Tax MetaFilter

September 28, 2007 8:54 PM

I'm planning to do some on-the-side freelance photography in the next year. I'd like some advice on how to play the tax game most effectively.

I have an 8-5 weekday job that pays my bills, but I'll probably be doing a small-potatoes amount of photography as a side business over the next year. Nothing to warrant obtaining a business license, incorporating, or anything like that; probably about 6-12 or so events/jobs at a modest rate. My expected earnings will almost certainly be higher than the $600 minimum for reporting additional income, but not anything in the several-thousand range. After doing a bit of research, here's my game plan:

1. Keep detailed receipts and records of ALL income and potential business-related expenses
2. Use 1040 (long) as normal for personal filing of W2s
3. Also file as "sole proprietor" using form Schedule C-EZ for business income based on receipts

Seems simple enough, right? Well, I'm wondering about deductions: I know with the Schedule C-EZ I'm allowed to file up to $5,000 worth of business expenses. I'm NOT planning on filing a home office expense, etc. But what about photo gear, computer equipment, software, or web hosting/printer subscription costs? Should I deduct these?

The obvious answer to me would be "yes", but I'm wondering that since I won't be making a tremendous amount of profit, it might be wiser to ignore some of those deductions to keep "under the radar". I mean, I'd love to get a new MacBook for my photo editing and write it off as a business deduction [which it legitimately would be], but if that offsets the majority of my profit, would the IRS consider me as being a "hobby" and screw me in the long run?

I know that the IRS looks for net profitability in 3 out of 5 years after filing as a sole proprietor. I don't plan on making this a primary source of income - be it next year or in five. Just a little side earnings. So would it be smarter to take the hit on my tax return and skip deducting too many expenses or to deduct away and keep my fingers crossed?

Would it be safe if I just made sure my net profits above were above $600 after all deductions?

Oh, and you can skip the "you should see a CPA" comments, I know you all ANACPA or ANAL, but I'm just "querying the hive mind" :)

posted by sprocket87 to Work & Money (8 answers total)

But what about photo gear, computer equipment, software, or web hosting/printer subscription costs? Should I deduct these? Yes.

Basically if you are audited, it shouldn't look like a hobby. (Don't make it look like you are having fun!) Also don't forget to track mileage.

From what I understand, the "attitude"/ or corporate mentality has been made to focus on bigger fish to fry then small sole proprietorships. And by small I mean less then 200k. So I wouldn't worry about it too much. If you are following the law, don't worry about being audited. You are within you rights to claim these things as expenses.

Nolo has been a great resource for me, you should really have a look at their offerings.
posted by bigmusic at 10:04 PM on September 28, 2007 [1 favorite]

IIRC the only way your business gets classified as a "hobby" by the IRS is if you fail to make a profit in three of your first five years. If your new MacBook eliminates a majority of your profit but you still do show a profit, then you're ok.

By the way, you can choose to depreciate new equipment over a number of years instead of deducting it all at once when you buy it. In your case, if depreciating helps you show a profit, you might want to opt for that.
posted by Dec One at 5:19 AM on September 29, 2007

Response by poster: Thanks for the replies. So the next question is: What if I decide to stop doing this in a couple years. Let's say I've made a profit this year and next year, even after deducting expenses. If I were to stop doing this altogether at that point (2 years), and didn't even file a Schedule C in the following years, would that raise red flags at the IRS? Would I probably have to pay backtaxes on the deductions I declared in the earlier years?
posted by sprocket87 at 5:37 AM on September 29, 2007

I think the main issue is when you buy something as a "business expense" and deduct it, but then use it for personal use. The MacBook would certainly fall under this category, while lenses and such for the camera would not.
posted by smackfu at 7:07 AM on September 29, 2007

Just keep your receipts and deduct everything you are allowed to. You can take the home office deduction if you want, but there has been some controversy over when it's allowable. If you have a room or a portion of a room where you do your photo editing, billing, and marketing work, then you are allowed the home office deduction. It doesn't have to be a whole room, just a dedicated area.

If you deduct a MacBook as a business expense (and I think the rule is that its major use is business; they know you are not going to have a different computer for work vs. personal), then you stop the business, I do think you can buy it from the business at fair market value. They used to use a depreciation schedule, and at one point the value would be zero, so it didn't matter. Then the rule changed so you could deduct the whole cost of certain items when you purchase them. I don't know if there is still a schedule where the value goes to zero, but it's worth looking into.

In short, as long as you show you are actually trying to make money at this, and you're not just trying to get some tax break for your hobby, then you are fine. My tax attorney once told me that if after 5 years you are not showing a profit, then they might classify it as a hobby. Keep your invoices, your contact list, your journal if you have one, your marketing materials; anything that you can show someone, in case of an audit, that you indeed are working a business.

Side story: I read a book years ago (I think it was about running a photography business, by the way) where the writer told about her experience with her accountant. He had many high income clients. She expressed concern about deducting certain things because she didn't want to flag an audit. He told her his rule for his clients was: claim EVERY penny you make, and take EVERY deduction you can. He said in his experience, people would not claim certain deductions, because they were afraid of an audit, yet if you have no hidden income, there is nothing to fear from an audit. None of his clients ever owed more after an audit, and some actually had money coming back to them. And this included clients who claimed yachts as business expenses for entertaining potential clients. Apocryphal or not, it's something to think about.
posted by The Deej at 8:20 AM on September 29, 2007

I have it on good authority that the IRS is stepping up its audits of small businesses, which tend to play fast and loose with the rules.

That said, it doesn't sound like you're doing anything wrong. The MacBook is a bit of a tenuous link, though -- $600 of income and a $2,000 expense might look a bit suspicious. BUT, it looks like you can lease a Macbook starting around $30 a month, which would let you show a profit.

It probably won't appease the IRS, but the mere fact that you're declaring the income at all sets you apart from a lot of people. A surprising amount of people might just pocket the cash and never declare it. And I know someone who has a luxury car as a 'business expense,' so the Macbook is small beans, and that's assuming (likely erroneously) that it's an improper deduction.

I know you said we could skip it, but I have to say it anyway: IANAL/IANAA, I just hang out with accountants. Taking my advice over that of an actual tax attorney / accountant would be lunatic.
posted by fogster at 9:18 AM on September 29, 2007

Overall, the best advice I can give is to do research and don't do anything improper. However, you shouldn't make choices of what to purchase/deduct based on whether you think you're going to get audited or not -- if you're not doing anything wrong, then it doesn't matter whether you're audited. Don't let the fear of an audit prevent you from using the tax laws to allow you to make legitimate claims.

In the "Business or Hobby" information from the IRS site, there is a specific note about "start-up" costs -- if these are one-time costs that you need to get your business going, then that's different than trying to claim a deduction for a new computer every year as a business expense when it realistically has no effect on the efficiency or profitability of your business.

As far as specifically what and how to make the claims, check out the Property Bought for Business Use section of IRS Publication 587, which lists your options for making claims:

- Elect a section 179 deduction for the full cost of the property.
- Depreciate the full cost of the property.
- Take part of the cost as a section 179 deduction and depreciate the balance.

The "section 179" link has all you need to know about qualifying property, how to make the deduction, etc.

If you're not interested in consulting a tax preparer or accountant, programs like TurboTax have pretty good features for guiding you through these issues, though an accountant is much more likely to help you with questions of legitimacy.
posted by camcgee at 11:02 AM on September 29, 2007

Thanks for the replies. So the next question is: What if I decide to stop doing this in a couple years. Let's say I've made a profit this year and next year, even after deducting expenses. If I were to stop doing this altogether at that point (2 years), and didn't even file a Schedule C in the following years, would that raise red flags at the IRS? Would I probably have to pay backtaxes on the deductions I declared in the earlier years?

Well if you've been deducting depreciation rather than taking the Sec. 179 deduction in the year the assets were placed into service, then there's no problem - no more Schedule C means no more deducting depreciation. If you take the Sec. 179 deduction, however, and then go out of business... good question. My guess is you'd have to take what would have been your depreciation in the years you're out of business, and count that as income. Look up Section 179 on the IRS web site and you'll probably find more.
posted by Dec One at 11:27 AM on September 29, 2007