Keeping records a dreaded chore, but do it anyway
For most tax professionals with year-round business, the Fourth of July marks the start of the slower tax season which will end around the first of September when corporate taxes are completed for submission.
Individuals who filed for extensions should be getting their late K-1s for inclusion in their returns. K-1s are reports of income sent to partners or stockholders of pass-through organizations, such as "S" corporations or certain types of estates and trusts.
Many taxpayers assume that if income is shown on a K-1, it cannot be offset by expenses. This might be incorrect.
It is the same assumption made by taxpayers who are investors and file a Schedule D showing profit or loss on their investments. They might write off expenses for purchasing books and journals and management fees on their Schedule A Miscellaneous and give up on the rest.
What if they go to the Money Show to learn more about investments or they are partners in a partnership and attend annual partnership meetings? There is a way of writing off the expenses.
But be prepared to document all expenses. This means keeping records: receipts, journals and other proof of expenses.
The way to write off your expenses is to identify yourself as an investor and file a Schedule C showing your expenses only. You must report the K-1 income on your Schedule E and capitol profit and loss on Schedule D. The Schedule C is for document expenses only related to income or loss on Schedule D or E.
If you are also involved in a business that reports income or loss on a Schedule C, keep the two businesses separate and file two Schedule Cs.
For the owners who receive a W-2 or a form 1099 Misc for work done for a partnership or "S" corporation, use the expense reporting methods appropriate to the type of form you received.
I know record keeping is a chore. I hate it also. But if I can reduce my tax liability, hurray! It is worth the extra effort.
Get a file box or shoe box and use it as a receipt dump. Better yet, augment your information with a journal, paper or computer.
Virginia Moryadas is a tax preparation professional in Bluffton.