Ask the Tax Diva … Frequently Asked Questions

The Tax Diva answers your questions:

Q. I’m a sole proprietor and my business earned only $1,000 this year. Do I have to file a tax return?

A. You have to file if net earnings from self employment are at least $400. Why? To pay into your self-employment social security account.

Q. I’m looking for a new job in my current field…can I deduct career counseling fees?

A. Yes, the expenses are deductible on Schedule A as long as they total more than 2% of your adjusted gross income.

Q.  What constitutes a casualty loss?

A.  A casualty loss has to be sudden, unexpected and unusual like a hurricane, fire or volcanic eruption.  Losses caused by your own willful act of negligence (like leaving your wallet with $2000 on top of your car and driving off) — sorry, not deductible.

Q. Last time I was in Vegas I lost my shirt. Can I deduct my losses?

A. Gambling losses can only be deducted up to the amount reported as income.  The full amount of your winnings from roulette, blackjack or other games must be shown as income.  So be sure to keep an accurate record of losses and winnings.

Q. When are legal fees deductible?

A. Only when they relate to producing or collecting taxable income or getting tax advice.

Q. How long should I keep my records?

A. Cancelled checks, bank statements and receipts should be kept for three tax years.

Q. I own three different businesses.  Can I combine them and file only one schedule C?

A. No, you need to keep separate books and file a separate Schedule C for each business.

Q. What is a profit & loss statement and why do I need one?

A. A profit & loss statement (also known as income and expense) gives you an instant snapshot of your business. Looking at your p&l on a monthly or quarterly basis allows you to see if you’re meeting your goals or if you need to modify them. By using this tool to assess your business, we can annualize the numbers and adjust your estimated tax payments accordingly, often resulting in a tax savings.

Q. How can I avoid being audited by the IRS?

A. While there are no guarantees, here are some guidelines that may help you avoid an audit. Keep in mind that as your income increases, so does your chance for an audit. Also, self-employed taxpayers are more likely to be audited than those who are employed.

  • Make sure that your deductions are in line with your income
  • The type of deduction should be appropriate for your business
  • Hire a tax professional if you have a complex return, don’t try to do it yourself
  • Math errors, an unsigned return or a messy return (yes, neatness counts!) could trigger an audit

Q. Can I hire you to handle my bookkeeping even if I use a different tax preparer?

A. Of course! As a full service bookkeeper, Suzanne will work with you to ensure that you have all your financial information in order for your tax professional.

Q. What happens if I can’t pay my taxes?

A. Generally the IRS will accept an installment agreement (Form 9465) if the unpaid amount is $25,000 or less and the tax will be paid within five years. However, if you already have an installment agreement in effect from a prior year, you may not file again. There is a user fee for the installment agreement and interest and late payment penalties still apply. If you can’t pay your California state taxes, you may file a Form 3567 to arrange for installment payments, although different rules apply.

Q. What is an Enrolled Agent?

A. An Enrolled Agent (EA) is a tax professional who is licensed by the federal government to represent taxpayers before the IRS. Only Enrolled Agents, attorneys and CPA’s are allowed this privilege.

Q. Why do I need an Enrolled Agent?

A. In case of an audit you want to be represented by a professional who is up-to-date in the continually changing world of taxes. Enrolled Agents have the expertise to represent taxpayers before the IRS.

Do you have a question that’s not answered here? Get in touch!