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Quick tax question for the US.

My sister claims as "head of household" on her taxes. She works full time, and then also has a photography business on the side. Mainly she just does summer craft markets, some etsy and craigs list sales and a few times she's been able to sell local photographs to local restaurants or sell on commission. She says she pretty much breaks even every year between expenses and income for her photography.

She has never tried to deduct business expenses on her income tax for her photography because, as she said, the standard tax deduction for Head of Household is $8700 and she doesn't have more than $8700 of photography business expenses to deduct, therefore she knows it's not worth it to save receipts and document her photography expenses.

Is that how it works? If you don't spend more than the standard deduction on your home business, it's not worth it to itemize those deductions?

Business losses are a separate deduction from other deductions.

However, you have to report the income and the expenses. If you have only losses for a couple of years in a row, you could get audited and a ruling that this isn't a business- it's a hobby.

Thanks! Does that count even if you claim your business expenses (and income) as part of your personal taxes?

Consult a tax professional, but...

There's a form you're supposed to fill out if you run a sole proprietor business. I believe it's Schedule SE.

It only works if you're declaring all your income and expenses, and if there is a profit, you incur extra income taxes and social security taxes.

If the income is high enough, you also need to make quarterly estimate filings, with checks to the IRS.

Ok, thanks. What we're trying to figure out is mainly if the "less than $8700" is actually a good quick way to estimate whether you should bother with deductions for a side business.

Because the alternative is to save all business receipts and mileage for the year, only to find out once you do your taxes that the deductions were smaller than your standard deduction and you needn't have bothered even going through the hassle of registering a business and keeping the accounts separately.

Does that make sense?

I was telling my sister she should save her receipts and mileage so she could deduct them, and she was saying that if her costs were less than the $8700 standard deduction it wouldn't make any difference at all to deduct business expenses on her taxes. I wasn't sure that was right. She can't even come close to affording professional advice or a tax prep service.

Googling anything tax related is useless because everyone says something different, and the official tax language is impenetrable.

So I'm just trying to figure out if business deductions that are less than the standard tax deduction while doing your personal income tax are essentially useless. In other words, are business expenses the same type of itemized expense as charitable donations, or excessive medical bills - in both of those examples, most people don't even bother to itemize them because the standard deduction is bigger.

[This message edited by circe at 2:00 PM, February 15th (Saturday)]

Profit or Loss from Business (Sole Proprietorship) is figured on Form 1040, Schedule C. If your sister has not been keeping receipts of sales and excellent track of her expenses, inventory, cost of goods sold, etc., then I would not recommend that she submit a Schedule C without a tax professional's review or assistance. The IRS will allow a loss for 3 out of 5 years of doing business, but anything over that means you have a hobby, not a business and you will not be able to deduct those losses/expenses. Also, if you are submitting a Schedule C, then you MUST fill out an itemized 1040 tax return rather than take a standard deduction for any filing status.

Also, if you are submitting a Schedule C, then you MUST fill out an itemized 1040 tax return rather than take a standard deduction for any filing status..

Ok, that's good info - I guess I should have been more clear: she's contemplating whether it would be worth the effort to keep her receipts, inventory, etc for this year, 2014, so next year she can deduct business expenses. She wants to know how much money you have to expend at a side business before it makes financial sense to use an itemized deduction rather than a standard deduction.

For instance her standard deduction right now is $8700. If she spends less than $8700 per year for her photography business, does that mean she shouldn't itemize because the standard deduction is higher?

Small business has nothing to do with the standard deduction. She can still take the standard deduction for her personal taxes while claiming her expenses and income from her business. My husband and I have a small business and still take the standard deduction. We do have to fill out the full 1040 but the standard deduction is used. The way the business expenses will figure in depends on how much income against expenses there are. Let's say she spent $500 on materials, advertising, and other business expenses but only made $100. That's a $400 loss. That comes directly off her income for the year which means she now has to pay taxes on $400 less income. Conversely, if she spent $500 on materials but made $700, she now has an income of $200 that is added to her other income for tax purposes.

If she is keeping track of all of her costs, large items can be depreciated over a period of years (depending on how large). Smaller items are treated as a one time expense and the whole amount is deducted. So if she spends $200 on a camera, that would be a one time expense. But if she bought a new car to transport her to different photo shoots, she could depreciate the car according to how much it is used for business. She would want to keep a record of traveling for business as well and to help her figure out what percentage of her car should be depreciated.

If you are fairly savvy and keep good records, a program like Turbo Tax can be used to file your taxes even with a small business added. But if you are not meticulous, you would want to consult with a professional. Small business filings increase the risk for audit so you don't want to play around if you don't keep good records or aren't sure what's deductible.

Hope that makes sense.

[This message edited by Tearsoflove at 7:35 PM, February 15th (Saturday)]

Sorry Circe, Tearsoflove was right and I was wrong about using the standard deduction. I have always itemized, so it just comes naturally to me and I was using my 2012 tax return as an example when I answered your question. The thing is, your sister is not really going to know if it is worth it or not until she really has a year's worth of income and expenditure receipts in hand to do the calculations. There is no way for her to do a backwards calculation. She should really be keeping the paperwork anyway since she is running several businesses. BTW, keeping an accurate ledger of all business-related mileage can be a real eye-opener. I had no idea how many miles I was putting on my vehicles going to auctions, antique shows, and the antique mall where I had my booth until I totaled them up - and they were all deductible. Mileage was one of my biggest expenses (I did not deduct depreciation for my vehicle, since I used it for personal purposes as well.) Your sister really might want to read IRS Pub. 334, "Tax Guide for Small Businesses"; IRS Pub. 535, "Business Expenses"; and IRS Pub. 587, "Business Use of Your Home".