Tax Tips for Doulas: Top 3 red flags for getting audited

Part 2. Top 3 Red Flags for Getting Audited by the IRS

doula businessIt’s tax time again and for self-employed doula business owners, this can be stressful. Unless your overall family income is greater than $200,000, doulas are unlikely to be at high risk of triggering an IRS audit. Nevertheless, there are specific red flags that may trigger a closer look at your return.

#1. Deductions for a Home Office

The IRS allows a deduction for business use of your home BUT strict rules apply. Large deductions for home offices are notoriously abused and could flag you for an audit. A key qualification to keep in mind is whether or not the space being designated as “home office” is a dedicated work space. If you are using the kitchen table to conduct business, this will be a hard case to make. If you are using a room for two purposes, say as an office and a guest bedroom, you can deduct only the space used regularly for business purposes.

Deductions are calculated as a percentage of your monthly rent payment or annual interest on your mortgage (not your monthly mortgage payment). To figure your deduction, you will need Form 8829 Business Use of Home. Start by calculating the total square footage of your home or apartment. Next, calculate the total square footage of the space singularly dedicated to business use. Now you can calculate the percentage that the business use represents of the total number. This number gets plugged into Form 8829 and then simply follow the directions to figure your deduction. The same percentage can also be applied to the total of your annual utility bills.

Capital improvements and repairs to your home may also be deductible, using the same percentage. Be careful, however. A plumbing repair to keep your bathroom operational may qualify if you are conducting clients visits in your home, while a washing machine repair probably does not (unless you are also a massage therapist and regular laundering is required).

For more information on deductions, see Part 1 of our Doula Business Advisor series on Tax Tips for Self-Employed Doulas.

#2. Writing Off Your Entire Cell Phone Bill

Be careful about writing off 100% of your cell phone bill. You can only deduct the portion used for business purposes. Assign a reasonable percentage to represent business use and apply it to the total amount spent for the year. For example, if you and your spouse share a plan and your business use is about 50%, then your deduction is 25% of your total annual cost.

The same thinking applies to internet service provider monthly fees; only deduct the percentage used for business purposes. If the entire family is using the internet, you need to come up with a reasonable percentage that represents business use. On the other hand, if you have an office outside the home and pay separately for a land line or internet access at that location, then the total amount paid is deductible. Just be reasonable and be able to back it up.

#3. Repeat Claiming of a Net Negative Income (or Loss) for Your Business

The IRS understands that sometimes business owners invest more money in building/running a business than we make in a given tax year. In particular, many owners may find themselves in this situation in their first year or two of business and justifiably end up claiming a loss on their Schedule C. However, claiming a loss three years in a row is pretty much guaranteed to get you some unwanted attention. Typically, the IRS will not allow such a claim and are likely to go back in time and disallow the two previous years as well. Their view is that if your “business” is not making money, then it is not truly a business but, rather, an expensive hobby.

To ensure that your passion for helping moms and babies is, indeed, generating an income, don’t neglect to set some marketing goals for your doula business. For more guidance, see our doula business training online.

More Tax Tips Coming Soon from the Doula Business Advisor!

Part 3. 5 Doula Bookkeeping Tips that Make Life Easier (on 3/31)
Part 4. Options to Making Quarterly Tax Payments (on 4/7)

Patty Brennan is the author of The Doula Business Guide: Creating a Successful MotherBaby Business, 2nd Edition. Now offering The Doula Business Guide Workshop and Webinar Series — an inspiring workshop and online class covering the nitty gritty of establishing a doula business and growing it into a sustainable income.

Posted by Patty Brennan on March 26, 2015 • Filed under
Comments (0)

Comments