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1. Tenants who can’t pay the rent.
2. Tax losses they can’t deduct.

We’ll start with the tenants and then move on to the rental property tax-loss issues.

For the first time in U.S. history, residential landlords are subject to a sweeping nationwide federal moratorium on evictions for nonpayment of rent through the end of 2020.

There is no moratorium on landlords’ responsibility to pay their bills. Thus, landlords need to prepare for some of the rockiest times in decades.

The Federal Moratorium on Residential Evictions

The Centers for Disease Control and Prevention (CDC) and the Department of Health & Human Services issued the latest federal moratorium on evictions. It is an emergency health measure intended to help prevent the spread of COVID-19.

The CDC order is effective September 4, 2020, through December 31, 2020. The order replaces an eviction moratorium put in place on March 27, 2020, by the Coronavirus Aid, Relief, and Economic Security (CARES) Act that expired July 24, 2020.

The CDC order generally bars residential landlords from evicting tenants for nonpayment of rent if a tenant’s estimated 2020 income is no more than $99,000 (single) or $198,000 (married, filing jointly).

Unlike the CARES Act moratorium, which applied only to multifamily rental properties with rental subsidies or federally backed mortgages, the CDC order applies to all types of residential rentals: houses, duplexes, apartment buildings, mobile homes, and mobile home spaces. There is no requirement that the rental be federally financed or rent subsidized.

The CDC order does not apply to commercial properties, including motels and hotels. Nor does it apply to guesthouses rented to temporary guests or seasonal tenants—this presumably excludes most Airbnb and similar short-term rentals.

To prevent an eviction, a tenant need only give the landlord a declaration signed under penalty of perjury providing that the tenant

• has used his or her best efforts to obtain all available government assistance for rent or housing;
• falls within the income restrictions ($99,000 or $198,000 in income for 2020);
• is unable to pay the full rent due to substantial loss of household income, loss of work or wages, or extraordinary out-of-pocket medical expenses;
• is using his or her best efforts to make partial payments that are as close to the full rental payments as the tenant’s circumstances permit; and
• would likely become homeless or forced to move into and live in close quarters or a shared living space.

Tenants need not provide their landlord with any proof that the statements in the declaration are true. The CDC has created a form declaration for tenants to use.

There is no time limit on when tenants must provide this declaration to their landlord—they can do so anytime before or after receiving a termination notice.

Individual landlords who violate the CDC order are subject to a fine of up to $100,000 and up to one year in jail, if the violation does not result in a death.

The fine goes up to $250,000 if the violation results in a death (it’s unclear how the government could prove an eviction caused a tenant’s death).

The fines are doubled for organizations such as LLCs, corporations, and REITs.

Help Tenants Get Help

The CDC order requires tenants to seek government aid to help pay their rent. But they need not seek help from nongovernment sources such as churches or private charities.

It is to your advantage to help your tenants obtain such aid. After all, you would like the rent to get paid. And you likely would want to keep the tenant—assuming this is a good tenant. Links to government programs providing financial assistance for renters are available at https://legalfaq.org.

Work Out a Payment Plan

Try to work out payment plans with struggling tenants. This is in their best interests as well as your own. Be sure to get the terms in writing.

For example, if a tenant’s income has declined by 20 percent, you could agree to accept a 20 percent rent reduction through the end of the year and require the tenant to pay the balance due over 2021. Make it clear that this is a partial rent payment and does not satisfy the tenant’s full rental obligation.

You are under no obligation to offer a tenant a permanent rent reduction or any form of rent forgiveness.

And keep in mind that your government is not going to reward your generosity. You get no tax deduction or other tax benefit for reducing or forgiving rent. This doesn’t mean you shouldn’t do it. Just don’t expect the tax code to reward your generosity.

Unpaid Rent Is Not Tax-Deductible

Bad news. Unpaid rent is not a tax-deductible rental expense. Rather, it is a debt owed to you by your tenant. You get no tax deduction for the unpaid rent even if tenants never pay the rent they owe.

Good news. On the plus side, unpaid rent is not taxable as income, is not reported on your tax return, and increases the chances that you will have a rental property tax loss (deductible, we hope). This assumes you are a cash-basis taxpayer, as virtually all residential landlords are.

Deducting Rental Property Tax Losses

You have a rental loss if the total annual expenses you incur for your rentals (mortgage interest, taxes, utilities, insurance, maintenance, depreciation, and other expenses) exceed your total rental income (which does not include unpaid rent).

It’s likely that many landlords who ordinarily have profitable rentals will suffer rental losses for 2020 because their tenants failed to pay all or part of their rent.

The dreaded passive activity loss rules prevent many landlords from deducting all or part of their rental losses from their non-rental income.

Rental losses are always classified as passive losses. Subject to two important exceptions, the general rules are as follows:

• Passive losses are deductible only from passive income—income from rental activities and from businesses in which you do not materially participate.
• Passive losses are not deductible either (a) from ordinary income such as salary and self-employment earnings, or (b) from investment income such as dividends or interest.

Exception 1. $25,000 Allowance for Rental Real Estate

The tax law takes pity on landlords with a relatively modest income and permits them to deduct a limited amount of rental losses from non-rental income.

If your modified adjusted gross income for the year is under $100,000, you may deduct up to $25,000 in total annual rental losses from your nonpassive income, provided that you actively participate in the management of your rentals (an easy standard to meet).

Exception 2. Real Estate Professional Exemption from Passive Loss Rules

There’s another way you may be able to deduct your rental losses from non-rental income no matter how high your income: the real estate professional exemption from the passive loss rules.

If you qualify as a tax law–defined real estate professional and materially participate in your rental activity, you may treat rental losses as nonpassive and deduct them from all other nonpassive income without limit for 2020.

Either you or your spouse will qualify as a real estate professional for the year if one of you spends

• more than half your personal service work time in real property trades or businesses in which you materially participate, and
• more than 750 hours of your personal service work and investment analysis time in real property trades or businesses in which you and/or your spouse materially participate.

In addition to the standard described above, you and/or your spouse must materially participate in a rental activity to enable the tax loss deduction against your other income. There are various methods for establishing material participation. The two most common are working more than 500 hours in a tax law–grouped multi-rental activity and working more than 100 hours more than anyone else on individual non-grouped properties.

People with a full-time job outside the tax law–defined real estate industry can rarely qualify as real estate professionals.

Non-deductible Rental Losses Become Suspended Passive Losses

You don’t lose rental losses you can’t deduct because of the passive loss rules. Instead, the losses become suspended passive losses. They are carried forward indefinitely and deducted from passive income each year until they are used up.

You may also deduct your suspended passive losses if you sell or otherwise dispose of substantially all your interest in your rental property in a taxable transaction.

To be better understand the Government to landlords’ detailed information. We are here to help you. Don’t hesitate to call our office:415-860-6288 (San Francisco), 917-397-0949 (New York) and 713-396-0107 (Houston), and e-mail us at info@flextcg.com.

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Nonprofits

The nonprofit organization is a charitable entity with specific social goals that uses its income and surplus to fund operations, rather than benefiting members, shareholders, employees, or leaders of the organization. The remaining profit is further used to achieve its goals. Nonprofit organizations accept donations from governments, foundations, institutions, and individuals, to name a few. These funds are then used for the charity work set. They can conduct activities in research, religious, educational, and even scientific environments and are tax-free.

Foundations

A foundation is an organization that does not qualify as a public charity. They are very similar to nonprofit organizations, except that the funds for foundations usually come from family or corporate entities. In contrast, the funds for nonprofit organizations generally come from their income.

Technically speaking, donations can be made to private foundations, but many foundations do not accept it. As an alternative, they use the funds initially used for investment and allocate the funds generated from these investments. The foundation will also donate these funds to other nonprofit organizations in the form of gifts or grants.

Private foundations have the following subsets: operational and non-operational. Private non-operating foundations donate to other charitable organizations, which is a more common form. The foundation also does not directly execute charitable programs or services. Privately operated foundations allocate funds to their own projects that exist for charitable purposes.

Summary of Nonprofit VS. Foundation

A nonprofit organization refers to a charitable organization with specific social goals that use its income and surplus to fund operations, rather than benefiting members, shareholders, employees, or leaders. They receive funds from governments, foundations, institutions, and individuals, and do not donate to other charities. On the other hand, a foundation refers to a charitable organization that raises funds from its founder. It can be a corporate entity or a family. They can get funds from private foundations, companies, governments, individuals, companies, or families. However, both of them play a significant charitable role in society.

To be better understand the difference between a non-profit organization and a private foundation. We are here to help you. Don’t hesitate to call our office:415-860-6288 (San Francisco), 917-397-0949 (New York) and 713-396-0107 (Houston), and e-mail us at info@flextcg.com.

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Deciding Between an Asset Sale or Entity Sale

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In fiscal 2012, the IRS assessed 37.9 million penalties against taxpayers totaling $26.8 billion. Individual, business, and payroll penalties for failure to file, failure to pay, and failure to deposit (the types potentially eligible for FTA) were 74% of all penalties assessed in 2012. The IRS assesses most of these penalties automatically, regardless of the taxpayer’s situation.

Methods for Requesting Penalty Relief

Taxpayers can request relief from failure-to-file, failure-to-pay, and failure-to-deposit penalties in three ways, depending on their situation:

• Before the IRS assesses a penalty,the taxpayer can file a penalty nonassertion request with a paper return to request that the IRS not automatically assess a penalty.
• After the IRS has assessed a penalty, the taxpayer can request penalty abatement, typically by writing a penalty abatement letter or by calling the IRS. Tax professionals can also request abatement using IRS e-services.
• After the taxpayer has paid the penalty, the taxpayer can request a refund using Form 843, Claim for Refund and Request for Abatement. The taxpayer must file the claim within three years of the return due date or filing date, or within two years of the date the penalty was paid.

Reasons to Request Abatement

Generally, relief from penalties falls into four separate categories: reasonable cause, statutory exceptions, administrative waivers, and correction of IRS error. Under the category of administrative waivers, the IRS may formally interpret or clarify a provision to provide administrative relief from a penalty it would otherwise assess. The IRS may address an administrative waiver in either a policy statement, news release, or other formal communication stating that the policy of the IRS is to provide relief from a penalty under specific conditions. The most widely available administrative waiver is FTA.

First-Time Abatement Waiver

In 2001, the IRS established FTA to help administer the abatement of penalties consistently and fairly, reward past compliance, and promote future compliance. This administrative penalty waiver allows a first-time noncompliant taxpayer to request abatement of certain penalties for a single tax period—one tax year for individual and business income taxes and one quarter for payroll taxes.

According to TIGTA, for tax year 2010, the average individual failure-to-file abatement qualifying under FTA was $240, and the average failure-to-pay abatement was $84. However, more than 90% of individuals who qualified for an FTA did not receive the waiver for 2010.  This is likely because taxpayers did not know they could request it. The IRS does not publicize FTA as a relief option on its penalty-related notices or on its website. 

The remainder of this article discusses how to determine whether a client qualifies for FTA and how to request it from the IRS.

Penalties Eligible for an FTA

FTA applies only to certain penalties and certain returns filed. First, determine whether FTA applies to the client’s situation:

• Individual taxpayers can request an FTA for failure-to-file and failure-to-pay penalties. Estate and gift tax returns do not qualify for FTA waivers. 
• Business and payroll taxpayers can request an FTA for failure-to-file, failure-to-pay, and/or failure-to-deposit penalties. The IRS is not explicit in its Internal Revenue Manual (IRM), but in practice, the IRS has granted FTAs for S corporation and partnership late-filing penalties. 
• For individual and business taxpayers, the estimated tax and accuracy-related penalties cannot be waived under FTA.

Clean Compliance Criteria

If FTA applies to the client’s situation, the practitioner must determine whether the client qualifies to receive it, which entails most of the complexity involved in requesting an FTA. To qualify, the client must demonstrate filing and payment compliance and a three-year clean penalty history.

To meet the rule for filing compliance, the client must have filed, or filed a valid extension for, all currently required returns and must not have an outstanding request from the IRS for an unfiled return. 11 To meet the payment compliance rule, the client must also have paid, or arranged to pay, any tax due. The client can have an open installment agreement, as long as installment payments are current. According to the IRM, the IRS should give a taxpayer not currently in compliance with these payment requirements an opportunity to comply and thereby qualify for an FTA before the IRS considers whether the penalty can abatefor reasonable cause. 

Requesting an FTA

By phone or e-services: A practitioner who determines that the client qualifies for an FTA can request it in several ways. Start with simple methods. If the client’s case does not involve a compliance function, call the IRS Practitioner Priority Service (PPS) line or use the IRS e-services Electronic Account Resolution function.  The IRS representatives in Accounts Management have authority to grant an FTA.

When an IRS compliance unit assesses the penalty, requesting an FTA from a PPS representative or by e-services will not work. For example, for a taxpayer under audit or underreporter inquiry or with a case in IRS Collection or Appeals functions, the appropriate compliance unit will address penalties based on the taxpayer’s facts and circumstances. If a compliance unit assesses a penalty, penalty relief must typically be requested directly from that unit.

IRS Abatement Determinations Often Flawed

When the taxpayer or practitioner calls or writes the IRS to request an FTA, the IRS evaluates the request using an automated tool. To uniformly apply penalty abatements, the IRS developed a decision-support software program called the Reasonable Cause Assistant (RCA). The program was designed to help IRS employees make penalty relief determinations for individuals (failure-to-file and failure-to-pay penalties) and businesses (failure-to-deposit penalty). The IRS requires its employees to use this program to make determinations on penalty abatement requests, including requests for an FTA.

Be prepared by researching the client’s clean compliance history and applying the qualification rules before contacting the IRS. If the client qualifies but the IRS representative says the client does not, ask the representative to override the RCA determination. If the representative will not override it, ask for the representative’s manager. Finally, if all other means have been exhausted, consider contacting the Taxpayer Advocate Service (TAS) for help. Keep in mind that IRS representatives often simply do not know how to use the RCA, thus resulting in errors. If the IRS representative is unsure about how to use the program, a practitioner who is sure the client qualifies can try calling back to request an FTA again.

FTA Confirmation

A client to whom the IRS grants an FTA will receive Letter 3502C or 3503C  for individual failure-to-file and failure-to-pay penalty abatement and Letter 168C (or its equivalent)  for business failure-to-deposit penalty abatement. The letter usually arrives about four weeks after the IRS grants the FTA.

The Future of FTA

Encouraging compliance is one of the IRS’s major goals as it focuses on closing the $450 billion annual tax gap. The proper use of penalties helps deter noncompliance, and it is clear that the IRS has been using penalties to that end. During the past 11 years, the number of penalties assessed increased by 34%, from 28.3 million penalties in 2002 to 37.9 million in 2012. However, to increase voluntary compliance, the IRS must administer penalties fairly and consistently.

The IRS stated in its response to the 2010 TAS Report to Congress that it is studying whether FTA increases compliance and whether a system to grant FTA waivers prior to penalty assessment should implemented. To date, the IRS has not concluded the study.

With TIGTA and TAS reports highlighting the IRS’s inconsistent application of penalty abatement. The IRS will likely make some changes in its requirements and procedures for requesting and granting penalty abatements in the future. For now, if the client qualifies, the practitioner can effectively request and receive relief for the client’s penalties using this largely unknown and beneficial administrative waiver.

Source

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More information on virtual currencies can found on IRS.gov. And Flex Tax and Consulting Group can help you all tax services, please don’t hesitate to contact with us.

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Anyone who sells a capital asset on an installment note with the buyer making payments over time can choose to spread the income from the sale over the life of the installment note. Spreading the capital gains income over multiple years can, in some circumstances, reduce the amount of tax compared to reporting the entire gain in one year. This tax strategy is called an installment sale.

The key benefit of the installment sale strategy is spreading capital gains income over time. Depending on a person’s financial circumstances, spreading capital gains income over time can result in:

• Income is taxed at potentially lower tax rates;
• Pairing the cash flow of money coming in from the buyer with money going out for taxes;
• Preventing huge, short-lived spikes in income, adjusted gross income, and tax; and
• Potentially more cash in hand to re-invest, save or spend on you see fit.

A secondary benefit is that the seller earns some interest on the seller-back loan to the buyer.

Installment sales require two factors.

1. You agree to sell an asset to a buyer with payments made over time. At least one payment must be received within a year after the tax year of the sale.
2. You choose to report this as an installment sale on Form 6252. (Alternatively, you can elect not to use the installment sale method.)

Simplified Scenario

When Jorandus (not his real name) sold his business, he was able to spread the tax impact over several years using the installment sale method. An installment sale is a transaction in which a person sells a capital asset to a buyer over time and at least one payment is received a year after the year of the sale. For Jorandus, the sales contract specified that the buyer would pay 30% of the selling price upfront, 40% in one year, and the remaining 30% in two years. This made it possible for Jorandus to report 30% of his capital gains in the first year, 40% in the second year, and 30% in the third and final year.

Additionally, because Jorandus had to wait to receive his payment, the buyer paid interest on the second and third payments.

In order to figure out whether Jorandus would be better off using the installment sale method, we will need to calculate what the tax impact would be 1) if he reported his gains over time compared to 2) if he reported all the gains in the year of sale. In order to do this comparison, we’ll need to know what income and deductions he has for these years. And since some of those years are in the future, we may need to estimate what his future income and deductions might be. Jorandus will be receiving $100,000 from the sale of his business, minus selling expenses of $10,000, over three years.

Plus the buyer will pay interest on the second and third installments. Additionally, Jorandus estimates he’ll have about $36,000 of ordinary income each year apart from the gains from selling his business. He doesn’t anticipate any significant deductions. We can now compare two tax scenarios.

*Calculated using the 2014 tax rates, standard deduction, and personal exemption. All gains are long-term. After-tax income is total income minus federal income tax. The effective tax rate is equal to the federal income tax divided by taxable income.

*Calculated using the 2014 tax rates, standard deduction, and personal exemption. All gains are long-term. After-tax income is total income minus federal income tax. The effective tax rate is equal to the federal income tax divided by taxable income.

Let’s talk through these two scenarios. Notice the only differences we are measuring are when the taxable gains are included in income – either spread out over three years under the installment sale method (scenario 1) or all at once if the client elects out (scenario 2). All the other income and deduction inputs remain the same between the two scenarios. Over three years, Jorandus will pay approximately $20,313 in federal income tax under the installment sale method compared to paying about $22,877 if he elects out and reports all his gains in the year of sale.

That’s a tax savings of $2,564 for using the installment sale method. That’s extra money Jorandus could use to save or spend as he sees fit.

When constructing a scenario like this, it’s important to capture all the relevant information about your current and future taxes. Different people will be impacted in different ways based on differences in their financial circumstances. Thus the inputs captured and the taxes calculated for your situation may look different than the simple scenario displayed above. So let’s dig into these details, so you know what to look for.

The Big Picture: Timing of Income

Under the installment sale method, taxable gains are spread out over multiple years. Gain is measured once (gross sales proceeds minus cost basis minus selling expenses) and is expressed as a gross profit percentage. This percentage is then applied to each payment as it is received. Gains are included in income each year for which the seller receives a payment from the buyer. In addition, the buyer pays interest to compensate the seller for waiting to receive payment. The interest is taxed separately at ordinary tax rates.

The gain is taxed either at short-term or long-term rates, depending on whether the underlying asset was held for one year or less (short-term) or held for more than one year (long-term). Long-term gains can be taxed at zero, 15%, or 20%. Long-term gains may also be subject to the 3.8% net investment income surtax for higher-income individuals.

What Else to Watch For

The installment sale method is basically a play on the timing of income. Should we spread out the income over multiple years? Or take the tax hit all at once? The “right” answer depends on the specifics of your financial situation.

As a tax strategy, installment sales are about managing the tax rates that apply to the capital gains income. Installment sales can also be used to manage other tax-related impacts. For example, spreading income out over multiple years can help a person manage their adjusted gross income, which may be important in qualifying for deductions or tax credits that are based on income. For example, keeping income underneath a certain threshold can help avoid higher Medicare Part B premiums or can help a person keep their income under the threshold where itemized deductions are phased out.

Increasing income by reporting a large capital gain in one year can potentially:

• Push ordinary income into a higher tax rate bracket;
• Push capital gains income into a higher tax rate bracket;
• Result in more Social Security benefits being subject to tax;
• Reduce or eliminate deductions that are phased out based on income, such as the student loan interest deduction, itemized deductions, & personal exemptions;
• Reduce or eliminate how much can be contributed to a Roth IRA or Coverdell Education Savings Account;
• Reduce or eliminate tax credits that are phased out based on income, such as the premium assistance tax credit, lifetime learning credit or child tax credit;

• Trigger or increase the net investment income tax;
• Trigger or increase the alternative minimum tax;

• Medicare Part B premiums can go up.

Conversely, spreading income out over multiple years can potentially:

• Help keep income within a desired tax rate bracket;
• Help keep capital gains income within the desired zero percent or 15% brackets;
• Result in fewer Social Security benefits being subject to tax;
• Help keep income within range for taking the full amount of student loan interest deduction, itemized deductions, personal exemptions, or other deductions that are limited by income;
• Help keep income within range for taking the premium assistance tax credit, or other tax credits;
• Avoid or lessen the impact of the net investment income tax;

• Avoid or lessen the impact of the alternative minimum tax;
• Avoid or lessen the impact of higher Medicare Part B premiums.

Now, these are the end results. These benefits come about by managing income levels and looking at how different levels of income trigger various tax impacts. When building your own tax planning scenario, be sure to identify all the types of income, types of deductions, types of taxes, and types of tax credits that are relevant for your situation. In other words, we’re trying to solve a puzzle here by looking at how a level of income interacts with other parts of your tax return.

The Details

• To qualify as an installment sale: the seller sells the property to a buyer where the seller receives at least one payment in a year after the year of sale.
• Taxpayers can elect not to use the installment sale method by including all the gains in income in the year of the sale. For this election to be valid, the tax return must be filed by the due date of the return, including extensions.

The installment sales method cannot be used in the following situations:

• Property sold at a loss. Report the entire capital loss in the year of the sale.
• Sales of inventory in the normal course of business, even if the customer pays for the merchandise in a later year.
• Sales of personal property or real property by dealers, even if the property is sold on an installment plan. (However, there’s an exception for dealers of time-shares and residential lots. See Publication 537 for the details.)
• Sales of stocks, bonds, and other investment securities.

Be aware there are special rules:

• When selling depreciable property to a closely-related person,
• When selling depreciable property and depreciation needs to be recaptured,
• When exchanging like-kind property with installment payments,
• When the selling price of the property is contingent on future events,
• When selling several assets as part of a single sale,
• If the interest rate is left unstated in the sales contract,
• If the installment note is subsequently sold or transferred, or
• If the seller subsequently repossesses the property,

See Publication 537, on the IRS Web site, for an in-depth discussion of these special rules.

Examples

While this list is not comprehensive, here are situations in which taxpayers may want to consider selling capital assets using an installment sale.

• Selling real estate, there’s no mortgage on the property, and the seller is willing to finance the buyer’s purchase. This can generate an income stream over multiple years for the seller.
• Selling a business or significant business assets.
• A large capital gain would push the taxpayer over the threshold for the 20% capital gains tax rate or for the net investment income tax.
• A large capital gain would make the taxpayer responsible for paying higher Medicare Part B premiums

Reference Material

• Publication 537, Installment Sales (IRS.gov)
• Form 6252 (includes instructions, pdf, IRS.gov)
• Publication 550, Investment Income and Expenses (IRS.gov)
• Publication 544, Sales and Other Dispositions of Assets (IRS.gov)

Written by:  WILLIAM PEREZ

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Employee compensation is a major expenditure for most corporations; therefore, many firms find it easier to pay at least a portion of it in the form of stock. This type of compensation has two advantages: It reduces the amount of cash that employers must dole out, and also serves as an incentive for employee productivity.

Restricted Stock

How Restricted Stocks and RSUs Taxed

What Restricted Stock Units?

How Restricted Stock Taxed?

Section 83(b) Election

Taxation of RSUs

The Bottom Line

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The good news is that, also like a business, you get to deduct expenses to lower the amount you pay in taxes. When you calculate quarterly or year-end 1099 taxes, you can itemize deductions which factor into your business profit or loss (as reported on the Schedule C). For example, let’s say you are a Dasher for DoorDash. For every mile you drive while working, you can deduct 58 cents from your earnings. You can also write off a percentage of your cell phone and any supplies needed for the job. After keeping track of those deductions, you could even pay less in taxes than a traditional W-2 employee (7.6 percent).

Let’s cover the most commonly used 1099 tax deductions for independent contractors.

Top Ten 1099 Tax Deductions

#1 Car expenses and mileage

Of all deductions available to contractors, mileage and car expenses can provide one of the most sizable write offs. You’re allowed to write off any driving while working, driving between gigs, going to meet clients, or driving out of town for business. In 2018, the standard mileage rate allows you to write 58 cents off of every mile you drive for your business.

There are two methods for tracking and deducting mileage: the actual method and the standard mileage rate. The standard mileage rate takes into account gas, insurance, maintenance and depreciation and is much easier to keep track of and claim. In order to deduct it, keep track of your business miles and multiply the total mileage amount by .54 (the 2016 standard mileage rate). If you use this deduction, you can’t additionally write off insurance or gas because it’s already included in the rate.

Make sure you’re keeping adequate records of your mileage because this is also one of the most often audited expenses for contractors. The IRS recommends spending a few minutes a day (or whenever you drive for business) recording your mileage in a driving log. You will need to log the date, miles, and business purpose, plus the starting and ending odometer amount.

#2 Home office expenses

If running your independent business from home, you can potentially count a portion of your home expenses as a tax write-off. There are two important conditions however to using this deduction:

1. Primary place of business: Your home must be where you conduct the majority of your independent business. If you only sometimes work at home out of convenience, then you can’t count it as a deduction.
2. Exclusively used for work: The space that you use within your home must be exclusively meant for work. For example, a room that is only your home office or a desk in one room that is reserved only for running your independent business. Ultimately you will write off only a percentage of your home space.

Like deducting mileage, there are two options for deducting home office expenses: the Simplified Method or the Regular Method.

• Simplified Method: You can multiply the square footage of your office by the IRS set rate of $5 per square foot for 2018, up to 300 square feet per year.
• Regular Method: Track all costs related to your home residence, and determine the portion to allocate to your home office using Form 8829.

#3 Supplies

Any supplies that you purchase to conduct your independent business are deductible. If you’re a cleaner you can deduct cleaning supplies. Other examples are office supplies, food for passengers in your car, and new messenger bags for couriers — if it’s used for you to get the job done then it’s deductible. If you rented or leased any equipment for your business, that’s a write-off as well.

#4 Health insurance premiums

If you pay for your own health insurance plan and your spouse doesn’t benefit from an employer-subsidized health insurance plan, then you could count those payments as a tax write-off on your individual income taxes. If your independent business earned a profit for the year, you can report this on your 1040 form, not your Schedule C (where you’ll report most deductions).

#5 Continuing education

Contemplating taking a class or online course to improve your skills? If any education is needed to “maintain or improve skills required in your present work” then you can count it as a tax write-off. An important caveat is that you can’t write off education expenses for learning a new line of work, only for improving and honing your current skill set.

The IRS Publication 970 provides additional information about this deduction in Chapter 12.

#6  Cell phone

Do you use your cell phone for your contracting business as well as your own personal use? If so, then you can count a portion of your cell phone bill as a tax write-off! You’ll have to make a close estimate as to what percent of your usage is personal versus business. But, for the amount that is business, apply that percentage to your phone bill and deduct it.

#7 Travel

If you ever have to travel for business, make sure to keep track of your airfare, cab, Uber/Lyft, hotel, rental cars and any other expenses. Those costs are deductible if your travel is for business purposes. For example, do you have to travel to pitch or present to a client? Count that trip and any associated costs as a tax deduction.

#8 Parking

This is another expense that can add up for certain types of contract work. If you regularly pay for parking, keep those receipts as well. These too can count as a tax write-off.

#9 Postage

Postage is one deduction that is often overlooked. But if you find yourself shipping and mailing for business often, keep track of these expenses as well.

#10 Fees, Dues, Subscriptions

If you pay for any services, trade organizations, or publications required for your business then those are tax deductible. For example, if you have a certification that requires a fee to maintain, then you can count that as a write-off.

There are many more 1099 deductions that you can count so make sure to double-check with a tax advisor to best understand the full extent of what you can write off based on your particular work. The IRS Schedule C instructions also provide a great resource for better understanding how to claim those deductions when doing your taxes. By far, the most important takeaway is to keep incredibly diligent records of the expenses that you plan on deducting. That diligence can save you a lot of money in the long run!

The post Top Ten 1099-MISC Tax Deductions appeared first on Flex Tax and Consulting Group (FTCG).