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|Tax time in the USA|
things Adsensers can possibly write off
First of all, you'll need to talk to your own tax preparer or accountant to see what you can write off when filing your taxes. I'm in Florida, USA, and this is only my experience. I know nothing about tax preparation except what my accountant has told me.
I was recently talking to a fellow Adsenser in my area and he was complaining about having to pay out about 3500 in taxes this year even though he didn't earn very much, maybe 18k total for the year. It was his first full year with Adsense, he started late the year prior with a good site he already had going. Anyway, I asked him what all he wrote off for his taxes and he said, to my astonishment, nothing! You didn't write anything off? Not even your cost for Internet? I didn't know I could, he said.
He's not a dumb person, I've always thought he was fairly intelligent so now I am wondering how many other seemingly intelligent people don't realize they can write things off from the money they owe for taxes on Adsense earnings.
Nearly every US based Adsenser should be able to write the following things off, the first few should be applicable to everyone here. Feel free to add to the list.
1) Internet connection. On your desktop and for your notebook.
2) Hosting fees for your website, registering and renewing domain names, etc.
3) Bank fees. Anything your bank charges you for handling your Adsense income.
4) Tax prep fees or costs for software to do your own.
5) Computer, computer parts, repair services, digital camera(if used for site), etc.
6) Membership to WebmasterWorld. You can write this off.
7) Conference costs, including hotel and meals. 100% of this.
8) Business lunches. Meeting with programmers, etc. Lunch with a fellow Adsenser to talk shop, etc. 50% of this can be written off.
9) Office supplies.
10) Office furniture, your desk, chair, etc.
11) Promos and advertising for your website.
12) Entertainment. 100% of this. Rent a beach house and invite a few of your site members to join you, things like this.
13) Services. Anyone that you pay to help with your site, editing services, to write articles, painting your office, etc.
14) Figure out what portion of your house that you use to run your site(s). Since my sites are hands on, we shoot videos from the house and everything, I am able to write off 1/3 of my household expenses. A large office and another large room are used strictly for business. This is about 1/3 of the entire square footage of the house. Household expenses would include rent or mortgage payment, land taxes, new insulation or windows(you can get a bonus tax deduction for anything that makes your house more energy efficient), removal of a dead tree limb that could harm the house, etc.
What? People are still working on their taxes?! I finished mine in Feb. :) (Well, still have to do the corp return, but I'm still waiting on some data...)
NOTE: These comments are only for U.S. taxpayers.
|3) Bank fees. Anything your bank charges you for handling your Adsense income. |
Maintain a seperate bank account for your business- then ALL of the fees are deductible. Ditto for business credit cards- fees and interest are deductible.
|7) Conference costs, including hotel and meals. 100% of this. |
Only 50% for meals (100% write-off is very difficult to qualify for- see IRS Pub 463).
|10) Office furniture, your desk, chair, etc. |
It is a write-off, but you have to decpreciate assets over their useful life. However, you can often Section 179 the full amount in the year purchased and placed into service. Desktops, laptops, digital cameras, and all other types of equipment used for your business qualify, not just furniture.
|12) Entertainment. 100% of this. Rent a beach house and invite a few of your site members to join you, things like this. |
As with #7, only 50% in most cases.
|14) Figure out what portion of your house that you use to run your site(s). |
Can be good, but the qualifying requirements are very strict. (IRS Pub 587 makes some good bed time reading of the fun details. :) ) One of the key issues is that the space must be used EXCLUSIVELY for your business. So if your kid comes into your home office to play computer games or write his book report, it's no longer exclusive use.
But if you do qualify, you also get to write-off a portion of your utilities (electricty, gas, etc.) If you own the building, you also deduct the depreciation of the structure's value. But you will be subject to depreciation recapture when you sell the house.
Other potential write-offs:
- Travel: mileage (or actual expenses) to/from conferences, meeting with clients, going to the store to buy equipment/supplies
- Books/magazines: if they are related to your business (e.g., "Dummy's Guide to AdSense")
Finally, you should always look into retirement plans- IRA, SEP-IRA, 401-K, etc.
Thanks LiA, for clarifying. Good additions, I forgot about mileage. I got a new car last year and mileage on it for business saved me a good bit. With retirement, I think it's 5k a year that you can put into a retirement fund and not have to pay taxes on it until you withdraw it.
I had an accountant prepare my taxes this year for the first time, and it was a HUGE load off my mind. Plus they managed to find stuff (such as is listed above) that I had no idea I could write off, and they could handle all the diverse expenses and income, such as selling off a few domain names at a pretty good profit, and advertising for my developed sites. So I'm getting a healthy chunk back; I've already received the check from the state. It cost me $415 to have my federal and state returns prepared (plus she set up an S Corp for me) and it as WELL worth it.
|I think it's 5k a year that you can put into a retirement fund |
You can open a SEP (Simplified Employee Pension) and contribute up to 20% of your self-employment income (capped at $46K/year).
Note- for most retirement plans you can still contribute to them until April 15 and take the deduction on your 2007 taxes. For some types (including SEPs), if you get an extension on your taxes, you get to wait to contribute until you actually file.
Retirement plans can be tricky as well, so consult with a financial planner to find out what is bert for your situation. Ideally, you will find someone with a sound understand of BOTH taxes and retirement plans.
I just found out that the taxes that I pay to the state can be a deduction. Anyone think of anything else?
Another consideration before taking a portion of your residence as a deduction, it impacts the basis in your house.
My mom was a tax preparer operating from her house, and she specifically decided NOT to deduct the home office because of this.
Health insurance costs if you file as a self-employed business. This is a biggy.
A couple of quick notes (and no, this should not be considered formal advice):
#1 and #5 - only deductible for the part used by the business. In other words, if you have an internet connetion and computer that you used for both personal use and business use - it is only partially deductible (i.e., you use it half the time for personal and half for business - then you can deduct half the costs)
#14 - be very careful with this one. The rules are quite strict and its something that is being watched quite closely by the authorities.
* Do not be tempted to report AdSense income as "other income" rather than a Schedule C / SE unless the amount is quite small (under $400).
* One completely unrelated piece of advice that applies to this year only: even in your owe money, fill in the direct deposit information on your tax return. The reason? your rebate check will be sent by direct deposit if that info is available - should get your check several weeks earlier that way.
|One completely unrelated piece of advice that applies to this year only: even in your owe money, fill in the direct deposit information on your tax return. The reason? your rebate check will be sent by direct deposit if that info is available - should get your check several weeks earlier that way. |
Are you related to VP Dick Cheney? LOL
H.R.Block sends me a CDRom with their tax software every year. It costs something like $29 to "unlock" it for use. But I find it very helpful in computing expenses for me. The program throws questions and suggestions to me for things I can deduct.
[edited by: Skeptic at 7:51 pm (utc) on April 6, 2008]
What a fantastic thread, well done spaceylacie.
I am a UK taxpayer, but some of this is still relevant. I am rapidly taking down notes.
|Anyway, I asked him what all he wrote off for his taxes and he said, to my astonishment, nothing! |
Hmmm. Well, I don't write off a lot either to be honest: a couple of business-related subscriptions, the occasional business-related book purchase, one or two flights and hotel bills for business-related assignments.
I never thought about writing off my internet connection... but then, I tend to discount anything that I would be paying for anyway, even if I weren't using it for business. That said I do deduct about a quarter of my rent (I work from home, so my home is my business premises).
|The program throws questions and suggestions to me for things I can deduct. |
I was looking for some "interview" accounting software a while back... I purchased the basic accounting package by SAGE, only to find to my disappointment that it expects you to know everything in the first place.
If you don't need all of your income for living expenses, you can really deduct quite a bit with your own pension plan.
For example, with a self employed 401K plan you can deduct $15,500 ($20,500 if you are over 50) plus 25% of your total compensation. Together with a spouse who is a co-owner or has his/her own business, you can save, tax deferred, up to $98,000 per married couple, depending on your income. There are other types of retirement plans that let you deduct even more, but it is not something that most accountants know how to do. They will just tell you to open a plain vanilla SEP, IRA or 401K but you really can deduct a lot more for your income with more exotic type plans . If you need help setting one up you can consult an actuary with a pension firm.
As far as deductions, beside health insurance, you can deduct dental and long term care insurance.
If you're on Social Security like I am, and make more than you're allowed, expect to have money deducted from your social security checks. Boy, it's sure nice to *have* to buy some site-related stuff to keep that total annual income down.
My accountant advised not to take deductions for a home office. Check with your accountant before you do.
|My accountant advised not to take deductions for a home office. |
But then your accountant isn't the one who has to pay your taxes. :)
[edited by: Jane_Doe at 2:58 pm (utc) on April 7, 2008]
>> But then your accountant isn't the one who has to pay your taxes. :)
Right, but we've used him more than a decade and he's top notch. Believe me, he saves us more money than if we ever did the tax returns ourself!
|As far as deductions, beside health insurance, you can deduct dental and long term care insurance. |
In some cases, this goes for your spouse also.
|But then your accountant isn't the one who has to pay your taxes. |
If your accountant isn't discussing the *negative* tax implications of deducting part of your house, then they aren't doing their job, they are just trying to look good by getting you the biggest refund they can for the current year.
It seems to me that shallow's accountant is doing their job better than most.
Agree with BigDave. Many tax issues can have consequences later on that more than offset the current year's savings.
It could also be that shallow's accountant doesn't think a home office deduction in shallow's case would pass an audit.
|If your accountant isn't discussing the *negative* tax implications of deducting part of your house, then they aren't doing their job, they are just trying to look good by getting you the biggest refund they can for the current year. |
It is illogical to assume that home office deductions are not appropriate for anyone just because you personally choose not to take advantage of this deduction. According to one of my tax books, 1.6 million people a year claim home office deductions.
[edited by: Jane_Doe at 8:05 pm (utc) on April 7, 2008]
>>If your accountant isn't discussing the *negative* tax implications of deducting part of your house, then they aren't doing their job<<
He has thoroughly gone over the negative tax implications. That's why I posted in this thread. And that's why I continue to use him. He's a top notch accountant who looks out for our best interest.
For those in the U.S. who do their own taxes, they need to get the facts before taking a deduction for a home office. It may be right for many but it certainly isn't right for everyone.
|It is illogical to assume that home office deductions are not appropriate for anyone just because you personally choose not to take advantage of this deduction. According to one of my tax books, 1.6 million people a year claim home office deductions. |
You're absolutely right. But it is also illogical to assume that taking the home office deduction is right for *everyone*, as it is not.
Like I said, if your tax preparer has never explained both the upside and the downside, they are not doing their job.
Maybe someone could explain a little bit what the downside is? =)
I'm assuming this downside in deducting a home office would apply primarily to homeowners and not renters.
Would I be correct?
My Accountant (UK) said that I can deduct all home office costs (PC, chair, flooring, wall paper, desk, screen, drawers etc etc). He never said anything about a down side that could be a UK specific thing but I don't think there would be a downside surely?
As I mentioned before, the biggest downside of the Home-Office thing is that the authorities are currently quite interested in it. Which is a nice way of saying that if you take it (especially for an unusually large % for your business type), you are more likely to be selected for an exam or audit.
All the details can be found in IRS Publication 587 (Business Use of Your Home).
(And no, I'm not related to Uncle Dick ;-)
|Maybe someone could explain a little bit what the downside is? =) |
See the second post of the thread where I mention depreciation recapture.
(As before, my comments relate to U.S. tax law.)
Basically, when you take depreciation on an asset, you are writing off that percentage of it's value that year. At the same time, you are lowering the "book value" of that asset, meaning it's value (for accountants and taxes) is that much less. (For example, let's say you have a $7,000 computer and you take a 7-year straight-line depreciation. The first year you would write-off a $1,000 deduction, and the computer would be "worth" the remaining $6,000. The second year you'd take an additional $1,000 write-off, and it would be "worth" $5,000. Keep going until the 7th year when you write-off the remaining $1,000, leaving it with no value.)
When you sell a depreciated asset for more than the remaining depreciated value, basically it means that you deducted too much depreciation, so you have to pay some of it back. And home office-related depreciation has a special treatment.
This is the basic idea and the example is a little incorrect, but it is just for illustrative purposes without trying to complicate things even more (the whole depreciate subject can be very confusing). Your tax preparer should be able to run the specific numbers for your case to show you any potential downside. (If he/she can't, then you should find one who can!)
Since renters do not own the building, they don't take depreciation, so are not subject to any depreciation recapture.
Oh, and to anyone who thinks they will take the easy way out and not deduct the depreciation part of the home office to avoid the hassle later- it doesn't work that way. Even if you don't take the depreciation as you go, you still have to pay the recpature as if you did!
|And home office-related depreciation has a special treatment. |
Under current tax law in the U.S., you pay the depreciation recapture at the 25% rate. But if you are in a higher tax bracket than 25% and invest the tax money you save in depreciation each year, then because of the time value of money and the tax rate differential a home office deduction may still be worthwhile for many people.
|...a home office deduction may still be worthwhile for many people. |
Exactly! Every person's situation is different, which is why I always recommend discussing with your tax advisor for your specific situation. Any preparer who tries a one-size-fits-all approach deserves to be dumped for someone who can give you customized advice.
I second that, each situation is different so consult a professional.
|I second that, each situation is different so consult a professional. |
Then why are we bothering with this thread?
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