Kalzumeus Software

This post isn’t aimed at anyone who already pays taxes on their uISV.  If you do, you already know that its not terribly difficult in the base case.  Its more aimed at allaying the fears of folks who are thinking of starting a uISV, but worried that the IRS will steal their lunch money after making them fill out 10,000 pages of forms.   

I haven’t actually filed these yet (overseas Americans get an automatic extension) but as they’ve resulted in tax liability I paid them (through the new and soon-to-be-indispensable EFTPS service).  My return was four forms this year:

• Schedule C-EZ (Profits & Loss from a Small Business)
• Schedule SE (Self-Employment Tax)
• Form 1040 (Individual Tax Return)
• Form 2555 (Overseas Earned Income Exemption)

I won’t show you my 1040 (private, sorry) or my 2555 (you’d find it boring), but I’m happy to show you how easy it is to dispose of all accounting and tax issues for a (very) small business. 

Many folks think you have to be superman to navigate the IRS’ maze, when they are actually decently taxpayer-focused and charged by regulations to make things easy for someone with a six grade reading level.

My tax process for Bingo Card Creator was quick and easy: First, run the e-junkie and eSellerate reports for sales in 2006.  Sum totals, copy into important boxes.  Then, look at all outgoing payments on Paypal and my credit card, figure out which ones to strike because they were not business expenses, sum totals, copy into important boxes. 

Then you have to do a wee bit of math — a subtraction on Schedule C-EZ.  Oh no!  You then go over to Schedule SE, copy in the information from Schedule C-EZ, do some multiplication as instructed by the form, and you get a self-employment tax number.  Copy to the place it tells you to on your 1040.  You’ll also get a credit against your income taxes for paying self-employment tax — copy to the place it tells you to on your 1040.  There, your uISV taxes are done, now you just finish your 1040 and associated forms and file them off to the IRS.

On my Schedule C-EZ:

 Line 1 (Gross Receipts): $2480.05

 Line 2 (Total Expenses): $1224.68

 Line 3 (Net Profit, copy to 1040 and Schedule SE): $1255.37

On my Schedule SE (Short Form, almost all uISVs should qualify):

 Line 1 (Farm Profits): $0

Line 2 (Copy Profits from Schedule C or Schedule C-EZ): $1255.37

Line 3 (Add Line 1 and Line 2): $1255.37

Line 4 (Multiply Line 3 by 92.35%): $1159.33

Line 5 (Self-Employment Tax: Simple math by instructions.  Most people just have to multiply Line 4 by 15.3%): $177.38

Line 6 (Self-Employment Tax Credit: Multiply Line 5 by .5, copy to 1040): $88.68

And there you have it.  On the outside, counting the two blog posts, data collection, downloading forms, and reading up on the Foreign Earned Income Exclusion that I have to do every year, my 2006 taxes took me three hours to prepare.  Reports of the impossibility of taxes have been greatly exaggerated.

Now, granted, if I had alternative minimum tax (AMT), a home office, or some other brain-intensive situation this would have been ugly.  However, I don’t.  When I do, I’ll pay an accountant to have the headache on my behalf.

Sidenote for folks who start a uISV: if you’re profitable, your SECOND year of business will probably get you to the point where you have to pay estimated tax.  Its also easy (requires you to be able to subtract and divide by four), but I’ll cover it another day.

This post is specific to Americans.  If you’re not one, you’ll have to fix your own tax problems.

 Its very easy to forget, particularly if you’re doing your own taxes, but the IRS is offering a credit against your taxes (or a refund if you don’t owe taxes) if you paid for long distance service in the US after Feb. 28, 2003, and before Aug. 1, 2006.  This should include pretty much every American filing taxes this year (it even includes me, since I paid for SBC while I still lived in the US prior to coming to my current job, and I do manage to hit that window). 

The official name is the Telephone Excise Tax Refund, and you can get information on it directly from the IRS.  There are two ways to calculate it as an individual taxpayer: one is to take a standard refund, the other is to get all your phone bills from the last couple of years together and do some number-crunching.  Don’t have your phone bills?  Yeah, me neither.  So take the standard refund.  Its based on the number of exemptions you claimed on your 2006 return (i.e. the one you’re writing for April 2007):

How exactly do you get it?  Pull out your copy of the 1040.  Enter the amount of your refund on line 71.  If you’re one of the lucky folks using the 1040EZ, enter it on line 9.  This will reduce, dollar for dollar, the amount of tax you owe.  If you owe nothing, it increases, dollar for dollar, your refund.

There, that was pretty painless.  Just don’t forget about claiming it!  It won’t be automatically added to your return if you or your tax adviser don’t put it there!

Hey, I’m jet-lagged and getting an early start.  It looks like I had $2480.05 of gross income on my Schedule C-EZ (thats where you put stuff for a sole proprietorship, for those not accustomed to US tax returns).  That is a fairly exact figure (check Paypal and eSellerate records).  Expenses I’m still working on, pouring over credit card statements and Paypal transaction logs looking for additional things to claim.  Some decisions I made, so you can giggle at how much penny pinching I do and realize how you can come to great tax savings if you keep copious records:

Winzip license: Deductible.   All of my use this year (yep, I made sure) was in opening and closing BingoCardCreator.zip.  For personal use I used the built-in Windows functions.  $29.95 (saves $4.50 in tax!)

Japanese training software: Not deductible.  While I got a blog entry about it it wasn’t incurred as an advertising expense and I don’t think I can fairly say it was training for my business (deductible) as opposed to training for my employment or personal edification (not deductible).

Sharebuilder.com account: Not deductible.  While it would have been lovely to get this one ($100+ expense) “my” accountant (a high school buddy who just passed CPA exam and was happy to brag about it over Christmas — hey, I’m cheap) says that even if you invest your business profits it is considered a personal expense.  He says if I go legal and have the business do a 401(k), SEP, or something similar, however, that costs involved in starting up those would be deductible.  Good to know.

High speed Internet: Not deductible.  While I doubt they’d audit little old me I have a level 60 gnome mage who would argue violently that the 50MB/s connection I pay for is not business related.  (Sidenote: good thing I don’t have to declare DKP as income.)

 Robosoft: Hella deductible.  I had totally forgotten about this expenditure until I was browsing my blog’s “stats” category looking for stuff I had missed.  $99 expenditure = $15 tax savings.  Not bad for 2 minutes of work. 

Things I did end up deducting:

CPC ads from Google and Yahoo, TextLinkAds, Winzip license, Stuffit license, RentACoder fee for Mac port, Paypal commission, BitsDuJour commission, cd-fulfillment.com costs, Robosoft, and refunds to customers.

I’ll give you the birds-eye view of my Schedule C-EZ when its over with.  I would show you how it fits in the 1040 except its not likely to be useful to most of you (how many folks make most of their income from an excludable foreign source?) and I’m not comfortable waving around my salary numbers for the day job.