Remember, more expensive is not necessarily better. Likewise, free may be too small an investment.

-Mark Poppen

Tax Tip #2: Schedule C

April 20, 1999

Now that you've filed your taxes (procrastinators excluded), how can you avoid paying so much tax in future years? One of the best methods for reducing your tax liability and earning a fat refund check from Uncle Sam is by turning personal expenses that weren't deductible into business expenses that will reduce your taxable income, and thus tax liability.

There are two ways to look at salaries: One way is how much money you make, and the other is how much you keep. In order to keep more of what you make, it may be time to consider getting Uncle Sam's hand out of your back pocket. You've probably been annoyed for years that your take-home pay is substantially less than your gross pay, but didn't realize that a few simple steps can narrow the gap between these two numbers.

This magic is performed on Schedule C, Profit or Loss from Business. Almost any hobby can be turned into a small business - all you need is solid record keeping and the intent to make a profit. It doesn't really matter what the hobby is, what is important is that you can show a reasonable intent to make a profit at some point down the road. Writing up a short business plan showing how your business can be built up over a number of years is usually sufficient to satisfy any potential IRS auditors. Libraries, Banks, College Business Departments, and the Small Business Administration can be a big help. Even the IRS is a good source for starter kits to get small businesses up and running.

Several line item expenses on Schedule C are especially helpful here. For example, you are allowed $.325 per every mile that you travel for your small business. By using a logbook and keeping track of your mileage when you investigate leads, supplies, and information, you can rack up tons of deductible expenses that won't cost you any extra money. If you plan on a long trip, take the time to incorporate a visit that relates to your new business (and former hobby).

If you log 10,000 miles that can be associated with your business for the year, you can deduct $3250 from your taxable income. This will reduce your tax liability by roughly $750 to $1000, depending on your tax rate. Another advantage to filing a Schedule C is that you can deduct a portion of your rent, utilities, computer expenses, meals, lodging, insurance, etc. Most of these expenses are normally personal out-of-pocket monies that you are already spending every year. You're just not getting credit for them. Even if you're only dedicating one-fourth of your apartment to your new business, it could be generating another $4000 in business losses that again ups your potential refund by another $750 to $1000.

The object is pretty simple: turn those yearly expenses that you already have into business deductions on Schedule C. And next thing you know, you've given yourself a well-deserved raise.

-Mark Poppen

Tax Tip #1: Postpone

April 19, 1999

Well, guess what season it is? Everybody's favorite, Tax Time!!

Because I once worked for H&R Block for about fifteen minutes, many of my friends start calling me frantically this time of year, looking for last minute help in filling out their returns. Tax forms are at various times an obstacle course, a minefield, and generally undecipherable.

Who makes up these things, anyway? I remember almost falling out of my chair when I read the 'estimated time to complete' the Estate Tax forms after my parents died. Even though their estate was well under the amount where any tax was due, the IRS expected me to spend 140 hours to complete the form!!! Do they really expect John Doe, Average American, to take three to four weeks off from work to complete forms like this? It's a wonder that anyone files taxes at all, given the difficulty involved.

Which is exactly the point, I suppose. The IRS doesn't really want anyone to bother filling out those pesky tax forms. What they want is for you to just let them take a chunk out of each paycheck, no questions asked. And then have you forget about how much of your money they took. "Don't worry," I can hear an IRS rep saying, "If it's not in your paycheck then it must not have been your money to begin with." Most of my friends are so afraid of the IRS that they just let them keep whatever money they've already snatched out of their paychecks, rather than actively pursuing what is owed to them.

For the true procrastinators, you can always postpone the inevitable by filing Form 4868 for an automatic four-month extension to file your 1998 taxes. Remember, this extension is granted without any need for explanation, but it is NOT an extension to PAY your taxes. If you estimate that you owe any money, you are supposed to pay any amount that is due. If you think your Federal Withholding basically covers your amount due, don't worry about this too much. The penalties & interest are based on the difference, and small differences won't cost you very much.