Sole Proprietors

One in seven 2009 tax returns contained a schedule C which is where you report the income and expenses of a sole proprietor business. You have to be engaged in the business with the intent to make a profit which is determined by facts and circumstances. If you fail the facts and circumstances test, then your business is a hobby and you can't deduct any losses. What kind of deductions can you take? The IRS says you can deduct "all the ordinary and necessary expenses paid in carrying on any trade or business." The IRS further defines ordinary and necessary as appropriate or helpful. What kind of deductions can you not take? The following is just a partial list: charitable contributions unless they qualify as advertising, gifts over $25 unless you can make the case it is marketing, penalties and fines, political contributions, personal living expenses, club dues, and lobbying expenses. Returns with a schedule C have a higher audit profile with the IRS.

Annual Gift tax Exclusion for 2013

The amount you can give to any donee in a calendar year without having to file a gift tax return goes up to $14,000 from $13,000 in 2013. The $14,000 is a cumulative amount for the year so you need to consider other gifts given during the year to see if you go over the total requiring a gift tax return.

Student Loan Interest

Only the person who is legally obligated to repay the student loan can take the deduction for the interest.  Someone who is a dependent on the parent's return cannot take the deduction, and joint filers with income over $150,000 cannot take the student loan interest deduction either. Higher income taxpayers may want to consider having the student be liable for the student loan so when they leave the nest the student can qualify for the deduction.

IRS Standard Mileage Rates for 2013

The standard mileage rate for business miles has increased 1 cent to 56.5 cents per mile. The medical and moving rate is 24 cents per mile, and the charitable rate stays at 14 cents per mile. Mileage should be documented by a taxpayer by some type of contemporaneous written record such as the "enter company mileage" under the company section in Quickbooks or a mileage log.

New Hospital Insurance Tax of .9%

Last week I talked about the new 3.8% tax on investment income or unearned income. Earned income of wages and self employment income also gets hit by Obamacare. Beginning in 2013 there is a new tax of .9% on wages and self employment income for those single filers making over $200,000 or joint filers making over $250,000. For example, if you have a joint return with wages of $100,000 and self employment income of $500,000, the calculation of the tax would be as follows: .009 x ($100,000+$500,000-$250,000) = $3,150.