Hair Stylist

[MBTS]

I posted this on another forum however wanted to see your views on here.

This is a bit lengthy...

New client - maybe....

TP was very sick most of 2014.... Spouse is Hair Stylist and didn't work very much so that she could tend to her husband. He passed away January 8, 2015. They both have Social Security, Rental and spouse hair salon. Her husband took care of getting Tax returns done. She gave him what he asked for as expenses - electric, phone, insurance and such. She just signed return when it was ready.

She came to me stating that the prior preparer was retiring and now that her husband has passed she wanted someone new to prepare her return. Anyways she stated since before her husband got sick, she really didn't work that much. Her "shop" is within a 100 feet of her house. She provided me a summary of income/expenses. income - 2113 and as I was looking over expenses she began telling me that electric, phone, insurance, etc were all included in with the house. I asked "SOOOO, your "shop" is NOT separate?" she said NO. I looked at prior return and all expenses were on her Sch C. She said prior preparer told her husband that "you have to have some expenses" so he used the totals of all. She couldn't tell me a % for business use either. She said as for the supplies amount on the summary sheet didn't know how much of it was for personal. Stated she hated all the paperwork. She did have some stock however not much bc she doesn't really want to work.

After talking with her more, she could care less if she had the "business". Doesn't depend on the income to make a living. Since she has done hair for so long she does her long time people if she felt like it. She doesn't advertise bc she is not as active. It's more like a Hobby now rather than a business.
When asked if she kept a separate checking acct, she said no. never had. I asked how did she differentiate personal/business. She said that she writes in checkbook when it's business.
I told her that if it were a Hobby she would still report the income however wouldn't be able to deduct expenses unless she Itemized (has never before and doesn't look like it now). She said that's fine.

Here's what I found: To determine if your business is a hobby, the IRS looks at numerous factors, including the following:

Do you put in the necessary time and effort to turn a profit? She doesn't.
Have you made a profit in this activity in the past, or can you expect to make one in the future? She has made profit, even tho the expenses at personal included
Do you have the necessary knowledge to succeed in this field? She does bc she has been doing hair for so long.
Do you depend on income from this activity? She doesn't
Are your losses beyond your control? She hasn't had however will be looking at other prior returns

Has anyone had this situation? How would you handle it?

[JohnH]

Hair stylists usually make very good clients - because the generally know more about tax preparation than we do.

I would have her write down on paper her total gross receipts, including tips. Then have her write down her direct expenses, such as supplies, cutting implements, etc. That will give of how much you are dealing with and the true magnitude of the business. After that, you can work with her on indirect expenses, calculated in the proper manner. This makes her recognize her ownership of the figures you are putting on the return. Maybe even have her sign and date it. (Be sure to keep a copy for your own records). If it's really just a hobby, than will be self-evident. If it is actually a business, chances are this will be the only return you prepare for her because once she sees her tax liability she will probably find a more malleable preparer next year.

Oh, and I omitted the first step. File an extension for now and work through this with her after Apr 15. Be sure to tell her if the figures for the extension are incorrect, she will owe a small amount of interest and FTP penalty of about 3/4 of 1% per month. And tell her that will be her responsibility to pay, not yours.

[RitaB]

Perfect

Hair stylists usually make very good clients - because the generally know more about tax preparation than we do.

I would have her write down on paper her total gross receipts, including tips. Then have her write down her direct expenses, such as supplies, cutting implements, etc. That will give of how much you are dealing with and the true magnitude of the business. After that, you can work with her on indirect expenses, calculated in the proper manner. This makes her recognize her ownership of the figures you are putting on the return. Maybe even have her sign and date it. (Be sure to keep a copy for your own records). If it's really just a hobby, than will be self-evident. If it is actually a business, chances are this will be the only return you prepare for her because once she sees her tax liability she will probably find a more malleable preparer next year.

Oh, and I omitted the first step. File an extension for now and work through this with her after Apr 15. Be sure to tell her if the figures for the extension are incorrect, she will owe a small amount of interest and FTP penalty of about 3/4 of 1% per month. And tell her that will be her responsibility to pay, not yours.

Do as he says. Yes. Only mechanics know more about taxes than hairdressers. Oh, and realtors. Maybe preachers.

[FEDUKE404]

Another

Do as he says. Yes. Only mechanics know more about taxes than hairdressers. Oh, and realtors. Maybe preachers.

You left out stockbrokers . . . wanna put some money into an IRA? NO problema!!

( And, honorable mention might go to police and firefighters as to available tax expertise. )

FE

[taxea]

"Do you have the necessary knowledge to succeed in this field?" It takes more than hairstyling experience. It takes recordkeeping know-how.
To my mind the ones who know so much about taxes are the "they"s that our clients keep quoting.

[MBTS]

Her "shop" is not in her home it's close. Her husband had a big shop built and has a section of the shop allocated to her. She gave me totals of expenses however there's no separate expense from main house. I know that I can't deduct phone bc it's landland no other line is for business. I can ask for a breakdown on house insurance however it's attached to big shop. Last preparer deducted abt half of the totals for phone, insurance, mortgage interest, electric and even had a "misc" (don't know where that came from nor does she). As I was interviewing her regarding expenses, I thought you don't really have expenses other than supplies. I looked on the states website to see if it listed her for a license and it does so Sch C it will be. Didn't think I could use the Safe harbor since it's not in her house. Am I wrong?

Hair stylists usually make very good clients - because the generally know more about tax preparation than we do.

I would have her write down on paper her total gross receipts, including tips. Then have her write down her direct expenses, such as supplies, cutting implements, etc. That will give of how much you are dealing with and the true magnitude of the business. After that, you can work with her on indirect expenses, calculated in the proper manner. This makes her recognize her ownership of the figures you are putting on the return. Maybe even have her sign and date it. (Be sure to keep a copy for your own records). If it's really just a hobby, than will be self-evident. If it is actually a business, chances are this will be the only return you prepare for her because once she sees her tax liability she will probably find a more malleable preparer next year.

Oh, and I omitted the first step. File an extension for now and work through this with her after Apr 15. Be sure to tell her if the figures for the extension are incorrect, she will owe a small amount of interest and FTP penalty of about 3/4 of 1% per month. And tell her that will be her responsibility to pay, not yours.

[JohnH]

If it's a separate structure, that actually simplifies things quite a bit, especially if it's used 100% for the hairstyling business. It gets its own depreciation schedule, and direct expenses (repairs, maintenance, etc) are much easier to identify. Electricity and insurance can be allocated using a "reasonable" method. Forget what the previous preparer did and just do it correctly yourself (although you might want to advise the client that amended returns might be helpful if you see huge problems with the prior years). Incidentally, I expect her homeowners insurer might be very interested in knowing that the business operates out of that separate structure if they don't already. They would probably want her to have a rider. It might cost a little more, but her other option is to risk finding herself without coverage if a customer falls coming/going, or if a customer's kid sticks their finger in an electrical outlet.

I do think the separate structure pretty well answers the question of "hobby vs business."

Have you filed that extension yet?

[JohnH]

I know plenty of people who are experts in their field, but know zip about recordkeeping.
That's why they have me, and is how I earn my living.

[MBTS]

I will be filing an extension.

Since her shop is sectioned out of her husband's shop (housed lawnmowers and things like that. NO business related) and all expenses are lump together, Suggestions on "reasonable" method??

I talked with her about prior returns and she said "Well, (husband) took care of it all with prior preparer, and as you stated there are some issues. NO amending... I want to use you from now on to make sure it's done right".

If it's a separate structure, that actually simplifies things quite a bit, especially if it's used 100% for the hairstyling business. It gets its own depreciation schedule, and direct expenses (repairs, maintenance, etc) are much easier to identify. Electricity and insurance can be allocated using a "reasonable" method. Forget what the previous preparer did and just do it correctly yourself (although you might want to advise the client that amended returns might be helpful if you see huge problems with the prior years). Incidentally, I expect her homeowners insurer might be very interested in knowing that the business operates out of that separate structure if they don't already. They would probably want her to have a rider. It might cost a little more, but her other option is to risk finding herself without coverage if a customer falls coming/going, or if a customer's kid sticks their finger in an electrical outlet.

I do think the separate structure pretty well answers the question of "hobby vs business."

Have you filed that extension yet?

[JohnH]

My first thought would be to allocate the building(depreciation, maintenance, etc) between business use and personal use, based on square footage of the building.

Utilities could be allocated based on total heated space of the house and the hairstyling portion of the building. (I assume the lawnmower storage of the building is not heated). You might also want to further limit the utilities based on relative hours of operation of the shop vs the home. Then a slight up-allocation for heavy use of hair dryers, water heater, etc. All fairly easy to do using Excel. I think any sort of common-sense allocation would probably work in the unlikely event of an audit. It's all about facts & circumstances.

[MBTS]

Had someone suggest the Simplified method... Adding total sq footage of home and shop bldg then have sq footage of shop... I didn't know you could do that however after reading don't see why you couldn't.

My first thought would be to allocate the building(depreciation, maintenance, etc) between business use and personal use, based on square footage of the building.

Utilities could be allocated based on total heated space of the house and the hairstyling portion of the building. (I assume the lawnmower storage of the building is not heated). You might also want to further limit the utilities based on relative hours of operation of the shop vs the home. Then a slight up-allocation for heavy use of hair dryers, water heater, etc. All fairly easy to do using Excel. I think any sort of common-sense allocation would probably work in the unlikely event of an audit. It's all about facts & circumstances.