by Erin Kidd, Guest Contributor
Part of what makes military spouses amazing is our ability to adapt. That means quite a few of us have made our careers ones that can move with us by becoming entrepreneurs.
Given everything else we are handling, tax time can be especially stressful.
Here is a checklist that can help creative and boss military spouses make sure they have every deduction.
Know The Military Spouse Residency Relief Act
Don’t forget about your state taxes too. Each state has different rules on how they handle the federal Military Spouse Residency Relief Act. The standard 3 prongs of the act are:
- Your service member is in the state due to military orders.
- You are only in the state to accompany your service member.
- You and your spouse are domiciled in the same state.
Remember that you typically cannot just choose a state in which to be a resident. You must have actually lived there and taken steps to establish your domicile in that state. There may be other provisions available, but you should check with your state.
Each state will also have rules regarding whether or not your income is considered sourced to the state in which you are conducting your business or if you can re-source that income to your home state. If you have set up an LLC or other entity, there may be special regulations that apply.
Report All Of Your Income
The first thing you should do when preparing for tax time is make sure you have captured all of your income. Many organizations will issue 1099-Misc to those they work with to whom they have paid over $600.
Even if you aren’t issued a 1099, it is important that you report all of your income.
Because the purpose of having a business is to make money, the IRS may eventually question (read: AUDIT) you if you don’t have income over 3 out of the last 5 years. That’s not to say you can’t have losses, but you should be careful to show you are in business for a profit, not just to set off your other income. See my LinkedIn article to determine if your side hustle is a business or a hobby.
Track Your Expenses Closely
The most important thing to know about expenses is that they must be ordinary and necessary for your business industry and that you must have proper documentation. Keep those receipts!
There are all kinds of planners, trackers and checklists out there. A quick Pinterest search will yield at least 20 different printables to help you out.
I have found a simple envelope for each month will work as a quick place to keep all your receipts. It also helps to keep notes about what the business purpose was and date of the expense on each receipt, on the envelope or in your planner because receipts often fade.
A Short Guide To Inventory and Charitable Contributions
If you have a business that requires you to carry inventory, you will need to be sure to include your beginning inventory, ending inventory and any amounts related to cost of goods sold (COGS). You will need to note if any inventory was withdrawn for personal use.
If you donate an item to a raffle at a craft fair, that does not need to be separately accounted for, however, if you withdraw inventory to donate to a charity, that item is considered withdrawn for personal use and you would then take an itemized deduction on your Schedule A. The same goes for cash donations in your business name.
If you are a sole proprietor, reporting business activity on a Schedule C, cash donations are a personal itemized deduction, not an expense for your business.
Business Use Of Home And Home Office
If you use a portion of your home for business use, you can take certain expenses for it. It must be used regularly and exclusively for business use, so no paying your personal bills or setting up the kids to do homework in there.
If you are an in-home child care provider or use space for inventory, there are special rules about the deductions you can take. Child care providers have an hours of use allocation, and those that use it for inventory can avoid some of the exclusive use rules.
Be sure to research or work with a tax professional who is familiar with these types of considerations.
Don’t Forget Your Retirement Contributions
One of the most overlooked deductions for self-employed individuals is retirement contributions. As long as you have net profit from your business you can take an above the line deduction for contributions to a SEP IRA or Solo 401(k). Many brokerage houses offer services as SEP IRA custodians as well as solo 401(k) custodians or administrators.
Setting up a SEP IRA is almost as easy as setting up any other IRA. It functions in much the same way as a Traditional IRA, without being subject to the AGI limits.
Business owners can stock away around 20% of their net profit, up to around $53,000 into a SEP IRA and defer it from taxation. Distributions will be subject to tax when they are withdrawn, and there are limits when those can be taken without penalty, similar to traditional and Roth IRA rules.
A solo 401(k) functions the same as any other employer’s 401(k) but the business owner is the only participant. This allows for even further deferral of income, for “employee” and “employer” contributions. If you have employees, there are rules about setting up these plans to ensure they meet regulations and are meeting ERISA requirements. Whomever you select as your plan custodian can help guide you in establishing a plan.
Questions? Ask For Help
If you are not sure, ask. Retain a CPA or Enrolled Agent to assist with your tax filings. Check with Military OneSource or your local VITA Program on your installation. Some military VITA sites will assist with filing tax returns that include business income.
Erin Kidd is a third-generation military spouse, Enrolled Agent, Accredited Financial Counselor®, and avid cook and eater, who believes economic success begins at the dinner table. You can find her on Twitter @TaxLadyErin or at www.taxladyerin.com