by Chris Morris
Now that Thanksgiving has passed, Christmas has come and the new year is upon us, it is time for my favorite holiday–Tax Season! I jest, of course, but January is the time when the spectre of filing taxes begins to come into the forefront of everyone’s mind.
As the man named “The Most Interesting Accountant in the World” by none other than Suzy Q, I hope to answer some common questions about taxes as they apply to you as creatives and small business owners. Along the way I hope to keep you engaged and perhaps even force a laugh or two out of you.
Is it a Hobby or a Business?
It seems tricky because it is easy to think that a hobby is for fun, while a business is to make money. It might surprise you to learn this, but the IRS doesn’t care about your passions or your motives. [Insert shocked emoticon here]
Rather, the IRS looks at dollars and cents to determine if you have a business.
The clear distinction between a hobby and a business is cash flow or revenues. While a business can lose money in the beginning stages, and down cycles are a part of every industry, no business continues to exist without profits. And, profits cannot happen without a product or a service to sell.
In other words, if you have something to sell, and you are actually selling it, then you have a business. Otherwise, you have a hobby. Hobbies aren’t taxable, but businesses are.
Is that Iced Venti Skinny Vanilla Latte a Business Expense?
Before I answer this question factually, let me address it as a coffee connoisseur (AKA coffee snob). The tax code should definitely make an allowance of some sort for those of us who need caffeine in the morning to function as decent human beings. After all, nobody wants to meet a non-caffeinated CPA, even if he is the most interesting one in the world. Sadly, the IRS does not agree with me, and in most cases an iced venti skinny vanilla latte will not be considered a valid business expense.
Fear not though, because there are three exceptions where coffee or other meals can be considered business expenses:
- When traveling for business, any meals consumed during the business trip are considered deductible business expenses. (Travel coffee is a business expense!)
- Occasional celebrations or employee appreciation expenses are considered appropriate, but you may need to describe what the event was to an auditor…and “it’s Tuesday” is not sufficient.
- If you are meeting with a client or a potential client over a meal and pay for both yourself and your client, then 50% of the expense is a deductible expense.
Would an LLC or S-Corp Be Better?
This is the number one question I have been asked over the past several years, as I interact with creatives and other small business owners. This is a complex question that does depend somewhat on your circumstances, so don’t take this simple response as the end-all answer, and please seek more specific counsel from a lawyer or a tax professional (he says, while slowly raising his hand and offering to help).
Generally speaking, you would want to consider either an LLC or an S-Corp for your fledgling business if one of the following circumstances applies to you:
- You have employees (not independent contractors, but employees);
- You have annual profit of more than $10,000;
- You have annual revenues greater than $20,000;
- The services or products you provide put you at risk for being sued; or
- The government says you have to form an LLC or S-Corp.
If none of these apply to you, then you probably will be just fine as a sole proprietorship.
Is it Time to Hire a CPA?
Yes, of course you do. Everyone needs a CPA, but only I can provide perfectly for your needs. Oh wait, let me take my salesman hat off for a moment and answer this question a bit more honestly. You might or might not need a CPA for your taxes. Consider the following, but please read these in your best redneck voice:
- If the very thought of doing your taxes causes you to break out in hives, you might need a CPA.
- If you think using a Ouija board is a good way to determine your tax liability, you might need a CPA.
- If you don’t like getting your taxes done in the same place you buy your milk, you might need a CPA.
- If you don’t know the difference between a tax deduction and a breakfast sandwich, you might need a CPA.
- If you think you can apply your creativity to your tax form, you might need a CPA.
In all seriousness, there are a couple reasons you might want to consider hiring a CPA for this upcoming tax season. The first is because you are not sure about the best way to file your taxes, and you have more questions like what I just answered. The second reason has nothing to do with knowledge per se, and everything to do with stress; sometimes, it is just easier to pay someone to do a stressful task for you.
If you think it’s time to find a CPA, let’s talk. And, unless you live in Guam, Hawaii, or the Northern Mariana Islands, I am able to take care of your tax needs even though I am based in Arizona. You can email me at firstname.lastname@example.org, call me 520.789.6153, or click through to this form. I also hope to see most of you at Villanova for Realm Makers 2016 too!
Chris Morris is the founder of the creatively named CPA firm Chris Morris CPA, which focuses on helping creatives and other entrepreneurs manage their tax and accounting needs. Because he is a writer himself, and over 1/3 of his clients are writers, he is very familiar with navigating tax laws for this industry. He is a fan of stories with dragons, warp drive, or epic sword fights, though he does not write speculative fiction himself. He also feels very awkward writing about himself in the third person.