Written by Dspeakes.
This is part of a special series of articles about tax essentials for mystery shoppers. Click here to view all of the articles.
Part 2: Deductible or not?
When you are in business you can deduct anything that you incurred solely because of your business, as long as it is “ordinary and necessary.” A few things necessary to mystery shoppers are a place to work, phones so schedulers can call you and to run certain apps, computers and internet. But health insurance, while being necessary to the taxpayer, is not necessary to the business, unless paid to employees as part of a benefits package. The key word is “employees.” Self-employed people are not employees.
Home office deduction: The rules for this require a designated part of your home to be used regularly and exclusively for your business. It does not have to be an entire room; it can be the area occupied by your desk, chair, and file cabinet, as long as you use it only for business. It makes part of your rent, utilities, home insurance, alarm expenses, and taxes and interest deductible on your Schedule C, but not lawn care, pool care, or other costs not specifically related to the house itself. This reduces the amount of self-employment tax you pay on those earnings. You’ll need to compute what percentage of your home is used for your office and take that percent of all the things I listed. You can take depreciation on your house if you own it.
Sounds like a lot of work? Try the new Simplified method. All you need to know is how many square feet (up to 300) your “office” is and you multiply that by $5 per square foot to get your deduction. In either case, you cannot deduct more than the net income from the business, but excess can be carried forward and deducted in a more profitable year.
Telephones: The IRS has decreed that in every case, the first phone line into a house is never a tax deduction. However long distance charges for your business are deductible on your Schedule C. Cell phones are another matter; you can deduct them, but only the percentage used for business. You can use the call log on the phone itself or cell phone bill to figure out how many of your calls are business and how many are personal. Do a sampling a few times a year and keep a record of the results in case you are audited.
You can also depreciate the business percentage of your computer and any accessories. Don’t forget the paper and toner. Log your business and personal computer time for a day or two a few times a year to come up the appropriate percentage. If you have a computer you use only for business you can take 100%.
Use that same percentage for your internet bill but factor in if there are more than one computer using the internet and allocate some of the bill to those non-business computers.
Cell phones and internet use have pervaded our lives. Nobody is going to believe you never use them for personal purposes unless you have more than one.
Health insurance, however is not a schedule C deduction, but you fill it in there when you do your taxes using common tax software. This is so you don’t forget to do it. If you are self-employed, your own insurance can be deducted even if you don’t itemize, but it does not change the bottom line of your Schedule C or affect how much Self Employment tax you will pay.
The US Tax Code is extremely complicated and there are many exceptions and special circumstances that can make for very different results for two people who may have similar situations. It’s best to read the materials on irs.gov that pertain to your particular situation and try to understand it for yourself. Discuss confusing information with your tax preparer or be brave and call the IRS yourself. (They really don’t bite.) Of particular interest to mystery shoppers who work from home are these publications:
For a full explanation of tax deductions for your home office refer to Publication 587, Business Use of Your Home.
Information about vehicle mileage deductions can be found here: http://www.irs.gov/publications/p463/ch04.html
Dspeakes has been a tax preparer since 1998 and specialized in Taxation when getting her Bachelor’s degree in Accounting at Arizona State University, graduating in the top 2% of her class. Her 130 current clients include individuals, sole proprietorships, S corporations, C corporations, Estates, one partnership, and a non-profit organization. She is an IRS Registered Tax Return Preparer.
Editors Note: This is not professional tax advice. Laws and regulations vary depending on your region. Be sure to consult a professional before filing any tax documents.