Concerns for Business Owners

Coworking Memberships and Home Offices

Occasionally, I’m interviewed for articles elsewhere. Recently, I spoke to the good people at Deskpass about the tax implications of where you work. In this interview, we discuss:

  • Deduction coworking memberships and related costs,
  • Deducting transportation costs to and from the coworking space, and
  • The impacts on a home office, if you have one of those as well.

Read the full interview here.

Can I Deduct my Coffee? Understanding the Meals & Entertainment Deduction

One of the most common questions I get pertains to doing work in coffee shops. Many entrepreneurs head to their local coffee place to meet clients, do work, or just get out of the house. Is that coffee deductible?

Well, it depends.

Were you meeting with clients or potential clients? 

Meeting with clients is an common business activity for freelancers, and a lot of those meetings take place in coffee shops. The IRS requires “substantial business discussion” at the meeting, and chatting with a client will almost always meet that threshold – you are there to convince them to hire you, after all.

Answer: Deductible!

Were you networking with other professionals in your industry?

Networking can be an important way to grow your business and further your connections in your field. Grabbing coffee can often lead to new information about your industry or new clients. Remember that the IRS requires that “substantial business discussion” took place, so you’ll want to make sure you participated in the meeting for specific business benefit. It helps to record who you met with so you can substantiate the expense if needed.

Answer: Most likely deductible!

Were you traveling?

If you were away from home overnight for work purposes, you most likely qualify to deduct your meals – including that morning coffee.

Answer: Most likely deductible!

Were you at a local client site?

If you were in your home town, just working from a different location that your normal office, the IRS does not allow you to deduct that morning coffee or afternoon lunch expense. Why not? Well, you were probably going to eat lunch anyway, right? If you are in your home town you could have made coffee at home or brown-bagged your lunch.

However, if you are eating with the clients or other freelancers on the project, see the info above about meeting with clients and networking!

Answer: Probably not deductible!

Were you there just to use the wi-fi or get out of your house?

While we all need to get out of the house sometimes, there was no real business need for you to head to Starbucks, so the coffee’s on you.

Answer: Not deductible!

Additional Resources:

 

Forms 1099-MISC and 1099-K: Who Gets What?

If you paid contractors to work for your business in 2016, you may owe them a Form 1099-MISC by January 31, 2017. However, payments made via credit card or PayPal are covered via Forms 1099-K issued by those payment settlement entities. To keep your contractors happy, you want to make sure their payments aren’t reported on two forms (and to keep the IRS happy, you want to make sure contractor payments are reported on the proper form)!

Forms 1099-MISC

What Are They?

These forms are used to report miscellaneous income (basically, income not reported on other forms!) for payments made in the course of trade or business. If you pay someone else to perform services for your business, you may be require to report them with a Form 1099-MISC.

Who Issues Them?

Business owners who hire contractors or outside service providers to perform work for the business issue Forms 1099-MISC to those contractors UNLESS they pay them via credit card or PayPal. If you paid your contractors via credit card or PayPal, those entities will report the income on a Form 1099-K discussed below.

In short, you are required to issue Forms 1099-MISC if you paid a contractor via cash, check, or a bank’s quick-transfer system (e.g., Chase QuickPay).

Who Gets Them?

For business owners, Forms 1099-MISC are most commonly used to report the following payments:

  • $10 or more in royalties paid in one year
  • $600 or more in payments to nonemployees and/or contractors
  • $600 or more in rents, prizes, or other income paid in one year

Forms 1099-MISC are used to report these types of payments to the individuals or businesses who received the payments. In other words, if you paid a contractor $1,000 to work for your business in 2016, you owe them a Form 1099-MISC.

See more FAQ here (including whether you owe Forms 1099-MISC to foreigners or corporations).

When Are They Due?

For the 2016 tax year, Forms 1099-MISC reporting non-employee compensation (i.e., money paid to contractors or outside service providers) are required to be filed by January 31, 2017. As this is the most-common reason business owners file Forms 1099-MISC, this is an important due date.

For all other income reported on a Form 1099-MISC, the forms must be filed by February 28, 2017, if you file by paper or March 31, 2017, if you e-file.

Forms 1099-K

What Are They?

Forms 1099-K report payments a business receives via entities called “Payment Settlement Entities” (or “PSEs”).

Who Issues Them?

PSEs issue Forms 1099-K. The most-common PSEs are:

  • Payment Card Processors (e.g., credit and debit cards)
  • Third Party Settlement Organizations (e.g., PayPal)

Who Gets Them?

Any business that

  • accepts credit or debit cards, or
  • uses a third party settlement organization if gross payments exceed $20,000 and there are more than 200 transactions in a calendar year.

A business will get a Form 1099-K from each PSE. This means if the business accepts MasterCard and PayPal, it will get a 1099-K from both MasterCard and PayPal assuming it meets the thresholds outlined above (i.e., $20,000 and 200 transactions for PayPal to issue a Form 1099-K).

When Are They Due?

Forms 1099-K must be issued to the recipient by January 31, 2017. The forms are due to the IRS by February 28, 2017, if filed on paper or April 1, 2017 if e-filed.

Summary

If you paid your contractors more than $600 in 2016, take a look at how you paid them:

  • Cash, check, bank quick-transfer system =  YOU issue them a Form 1099-MISC.
  • Credit card, debit card, PayPal = THE PAYMENT PROCESSOR issues them a Form 1099-K.

Resources