The Tax Man Cometh

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cbb007

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It is tax time again and I would like to know how to handle the taxes for by business. I figure it is still a business even though I haven't sold a pen yet.

When I got the penturning disease I went out and bought a lathe, a table saw, a drill press and all kinds of smaller stuff (you all know what I mean), along with all kinds of pen supplies, bits, blanks, pen kits and all kinds of other stuff (you all know what I mean).

I'm using TurboTax Deluxe. If I file for a business, it wants to know the dates of purchase and prices of each item so that it can compute depreciation and all that stuff. I could do that, of course, but is that what all of you do?

What do you do with your inventory? Do you compute the cost of each blank you have, every pen kit, etc.?

Or should I just forget about declaring a business, because it is too much hassle since I haven't sold anything yet?

Any advice would be appreciated.

Clay
 
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i use turbo tax. I don't do the inventory method; (but I really should so I know when to reorder stuff). I haven't sold any pens yet. but some day I will, yes it is a PIA the first time to get things going, but if you keep using turbo tax it does a great job of depreciation. I only use the deprecation on big ticket items. saws, lathe, etc. The kits and blanks I consider supplies, and don't depreciate them.
hope this helps a little.

NOTE: I am not a tax person, or tax advisor, this is what I do, your best bet is to talk to your personal accountant to do what is best for your situation.
 
Did you start making pens as a hobby or as a business? Can you prove to the IRS that you started it as a business?

As a business owner, you actually have to prove to the IRS that you're in business to make a profit. If the IRS determines that the activity that you think of as your business is not actually a business, but a hobby, the tax consequences can be disastrous. The reason for this distinction is that the IRS does not want taxpayers to be able to engage in activities primarily for fun, and then simply call the activity a business and attempt to deduct the related expenses.

If the IRS determines that your business is going to be treated as a hobby for tax purposes, your ability to take deductions is severely limited. First, any deductions that you take will not be treated as Schedule C deductions; they will become itemized deductions (thus only benefiting you if they, along with your other itemized deductions, exceed your standard deduction).

In addition, the itemized deductions are included in the type known as "miscellaneous" itemized deductions. What this means is that they can only be deducted to the extent that they exceed 2% of your Adjusted Gross Income (basically your taxable income minus any above the line deductions).

Finally, the deductions you can take for the activity are limited to your income from the activity. As such, if you have a loss from your business/hobby, you won't be able to use it to reduce your taxable income from other sources.

Fortunately, there are several things you can do that can help you prove to the IRS that you are in fact running a for-profit business. The most important thing you could do is to actually earn a profit. If your activity has earned a profit for three of the last five years, it is presumed to be a for-profit business.

Since you just started your business, there are a number of other factors that are considered before it is declared that your business is in fact a hobby:
  • How much time and effort do you put into the activity? (The more, the better.)
  • Do you depend on the activity for income?
  • Do you conduct the activity in a business-like manner? (Having business cards and customized letterhead, for example, will help with this.)
  • Do you have the level of expertise necessary to be able to earn a profit from the activity?
  • Do you regularly improve upon your processes in order to improve your profitability?
  • Have you made a profit with similar activities in the past?
  • Were the majority of the years with losses during the start-up phase of the business, or were the losses due to circumstances beyond your control?
I hope this helps.
 
Lou - Lots of great information in your post.

Clay - Taxes are just one aspect of running a business. Anyone going into business really needs to look into their State, County, City and local area laws and policies on running a business and licensing requirements.

Search the internet for your State and local government websites to find more detailed information on how to start a new business. Also, check with your local Chamber of Commerce regarding starting a new business.

One more thing - I didn't know Turbo Tax would do any calculating depreciation or other business related record keeping. Turbo Tax does allow you to input your expenses but you should be using something like QuickBooks from Intuit. There are many other business software packages that keep track of all the details of managing a business. Most of them also can output data to TurboTax at the end of the year so you don't have to reenter your income and expenses all over again.

The IRS also conducts free seminars/classes for those starting up new small businesses. It gives you all of the information you need so you don't run afoul of the IRS rules. The class I took many years ago also had tons of handouts that helped to guide me through the steps necessary to get started in business. Doing these things after the fact, can result in all kinds of problems especially if you haven't kept detailed and accurate records of all of your purchases for supplies, equipment, etc..

Good luck in your endeavor.
 
Very simply: get a CPA to do your taxes. It will cost you about $350 in most cases and you will be MUCH better off having someone who knows what he/she is doing handling it for you. I stubbornly did my own taxes for years until I started my own law office and had to get help. Now, I'll never do them on my own again. All of the advice that people give you is fine, but the laws vary from state to state (at least as to state taxes) and unless the person giving advice is a CPA from your state, don't rely on it.
 
Simple solution ... makea casket and put IRS on the lid. Prop it up in your shop and introduce the taxman to it when he comes calling...

In real life, get the advice of a CPA. They cost a bit, but the end results always outweight the cost of guessing on your own! I would not ewven thing of starting a business without my CPA's advice first! Besides, you can always make him a pen or something!
 
Get professional advice, a CPA or an Enrolled Agent, Unless you are trained in tax law you are asking for trouble in doing it yourself. I got out of the tax law field a few years ago and I now have a professional do our taxes. The money paid is a great investment for piece of mind.

Hobby income and business income are both are reportable as income. It is the expenses that will get you in trouble. To cover most of the issues and then answer the multitude of questions would take volumes.
 
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