Q&A: answers to the 5 most burning questions for female entrepreneurs
I would say that 90% of the questions I receive from entrepreneurs center around one thing: taxes.
And I get it. They are confusing. And always changing. And sometimes extremely boring.
Trust me, I’ve done hundreds in my lifetime. I should know.
Which is why I hopped on Instagram to ask you what your biggest tax question is, and girl, here are your answers:
WHERE SHOULD YOU SPEND TO GET THE MOST OUT OF WRITE-OFFS?
In other words, what does the IRS not allow to you fully deduct on your tax return?
If you thought Uncle Same was extremely generous and allowed you to expense EVERYTHING in full, well, take off those rose-colored glasses, sister. There are certain expenses that you can only partially deduct, and it’s best to know it upfront so that you don’t frivolously spend your money in those categories.
Entertainment: As of 2021, any entertainment costs are non-deductible. Whomp, whomp.
Meals: The only types of meals that are fully deductible are company social events (like your holiday party) or food sold as part of your business or provided to the public for free. Anything else is either 50% deductible (like when you’re traveling for business, paying for a client’s meal, or picking up food or coffee for your employees) or not deductible at all (owner’s personal meals).
UPDATE: In 2021 and 2022, all those business meals that were previously 50% deductible are now 100% deductible (woo!). But note, this reverts back in 2023, so keep tabs on your meals spending.
Vehicle: Your vehicle expenses can be deducted but only up to the percentage you use it for your business.
So don’t go wild, buy yourself an expensive vehicle, and offer to drive cross country for your girls trip in Tahoe. You won’t get any benefit from that – except some great stories, so don’t discount that altogether.
Travel: It may seem like a good idea to mash a personal trip onto a business one, but if a majority of your time (& purpose) relate to hanging out with your friends or touring the city instead of meeting with clients or attending a conference, then many of your travel costs (like airfare) could be nondeductible.
Thus, make sure you have support for the business purpose of your trip and could prove, if audited, that it was solely for business.
Owner’s Pay: If you operate as a sole proprietor or LLC, the distributions you take out to pay yourself are not considered deductions, meaning they won’t go against your income to lower your net profit (& tax liability).
So don’t think paying yourself a big bonus at the end of the year will help you on your taxes…but hey, doesn’t mean you shouldn’t anyway.
WHEN DO I DEDUCT START-UP COSTS?
A little refresher: Start-up costs are those expenses you pay for in order to get a business up & running, and you typically want to define a start-up date for you to start tracking these.
You can deduct up to $5,000 in start-up costs in the first year of business – anything after that must be amortized over 15 years.
Note, however, that organizational costs can be segregated from other start-up costs and $5,000 of these can also be expensed in the first year. These costs relate to forming your business, such as legal fees or registration costs.
WHAT CATEGORIES FOR EXPENSES SHOULD BE LISTED?
Good question – the IRS gives a lot of flexibility on this, so essentially any category you have, you can list on your tax return. However, they do list out those “most commonly used,” and I’ve listed those for you below. Any others need to go under the “Other Expenses” section.
Advertising and Promotion
Car and Truck Expenses
Commissions and Fees
Contract Labor
Depletion
Depreciation
Employee Benefit Programs
Insurance
Interest
Legal and Professional Fees
Office Expense
Pension and Profit-Sharing Plans
Rent
Repairs and Maintenance
Supplies
Taxes & Licenses
Travel
Meals & Entertainment
Utilities
Wages
My advice to you? For simplicity’s sake, stick to the set categories as much as possible. If you need to add others, try to keep them to a minimum while still providing you with enough information to run your business.
HOW DO YOU HANDLE TAXES AS AN INDEPENDENT CONTRACTOR?
When you work as an independent contractor, you are essentially running your own business as a sole proprietor.
The good news? This means you can deduct all those expenses you cover on your own dime against the money you make.
The bad news? You are in charge of ensuring you pay taxes on all of that. And timely.
As an independent contractor, you will need to pay estimated taxes each quarter to the government. A good rule of thumb is to save 25-30% of your income to pay for taxes, but there are so many factors that go into calculating your tax liability, your actual estimated payments be much more or less than that.
If you want to get more exact, hire a CPA (like me!) or a tax accountant to calculate these for you each quarter. They will be more accurate and could keep more money in your pocket throughout the year (or help you avoid a heart attack when filing your return come tax time).
DO I NEED TO FILE 1099S? AND WHAT IF I DON’T RECEIVE ONE FROM ONE OF MY CLIENTS?
If you pay a U.S. Citizen who operates as an unincorporated business (i.e. not a S-Corp, C-Corp, or LLC filing as an S-Corp) over $600 in any given year, then yes, you have to file 1099s.
If you do not and the IRS finds you out, you could pay some hefty fines. Even filing late adds a significant penalty – 1099s are required to be filed & mailed by January 31st each year and if you file within a 30 day period after that, you’re already looking at a $50 fine. Per 1099. So if you have 25 to file, you’re looking at a bill of $1,250.
File after that 30-day window and before August 1st of that year, and it’s $100 per form. After August 1st? You’re looking at a whopping $270 penalty per form. The IRS ain’t kidding around.
Moral of the story: Make sure you file these on time. And if you need help with that, you know who to call.
Now, if you don’t receive a 1099 from a client that you should have, I would definitely request this if nothing more than a nice gesture to remind them of their obligation (you don’t need them using all their funds on IRS penalties either).
However, you are not liable if you do not receive one. You do, though, still need to claim that income on your tax return, whether you received a 1099 or not.
HOW DO I DEPRECIATE A RENTAL PROPERTY?
Love real estate questions!
For those of you who are not familiar with depreciation (AT ALL), it’s simply expensing the cost of an asset over its useful life. For example, let’s say you buy a new computer for $1,000 that you believe will last 4 years. Each year for your company, you would expense $250. Simplified, but you catch my drift.
As for rental properties, the first thing you need to do is separate the land value from the building’s value. Because land typically appreciates, the IRS does not allow you to expense any of that; hence, you gotta keep ‘em separated (#tbt to Offspring’s day in the limelight).
From there, you would then depreciate the building over a life of 27.5 years, which is what the IRS set. How they determined that number, I have no clue, but we’re going with it. Because we have to.
For example, let’s say you bought a property for $100,000. $20,000 of that is deemed the value of the land (FYI – You can typically find this in your closing documents), and $80,000 is the building. Thus, each year that you rent that property out, you can deduct $2,909 ($80,000/27.5 years).
And that brings us to the end of our first Tax Time Q&A!
If you have a burning question that you’ve always been curious about, whether it be on taxes, business, real estate, or whatever, flood up the comments section below or send me a DM on Insta. I’ll answer it in my next Q&A!
All my best,
Britt
