1099 Tax Deductions and Record Keeping?

Question

I’ve been self-employed for about a year now and I have recently started keeping more detailed expense records. Because I use my home and personal automobile for business related purposes a lot of my ‘personal’ and business expenses are crossing and I’m having a hard time figuring out how to keep my records. As I understand it, my Internet, Cell Phone, Rent, Electricity, and Mileage are all or partially deductible on some level. My problem is that currently I am using my personal checking account to make payments for all of these things. I do have a Business checking account that I recently opened as a Sole Proprietor under my SSN but haven’t started using it just yet. My question is should I use my business account to pay my Internet, Cell Phone, Rent, and Electric bills in addition to my fixed operating expenses and other standard business related payments? The only conflict I could see is that in some cases only a portion of those expenses are deductible. Will that be an issue?

Answer 1

Paying your expenses from one account is a big issue. If the IRS wants to audit your business they will ask for bank records and you will be showing them a lot more than you need to.
I suggest that you start using the business account for all direct business deposits and expenses. If you need funds in your personal account write yourself a check and deposit that in your personal account.
The non-direct expenses should be paid from the personal account. This would be rent, mortgage payments, utilities etc.
When you do your taxes you would allocate the business use of the home based on the percentage of the home that is used for business.
Your automobile use can be deducted against your business income based on the milage rtate or based on the percentage of actual expenses that apply to the business use. Good Luck!

Answer 2

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Answer 3

Using your business account to pay the bills isn't required to claim them as business expenses and in fact would not make them deductible - keeping good records is the important thing. If you're audited it won't matter what account you paid the expenses from, but just that they are legitimately deductible expenses and you did pay them.

For items like cell phone and Internet, they might be partially deductible depending on how you use them. You'd need to be able to show what portion was business use.

Business miles on your personal car are an allowable deductible expense. For that, you'd need to keep records AS YOU GO, not just put them together at the end of the year, of all the mileage on your car and what's business, what's commuting, and what's personal miles.

You might or might not quaility for a home office deduction, which would include rent and utilities. To qualify, you must have a portion of your home that you use regularly and EXCLUSIVELY for business. If you have a desk in the corner of your bedroom with your computer sitting on it that you do your business work at, that wouldn't qualify, or if you have an extra bedroom that does double duty as your office and as a guest room, that doesn't qualify either. But if you do have a space that qualifies, figure out the square footage of that room and the sq ft in your entire home. The percent of the total that's your office gives you the percent of your rent and other expenses like utilities that you can deduct.

Answer 4

Paying your expenses which are part personal and part business from your personal account is not an issue.

It is not necessary to pay your rent and utilities with a business account. The percentage of these "indirect" expenses that you can deduct is the percentage of the square footage of your home that is used for business.

The cell phone which is used for business and for personal is more problematic. If this is your only phone line, you cannot deduct any of it. This is an example of where it might make sense to have two cell phones and then deduct all of the business cell phone.

Your car records should show all mileage that is for business. Keep a daily log. The simplest way to deduct that is to take a straight mileage deduction of 48.5 cents per mile.

If you have purely business expenses, using a business account makes sense, but it is not necessary if the records are good. Paying out of a business account is not documentation that it was a business expense.

Answer 5

If you itemize (schedule A) for your tax return, you have a choice of deducting either state and local income taxes, or sales tax you paid. If you chose sales tax, there is a standard table you can use (and add sales tax paid on purchase of a car, boat or plane) or if you prefer, you can save all your receipts and add up the sales tax. This has nothing to do with whether your income was on a 1099 or not. If you got a 1099, you could include sales tax paid on deductible items purchased for business (NOT your groceries, entertainment, etc) as expenses, as part of the cost of the item. If you do that and also itemize, you couldn't deduct the sales tax on those items as itemized deductions also.

Answer 6

This is why I don't do my own taxes. H&R Block is a great place to get your taxes done. Or any place where they do regular courses to update their knowledge of the tax laws.

Good luck.