Expenses
Operating expenses are the costs
you incur in your day-to-day business,
like rent, utilities, telephone
and printing. When determining if
these costs are deductible, two criteria
must be considered—intent and
documentation.
The first, intent, covers how the
purchase is intended to be used. If
you go to a department store and
buy a telephone to use in your office,
for example, the cost of the phone
can be deducted. If, however, you
use this phone in your home, the
purchase is considered personal and
cannot be deducted. If the telephone
was originally purchased for your
home but you later take it to your office,
it’s considered converted property
and is deductible at fair market
value instead of original cost.
The second piece of the puzzle is
documentation. A cancelled check
or credit card statement will suffice.
Other forms of documentation that
meet the burden of proof required
by the IRS are receipts for the vendor,
written log and written evidence.
Logs and evidence must be
written at approximately the time of
the transaction and contain all pertinent
information, including who,
what, where, when and why. Even
just a few words jotted down in an
appointment book or on the back of
a business card would suffice.
The IRS requires additional information
for deductions pertaining to
travel, entertainment, gifts and auto
expenses. Travel costs, for instance,
are a necessary expense when you
are driving to clients’ homes, but
your residential home is not the
same as your tax home. According
to the IRS, your tax home is defined
as your primary place of business,
regardless of where you live.
The IRS allows you to deduct
travel costs, even if you’re not gone
overnight, if the following requirements
are met: Your duties require
you to be away from the general area
of your tax home substantially longer
than an ordinary day’s work, and
you need to sleep or rest to meet the
demands of your work while away
from home.
Meals are deductible if they are
business-related and are not deemed
lavish or extravagant by the IRS.
The definition of lavish is based on
reasonable facts and circumstances,
and documentation will be vital. A
dinner in New York City could very
well be $100, whereas in a smaller,
less cosmopolitan area, $100 for dinner
may seem excessive—geographic
location will have a lot to do with
determining what is reasonable.
You can deduct meals in one of
two ways: by using the actual cost
of the meal, using your receipt as
documentation, or using the IRS per
diem rate for the city and time of
year. If you were in Miami, Florida
in February 2008, for example, the
IRS per diem rate for meals and incidentals
was $58 per day.
When the actual cost is higher
than the per diem rate, using the
actual cost method would provide
more of a deduction. You can switch
between per diem and actual cost on
a trip-by-trip basis, but can choose
only one method per trip, even when
multiple cities are involved. Ultimately,
only 50 percent of the meal
expense will be deductible, though
some food items are 100 percent
deductible, including food you buy
for an open house at your practice,
and snacks, water and tea you make
available to your clients. (For more
information on travel and meal deductions,
see Travel Expenses Made
Easy)
The deductions you can take for
any gifts you give are limited. You
can deduct no more than $25 per
person, per calendar year. Any cost
above $25 is nondeductible, unless
considered incidental. Packaging,
gift wrapping and mailing would fall
into this category and not count toward
the $25 limit.
In My Estimation
Financial records that are up to date can help you estimate your quarterly
taxes, and you’ll be able to more accurately predict what you owe. Estimated
taxes are based on one of two things: the prior year total tax liability or 90
percent of the taxes for the current year calculated with actual financial data
compiled through the end of the month preceding the due date.
Estimated taxes are due according to the following schedule:
January 1–March 31 are due on April 15
January 1–May 31 are due June 15
January 1–August 31 are due September 15
January 1–December 31 are due January 15 of the following year
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American Massage Therapy Association®
