A lot of people are talking about taxes this time of year, myself included. This talk comes in many different forms from many different directions. Maybe sometimes, though, we are missing some of the basic things.
This struck me recently when reading an article on the TaxProf Blog. This touts itself as a member of the Law Professor Blogs Network, so it often discusses some high-level things, which can be of interest to some, but are not things I generally like to talk about in this space. This recent work, though, had some of those basic points in it that I thought were worth remembering during filing season.
The first big point is the dividing line between personal and business taxes. Almost everyone understands that both individuals and businesses pay taxes and file tax returns, but the fact that items and expenses can only be in one or the other category might be lost. If you spent something while carrying on an activity geared toward profit, that is a business expense. If not, it is personal.
Now let me go into a spiel on the importance of having separate bank accounts for your personal and business expenses. If you are legitimately putting effort into a business, there are going to be expenses. No one likes to sit down with a bank statement and a highlighter and go through which of the expenses were actually for your business, though. There is computer software that can make this more manageable, but it is even easier when you have already made the dividing line with separate accounts. This comes with minimal cost and can fend off a large amount of aggravation.
The article talks about how there can be some difficulty distinguishing the business from the personal and this division helps with that. Even with separate accounts, though, just what is a deduction can become an issue. Another great point from this article is that the expenditures will either be deductible or non-deductible. This is not area where there is some gray area between the two. Something either falls into the rules or it does not. If you hear people talking about how certain machinations could turn something into a deduction, chances are that is not on the up and up. A good tax preparer can make you aware of deductions you did not know existed, but they cannot conjure up new ones.
The article then goes deeper into the weeds about the intricacies of when things turn from personal to business, and that is on the deeper level I don’t feel is appropriate for this space. I do, however, see more and more people pursuing small businesses of their own, or taking part in the gig economy, so I thought some of these basic facts were worth highlighting.
If the difference between the personal and the business is something you are struggling with as you prepare your 2018 tax information, let me help. Time is starting to run short on the filing season, but some appointments are still available. But then let’s talk again after the season to continue taking steps to make that dividing line between the two ever easier to navigate.
UPDATE: As a follow up to my blog over the weekend, HR 1558 better known as The Tax Payer Extension Act is currently in the House Ways and Means Committee. This the current status on this legislation.
Harry E. Hunter
Hunter Consulting, Inc.
March 28, 2019