| Article Source: http://locumlife.modernmedicine.com/locumlife/article/articleDetail.jsp?id=176558&sk=&date=&pageID=1 This month, we will look at some of the different categories of tax deductions available to independent contractors. Even though each entity—sole proprietor, C-corporation, S-corporation, and Limited Liability Company (LLC)—is required to file a specific tax form, and there are some differences (especially at the state level), the rules for deductions are predominantly similar, particularly for a single-member or "closely held" entity. GENERAL RULES First, according to Internal Revenue Service (IRS) Publication 535, Business Expenses, "in order to be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary." Because of the broad scope of this definition, in audit, IRS generally only denies the most flagrant expenses—and more often attempts to differentiate and deny non-deductible personal expenses. However, even the business use percentage of an otherwise personal expense is also deductible (such as the portion of a vacation spent conducting business.) Also, IRS always looks at the individual "facts and circumstances" of a claimed business deduction to determine if there is a "preponderance of evidence" to support the use of the expense to reduce income. As a result, a given expense may be deductible for one business, but not another. IRS also requires documentary evidence of any expense over $75, such as receipts, bills, or cancelled checks. A diary or log is sufficient evidence for mileage deductions. Most independent contractor business deductions reduce net self-employment income—which reduces self-employment tax (15.2%), as well as federal tax (up to 35%) and state taxes. The few allowable personal deductions (1040 Schedule A) and employee unreimbursed employee expenses (1040 form 2106) only reduce federal and state taxes. TRAVEL EXPENSES If you maintain a permanent "tax home" that you return to on a regular basis to live and work, then you may deduct travel expenses between temporary assignments (less than 12 months). Any additional costs for your family would not be deductible. If you do not maintain a permanent home, then you are considered an "itinerant worker"— wherever you work is considered your tax home, and the travel expenses between assignments are not deductible. If your assignment is, or becomes permanent, then you may deduct some costs as personal moving expenses (on 1040 form 3903), but not as business expenses. Should your agency not provide reimbursement for travel (typically airline fares), hotel, rental car, or gas, you may deduct these out-of-pocket travel expenses. Additional items that can be deducted include fees for U-Hauls, packing supplies, storage, tolls, parking, and vehicle expenses such as mileage. VEHICLE EXPENSES These types of costs are deductible when traveling between temporary assignments (less than 12 months) and while on temporary assignment. They are not deductible for personal use, including commuting to and from a permanent job. There are two ways to deduct vehicle expenses—using either the business-use percentage of actual expenses or using the current federal mileage rate. Actual expenses include gas, maintenance, repairs, insurance, license, lease payments, and/or depreciation. The mileage rate for 2005 is 40.5 cents per mile; up from 37.5 cents for 2004, and includes all vehicle expenses except tolls and parking. TEMPORARY LIVING EXPENSES Generally, the largest deduction for locum tenens physicians with a permanent home is temporary living expenses while working away from their residences. If you maintain a permanent home, and return there on a regular basis to live and work, then you may deduct all duplicated out-of-pocket expenses while on temporary assignment—including housing, utilities, and half of your meals. As an alternative, you may use a daily meal per diem rate from IRS publication 1542, without receipts. However, keep in mind that you may not deduct the lodging per diem found in this publication, which is for employers to use for reimbursements. Any deductions taken should be offset by reimbursements, stipends, or allowances. Reimbursements received on a dollar-for-dollar accounting program are not included as income to you and not deductible. In addition, any stipends or in-kind benefits you may receive on temporary assignment (such as a lodging stipend or apartment), that you would have been able to deduct had you paid for them, are tax-free to you. PROFESSIONAL EXPENSES All licensure expenses are deductible—including state license fees, DEA license fees, drug testing, and fingerprinting; as well as continuing education expenses and seminars. Also, any contractor paid liability insurance is deductible—such as malpractice insurance—if you purchase your own policy. Special-use clothing and equipment, such as scrubs, shoes, lab coats, and stethoscope, may be deducted, as well. Care and maintenance—from laundering to cleaning—also falls into this category, whether on temporary assignment or at home. Professional journals, subscriptions, and reference books are also deductible. The business-use percentage of Internet expenses and cost of any on-line research can be deducted, too. TELEPHONE EXPENSES You cannot deduct any charges for basic local telephone service for the first telephone line to your home, even if used for business, or required for on-call. However, you can deduct business long distance, any additional business line, and extra features for business use, such as call waiting. Additionally, answering service expenses are deductible. For cell phones, the cost of all billable business calls can be deducted. It also seems appropriate, though not audit-tested, to take a percentage of initial so-called "free" air minutes based on the business-use percentage of total minutes, as well as the cost of the phone if it—and its charges—are not covered by your staffing company. CAPITAL EQUIPMENT The purchase cost of business-use equipment with a useful life of more than one year ("capital equipment"), such as vehicles, computers, PDAs, furniture, cell phones, and office equipment is supposed to be spread over the life of the equipment (depreciation). However, the business owner may, under tax code section 179, elect to accelerate some portion of the depreciation into the year of purchase. This is available for up to $100,000 of capital equipment for 2005 through 2008; but is scheduled to drop back to the old limit of $25,000 for 2008. Depreciation has many pitfalls, especially since not all states follow federal guidelines, and should probably be left to a professional. HOME OFFICE Taking "home office" expenses for business conducted at home is risky due to the restrictions of defining such an entity and the red flag nature of deducting it. Fortunately, home office deductions at temporary assignments for locum tenens physicians is inconsistent with the deduction of temporary living expenses—since the entire cost of temporary lodging is already deductible. INSURANCE In addition to malpractice insurance and vehicle insurance (if using the actual expense method), independent contractors who are self-employed may currently deduct 100% of health insurance premiums paid on behalf of the owner, as well as his/her spouse and dependents. However, while the deduction reduces federal and state income taxes, it does not lower self-employment tax. Life insurance premiums, on the other hand, are a personal, non-deductible expense. NON-DEDUCTIBLES Other non-business expenses include personal income taxes (federal, state, and local—although state and local taxes may be taken as a personal deduction on 1040 schedule A), charitable contributions, and political contributions. The last word. While this discussion could not cover all possible deductible or non-deductible business expenses, any omissions hold little if any significance. For more information, explore http://www.irs.gov/. REFERENCES Internal Revenue Service. (2005, May). Per diem rates [IRS Publication 1542]. Washington, DC: Author. |
Internal Revenue Service. (2004). Business expenses [IRS Publication 535]. Washington, DC: Author.
Internal Revenue Service. (2004). Tax guide for small businesses [IRS Publication 334]. Washington, DC: Author.
Internal Revenue Service. (2004). Travel, entertainment, gift, and car expenses [IRS Publication 463]. Washington, DC: Author.
Internal Revenue Service. (2004). Your federal income tax [IRS Publication 17]. Washington, DC: Author. Internal Revenue Service. (2004, December 6). Optional standard mileage rates, Rev. Proc. 2004–64, Internal Revenue Bulletin 2004-49 [p. 898].
The preceding discussion is general in nature, and should not be considered advice for any individual tax situation. You should consult with your personal tax planning professional for specific guidance relating to your unique circumstances.
