this, I was told that as long as we paid enough by an alternate method (such as by increasing withholding from my own other job or by increasing my spouse's withholding) to cover it all, I would not have to worry about paying this quar terly. (More on keeping track of this later.) There are specific guidelines about how much you have to pay to avoid penalties, etc, so be very careful to keep this as accurate as possible or to have your estimate slightly high. They explain that income tax is a "pay as you go" tax. If you have questions about this at any time, call the IRS.

BUSINESS EXPENSES:

WHAT TO KEEP TRACK OF: Keep track of absolutely anything that could possibly be considered a business expense. Keep receipts, cancelled checks (or your carbon copies) (both receipts AND checks if possible), or at least keep a running log or make a note on a 3x5 card for anythi ng you don't get a receipt for. I've been told that all this documentation really helps if you are audited.

TELEPHONE EXPENSES: The publications were not really clear about telephone costs, so I called. Since having the second phone line enables me to work at home, I can use the base monthly cost as a business expense. However, long distance calls other than directly related to the business do not count. Since we use the phone when I am not working to make other calls, I keep track of this. I keep a running log of long distance calls I make related to work and when the phone bill comes, I fill in the long distance charges. I also keep a monthly log of the basic service expense. Since I do this in WP51 tables with the math feature, I can have WP do the adding up and then print the tables out at the end of the year to keep with my supporting tax documents. (Keep the phone bills someplace also so in case you are audited.)

MILEAGE AND VEHICLE USE: Another thing to keep track of is mileage on your vehicle if you pick up and deliver, even if only once in a while. Just keep a log noting where you went and why and how many miles you drove (round trip). If you do this on the way to or from your "regul ar" job, just count it one way. This is what we were told by our accountant to do with the cattle business. If we pick up feed on the way home from work, count it as a one way trip from the feed store to home. If we specifically go to town (say on Satu rday) to the feed store, count it as a round trip. If you pick up and deliver daily, this� heck further on this. Also keep your bills if you use a courier as this is a deductible expense.

EQUIPMENT EXPENSES: When I prepared our 96 taxes this spring, I called about using the cost of my computer as a business expense. Since there are restrictions on equipment used only partly for business, you need to document how much of the use is for business. The IRS told me to keep a log of when and how the computer was used. If you are audited, they will ask for something to support your stated 75% or whatever usage for business. Reconstructions and estimates are frowned on��they want some record made at the time the equipment is used or the expense was incurred. A log counts.

STATE INCOME TAX: If you have a state income tax, check with them on these same things, especially paying estimated taxes.

HOME OFFICE DEDUCTION: I really don't know how this works. There are specific and strict rules about it. I don't believe my maybe 5' by maybe 6' space in my bedroom qualifies, and since I only worked at home 6 weeks last year, I didn't fool with it. Check on it. The tax programs should help here.

KEEPING TRACK OF YOUR TAX INFORMATION: I find that phone expenses, computer use, and mileage need to be kept track of "manually." (Home office deduction expenses probably would also need to be kept track of "manually.") Other things can be kept track of via financial management software such as Managing Your Money, Quicken, or other similar programs. When my bank offered PC Banking, they gave me an enhanced version of Managing Your Money which allows me to make a direct connection to the bank to download statements, transfer funds between a ccounts, and even pay bills electronically. So I use it to keep track of our income and tax deductible expenses. When I "write a check", there is a place to enter the tax category. When I "fill out a deposit slip," there is a way to "split" it listing gross income, and all the various deductions. The program puts this information into a database which it uses to list income and expenses and calculate income tax to date including self�employment taxes. So far this year, we are due a refund. But I thi nk I will need to have my husband increase his withholding later on to be sure it is covered. I don't worry about not including the things I track manually in this��they are more likely to decrease my tax bill than increase it.

PREPARING YOUR TAXES��DO IT YOURSELF VERSUS USING A PROFESSIONAL: For many years after we got into cows, we had a CPA do our income taxes. The cost (which is deductible on the next year's return) was definitely worth it. However, when we moved and had a simple state tax form added, the cost quadrupled and we decided t o try it� ation when I needed it to determine what classification certain items fall under. The calculations are complicated, but a tax program such as TurboTax or Kiplinger Tax Cut or Parsons takes care of that. You can even import data from your financial manag ement program into many of these programs. The main thing is to know what you can and cannot deduct. Many of these programs are good at suggesting possible things you have missed based on what you have entered, but they can't link everything. They also usually have programs to do your state taxes after you're done with the federal return. However, we don't use that as completing our state return is a simple matter of transferring information from the federal form and a couple of simple calculations wh ich are not worth the extra expense. Others are more complicated. These programs are also tax deductible, I believe partly as a business expense and partly on Schedule A.

A good way to save money and still learn a lot is to do it yourself and then have the return reviewed by a professional. Since CPA's often charge by the hour and you have done the work, a review should not be too expensive. Take your supporting document s with you along with the return. If there are things you are not sure about and have not been able to clarify with the IRS, make a list of those questions. The CPA should be able to answer those questions and also suggest any possible deductions you ma y have missed and even make suggestions to plan for the next year. For instance, certain property taxes or expenses or income can be put off until January in order to improve your situation for one year or the other. Knowing that making the move to home would probably mean less income for a time, we paid all our property taxes in December but put off selling calves until January in order to decrease the taxable income for the year likely to have more income. (In one state where we own property, propert y taxes can be paid in January without penalty; in the other, they have be paid before the end of December).

Another point about an accountant is that if possible you should use the same one each year. They have your past records in their computers and can spot places you may have missed from the year before and also significant differences in classes of expens es that perhaps need to be explained or checked on. And, when you have your taxes prepared by a professional, they get to help explain how your taxes were prepared if you get audited although their liability is limited. If you decide to use a profession al, you should still know as much as possible about your tax return in order to protect yourself. If your accountant suggests something you feel may be wrong, ask questions��of the accountant and/or the IRS. I know of instances when people trusted their accountants implicitly, didn't know what they needed to, and ended up in major financial trouble when the accountants made major mistakes in the tax returns or even worse. In the end, YOU are responsible even if your tax preparer made the errors or gave you bad advice.