I’ve been a WWer hobbyist since my grandfather helped me build rubber band guns and soap box cars when I was 8. But I’ve never really gotten serious about it – I am an engineer at Harley-Davidson during the week.
So now I’m thinking that it would be fun to get into some income-producing WWing on weekends. I know there are some tax advantages in doing this that would make it easier to pay for equipment.
Can anyone summarize what the IRS rules are for doing this? I’ve read some of the IRS publications, but I’m not sure of several things:
- Do I need to file any paperwork or get any licenses before I am “official”?
- Can I deduct the cost of new equipment from my business income, and therefore my personal adjusted gross income?
- Can I use Section 179 to deduct the full amount, or do I have to depreciate?
- Do I have to deal with inventory, or can I use the “carpenter” exclusion?
- Do I have to make a profit at some point?
- Are there any specific tax opportunities that I should take advantage of?
- Are there any specific tax dangers that I need to avoid?
Thanks in advance!
Do I need to file any paperwork or get any licenses before I am "official"?
Check with your state, county, and local officials. This varies widely by locality.
Can I deduct the cost of new equipment from my business income, and therefore my personal adjusted gross income?
Be very careful with this one. Technically, yeas you can. But if the IRS decides that you are simply asking the taxpayers to fund your hobby, you'll have BIG problems.
Can I use Section 179 to deduct the full amount, or do I have to depreciate?
Same as above -- be very careful, but yes.
Do I have to deal with inventory, or can I use the "carpenter" exclusion?
This decision is made when you do your business plan. (You were planning to write one, weren't you?)
Do I have to make a profit at some point?
Are there any specific tax opportunities that I should take advantage of?
For the most part, you already hit on the big one -- depreciation.
Are there any specific tax dangers that I need to avoid?
Yes, and for the most part, you touched on it -- depreciation.
You should take the time to study what happens to those depreciated assets when they are "removed from service" in your business. It's even more complicated when they are partialy depreciated, and you sell them, or cease operations as a business.
Note that the answer might include a huge payment of taxes on those assets, which the taxpayers had previously subsidized.
And here's the best advice you'll here on this forum: Don't get tax advice from an internet forum that specializes in woodworking topics.
Thanks for the feedback. I'm definitely going to have a CPA involved before I make any tax decisions. At this point I'm just trying to get a general idea if it's even worth further effort to pursue. Sounds like it could be, and it could also be a lot of hassle, depends on how badly I want this to be a business vs. just a hobby. To be honest, I don't really anticipate this ever being a significant source of income - more likely just enough sales to make it legit and hopefully pay for the next project.
good advice above - - mine is that you may want to consider a 'subchapter S' corportation - this would keep your WW business separate from the rest of your life - - pretty simple and cheap to do - nominal rule is 'profits 2 out of the first five years', but the advantages ($ saved on depreciation) on a part time WW business are gonna be modest, and not worth it if it gets you special attention from the IRS - by all means, talk to a pro - -
My wife is regarded as a good CPA. (She is very good at staying on the legal side at the edges of the law.) She has many small businesses (including mine) as clients.
As long as you follow the rules you need not worry about the IRS and its radar. Find a GOOD CPA and have fun with your business.
One word of caution. The IRS does quality control audits. They are completely random. They examine every line of everything. One of our clients, a business with $25k gross, was selected. The audit took 2 weeks, found nothing of consequence (no additional tax assessed and no penalties), but cost the client for 10 hours of the CPA's time. You really do not want to get caught cheating.
Proje, there are some things your CPA won't tell you. There are 2 red flags to avoid:
1. Never take a" home office" deduction, and try to deduct the garage area as "rent".
2.Take only a percentage of the truck as a deduction which is in close reality to the amount of gross income you get from your WW compared to the amount you get from Milwaukee Vibrator.
If you violate either of the above, you will be subjected to an IRS audit of a density sufficient to warp time and space.
There are ways to come in under the IRS radar. They should not be discussed in a public forum.
Best advice I've seen was "hire a good CPA, don't try to cheat and have fun".
The IRS people are not the one eyed monsters that lots of folks imagine. My wife and I have a paint contracting business that does $500-$600K in gross business per year. We just finished an IRS audit for the years 1998,1999 and 2000. We dealt with two agents and both were very polite, courteous and respectful. I'm not saying it was a ton of fun but they really went out of their way to give us every consideration possible.
If you keep good records and keep it reasonable you won't have any problems. Our accountants (personal and business) both told me that the state dept. of revenue were by far the more demanding and unreasonable than the IRS.
Hi proje ,
As far as showing profit goes , It's my understanding that on a new business after about 2 years if no profit is shown it may only be considered a hobby, and therefore disallow any deductions or write offs. Remember you may need to earn money before you can write anything off. Many write offs are actually credits against your tax bill. Also when you first start up any tools and assets that you already own can be what is called converted to business use, and then written off or depreciated .I would strongly agree with advice on the previous post, check with a licensed C.P.A. or tax person in your state .
good luck dusty
I am in business and have been since 1978. One of the most important things I did was hire a very good honest Accounting firm. I bought an existing business and still operate it today. I formed a chapter S corporation in 1981 not so much to save taxes but for liability reasons. Since then I have started two other business ventures, one a proprietorship and one a partnership. The proprietorship didn't make a profit on the books for 5 years, with no problem. The partnership, I bought the other fellows interest and sold it to my corporation. The main thing I did was keep good records, pay by check and had a good Accountant.
I don't know what state you live in but I bet you pay sales tax in your state. If you form a company you can buy your consumables tax free but you must charge sales tax when you sell your product and probably file your sales tax at least quarterly. In the state of Texas (where I live) the sales tax people can be harder to deal with than the IRS. Also in Texas if you buy something that has an expected life of less than six months it is tax exempt.
An earlier post addressed the home office and counting your garage as a tax deduction. Good advice, be very careful don't throw up any flags. The tax laws are like the Holy Bible they can be interpreted many ways with many different answers.
Good Luck and God Bless
Up to 100,000 in depreciation per year for items (machinery and equiptment,furniture and fixture) placed in service that year is the big plus.
The bid draw back is that you are responsible for your own social security taxes: BOTH HALVES (employer and employee) which comes to about 15% of net profit on your schedule C.
Sate law does play a part here because one has to compare the trade off of choosing schedule C vs. S Corp status.
This used to be the law and I am pretty familiar with it BUT!!!!! that was several years ago and there have been many changes during those years.
You REALLY ought to use a CPA "Tax Specialist" at least to set up the business and do the first years taxes. After that it is mainly a repeat of the process. That you could do yourself (if you are paper friendly).
Best of luck
I have a question re the soc security aspect. I know that after a certain amount of income the SS payments stop. How does this work if you have a sole proprietirship and another full time job. If you are going to pay the maximum at the one job do you still pay in for the other? Do you end up having to pay both? Tom
You can always ask for a refund.
You will definitely want to ask a tax person about this, but it was my understanding that as long as you keep it limited to a hobby, then you can deduct any hobby related costs from any profit that you make on your hobby. In other words, if you happen to make $100 in a year from selling a few hobby made items, then you would normally have to include that as income on your taxes, but if you also bought a tool costing $100 in that year, then you can claim that as a hobby related expense and it cancels the $100 that you made. From what I remember when reading that portion of the tax rules, you of course cannot deduct more for tools than you made off of the hobby. This helps keep you from having to start a business in order to use your hobby to help pay for itself.
The last time I read up on this was about 6 years ago, so the rules may also have changed since then.
I started 3 years ago as a "handyman". For the last year most of my jobs have been in the $5,000 range. Not too big, not too small. I sold 11 pieces last year, most costing over $1000. For me it is easy to lump my ww'ing tool purchases into the same catagory as my remodeling tools. I keep track of the two sides of my business seperately in Quick Books, but file them as the same on my IRS form. One thing about my business is that it has always been profitable. I only buy new tools when the money is in my business account. This way it never appears that I am buying items that are not strictly for the business.
For me and, as I hear it, for all small business owners the accounting is the hardest part. It is a huge pain in the but. Today instead of working on the site I am home catching up on the paperwork stuff. Unless you really intend to do this as a money making venture, and put in more than 20 hours a week I can't imagine that it is worth the trouble and cost. A good accountant with experience in your trade is hard to find, and those who do charge 80 to 150 an hour. You can easily blow $1000 on the basics of the business side. As a hobbiest and not writing off the tools you can still sell you r stuff and unless you really start making a lot of money (say more than 6 or 8K a year) you are unlikely to have any trouble.
I can't imagine how you could ever turn a profit working only on the weekends if you are writing off all your tools and expenses. After three years of this the IRS is likely to look into your "business". If your only goal is to write off the tools then BEWARE, this is how you can get in trouble. If you truly want to have a business then be prepared to put more work into it than you have in anything else. I don't think there is a middle ground.
I think that there is a lot of good advice posted here save this page and read it in a week then think about it some more.
This forum post is now archived. Commenting has been disabled