Can I classify as a sole proprietorship?

Forum|Forum|7 years ago
June 5, 2019
3 replies
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Hi all - I’m getting hammered by the cap on job related expenses in my itemized deductions this year.

I understand if I’m classified as a sole proprietorship, I can still itemize. My question is, is hat worth it for my situation, and if so, which version of TurboTax do I need? (I purchased the deluxe version because that’s what I’ve always used in the past.)

We are musicians with day jobs: were in CA, Married (filing jointly, although not opppsed to individual filing if it’s better), one child, w2 income in the 80k range, and 1099 income in the 30k range from performing in 2018.

In the past he jo related expenses deduction has really saved us, we do have lots of them due to the nature of our work. I understand that there’s a cap on that this year of 2% of your AGI. Is there any way to reclassify ourselves to avoid this and be able to take the deductions? Sole proprietorship?

Thanks!!

TurboTax Deluxe Mac

Best answer by Opus 17

Your job classification depends on your relationship with your employer, you can't change it on a whim.

If you have unreimbursed job expenses from your W-2 job, you should discuss reimbursement with your employer. In some states, if you are required to pay certain costs and are not reimbursed, that may be a labor violation. You can't get any tax benefits for unreimbursed expenses from a W-2 job.

For self-employment income (side jobs, gigs, etc.) you report your income and expenses on schedule C, that expense deduction was not changed in tax reform. However, you can't allocate expenses from one job to another -- you can't allocate expenses from your W-2 job to your schedule C, even if they are the same kind of work. For example, you can't deduct mileage from your W-2 job on schedule C, although you can deduct the mileage to and from your side gigs on schedule C.

Remember that each spouse needs a separate schedule C for their own part of their SE income.

Some costs may be difficult to allocate. For example, if you buy a new instrument, can you list it as an asset on your schedule C and depreciate it, or do you only depreciate 50% of the cost, if 50% of your income is W-2 and 50% is self-employment. I'm pretty sure you have to allocate everything, but you would need to speak with a professional accountant for a definitive answer.

Carl11_2

Employee

A self-employed person who reports their income on SCH C as a part of their personal tax return is either a sole-proprietorship, a single member LLC or a contractor. For tax purposes, the only difference between those three is the spelling.
If your income is reported on a W-2 and the "statutory employee" box on that W-2 is not checked, then you are not self-employed for that income. Period. You don't get to chose here.
"I’m getting hammered by the cap on job related expenses in my itemized deductions this year"
What cap? There is no cap. W-2 job related expenses are just flat out not deductible at all starting in 2018. But then, maybe you're referring to a state return possibly? I can't speak for any state return.

G

gdgrossAuthor

Employee

Thanks Carl - it’s the job related expenses for the 1099 income, not the w-2. 🙂

Thanks!

O

Opus 17Answer

Employee

Your job classification depends on your relationship with your employer, you can't change it on a whim.

If you have unreimbursed job expenses from your W-2 job, you should discuss reimbursement with your employer. In some states, if you are required to pay certain costs and are not reimbursed, that may be a labor violation. You can't get any tax benefits for unreimbursed expenses from a W-2 job.

For self-employment income (side jobs, gigs, etc.) you report your income and expenses on schedule C, that expense deduction was not changed in tax reform. However, you can't allocate expenses from one job to another -- you can't allocate expenses from your W-2 job to your schedule C, even if they are the same kind of work. For example, you can't deduct mileage from your W-2 job on schedule C, although you can deduct the mileage to and from your side gigs on schedule C.

Remember that each spouse needs a separate schedule C for their own part of their SE income.

Some costs may be difficult to allocate. For example, if you buy a new instrument, can you list it as an asset on your schedule C and depreciate it, or do you only depreciate 50% of the cost, if 50% of your income is W-2 and 50% is self-employment. I'm pretty sure you have to allocate everything, but you would need to speak with a professional accountant for a definitive answer.

G

gdgrossAuthor

Employee

Thanks Opus - yeah I realize that you can't deduct job expenses from the W-2 income, this would all be related to the 1099 income.  Instruments, website fees, strings, picks, mileage to gigs, part of my phone bills that are used for business purposes, etc.

I've always deducted these kinds of things in past years, but it looks like to be able to do it this year I will need to classify myself as a small business/sole proprietor, as the new tax code limits unreimbursed job expense deductions to 2% of your AGI.  I suppose I never realized that I wasn't a small business before; I'm not sure if Trubotax classified this as hobby income or what.

I've used TurboTax Deluxe in past years, which I now understand only covers schedule C income, but not schedule C deductions.  I've upgraded to TT self-employed, hopefully this will allow me to do what I need to do do claim these deductions.  They're kind of a lot, including my mortgage interest maybe 10 or 15k more than the standard deduction!

Thanks for your answer, I do appreciate you helping out!