So you’ve decided to donate an hour of your professional time to a local charity’s auction.  If your time is worth $200/hour, does that mean you get a $200 tax deduction??

Not so fast.  The IRS says “no deduction is allowable for a contribution of services.”  This is true for both general volunteer time and the donation of professional services.  You can, however, take a personal deduction for your mileage to/from the charity.

After you’ve helped out the local charity, you can help your small business, too!  Send out some press releases about the worthy cause and how you helped them.  It will give the charity some good press and spread the word about you and your business!  People love stories about somebody in their community who is making a difference.

There seems to be a bit of confusion on what is included in the amounts reported on the 1099-MISC when reporting independent contractor payments.

Payments made to independent contractors need to be reported if:

• You made the payment for services in the course of your business;
• You made the payment to an individual (sole proprietorship), partnership or an LLC taxed as a sole proprietorship or partnership; and
• You made payments to that independent contractor of at least $600

What should be included in the amounts reported?

• Service fees
• Referral and/or commission fees
• Payment for services, including payment for parts or materials used to perform the services if the materials/expenses were incidental to providing the service.

So, if you are working as a consultant or coach and are paid $6,500 by your client — $5,000 for fees and $1,500 for reimbursed travel expenses — your client is going to report the full $6,500 on a 1099-MISC.  You are going to report the full $6,500 in revenues AND deduct the $1,500 of travel expenses on your tax return.  Don’t try to convince your client that they don’t have to report the $1,500 — they have to report that payment and you have to report that income.  You get to deduct the actual expenses, though, so the bottom-line effect will be $5,000 in taxable net profit.

Nothing strikes terror in the heart of the small biz owner quite like finding a letter in the mailbox from the IRS! In an effort to help you avoid that unpleasant scenario, here are some common pitfalls to avoid if you don’t want the IRS as your new pen pal!

• Include all your income on your tax return! If you received a Form 1099-MISC from anyone, be sure this income is on the return, in the right place, or you will receive a notice.  Even if you did not receive a 1099 for work you did, you are required to report the income.  The IRS receives copies of 1099s from the payers and these are checked against the income you report.
• If you made quarterly estimated tax payments, double-check the amount and the dates the taxes were paid.  Forgetting to include a payment is common, especially the payment made in January for the fourth quarter.  Remember the first payment of the year is sent in April, followed by June and September payments and concluding with the January payment for the fourth quarter of the preceding year.
• If you underestimated the amount of your taxes and are unable to pay the full amount, be sure to file the return on time anyway.  You can request to pay the remainder in 120 days or with an installment agreement.

A few minutes of extra time reviewing your return will pay off in peace of mind and help you stay off the IRS radar screen!

Recently, I found a really neat product for accumulating your tax documents and receipts throughout the year, so you can always be ready for tax time.  It’s called FreedomFiler:

You can have one folder for all of your income statements, or numerous folders for ”Income/W2,” ”Business Income,” “Rental Income,” and so on.  You can have a single folder for “Itemized Deductions,” or one for “Medical Expenses,” one for “Charitable Contributions,” and one for “Unreimbursed Business Expenses.”  You can make the system as simple or detailed as you like.  The beauty of the system is that no matter what paper you find, there’s a folder for it.  And at the end of the year, everything is ready to hand over to your tax preparer.  Check it out!

Thanks to Senator Olympia Snowe of Maine, there is a movement in Congress to establish an optional home office deduction for small business owners.  According to the SBA, even though 53% of small businesses are home-based, few owners take the home office deduction due to its complexity and strict requirements.  The Home Office Tax Deduction Simplification and Improvement Act of 2009 would establish a straight-forward, standard deduction that could be used instead.

Perhaps the best part of the Act is that it eases the burden of proof in claiming the deduction.  If your business is “virtual” like mine and you don’t actually meet clients in your home office, the legislation will allow you to take the deduction regardless of whether your clients are physically present in your office.  Also, making the occasional personal call or paying personal bills at your desk would no longer disqualify you from the deduction.

Finally, our tax laws are starting to catch up with how we actually live our lives!