tax question: switching over from hobby to business?

I have had a large hobby metal shop for a long time. I have recently begun operating as a small business out of my home shop. I have never deducted
anything (yet) from my taxes.
I want to know the mechanics of transferring assets to my business and then depreciating or writing them off. There is lots of information out there on how to depreciate assets purchased new, but little on my situation. For example, I have an older but fully rebuilt Bridgeport mill which would probably sell for about $4k right now. Can I transfer the asset to my business and depreciate that over seven years?
Thanks,
Grant
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Grant Erwin wrote:

You need to talk to an accountant. If you've been operating a business without paying taxes you already have problems. It's not just a function of deductions, there are also self employment taxes that those deductions go against.
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"Pete C." wrote:

Oh, and also get a lawyer for the zoning and other issues related to a home business shop vs. a hobby shop. And the fire marshall for the regs related to your welding business. And check with OSHA for those regs and inspections. Make sure you have all the required PPE, fire extinguishers (and they're annually serviced too), etc.
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"Pete C." wrote:

Don't forget insurance either, commercial general liability, possibly product liability since you're fabbing stuff. Your homeowner's insurance will almost certainly be an issue. Your best bet will be to lease a warehouse / shop bay in an industrial park which will remove a huge number of issues vs. operating a commercial fabrication business at your residence.
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Absolutely. Recently, in the process of changing my insurance broker for a local one, I mentioned that I make stuff in the garage and managed to sell a whole whopping $100 worth of it. The fecal matter hit the fan. To cut the long story short: 1) If I did not mention it and claimed later and this info came out they could have denied any claims. 2) They are prepared to cover risks now but only if I "stay small". For instance no web site and no business cards. Also they will not cover product liability. 3) I have to weld "25 feet away from the buildings". We fought them off on soldering!
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big mistake

You definitely need to talk to an accountant.
If it was up to me, I would not depreciate anything that I already bought with personal funds, but I would write off the new stuff.
The key is to make enough money to cover your writeoffs to make a profit every year.
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Sell your equipment to your brother, sister, neighbor, etc. this year. Give 'em a loan to purchase. Start your business next year, Buy equipment from brother, sister, neighbor, etc.
An accountant is going to tell you that it is difficult to go back. The above gives you a current year paper trail. Don't give your accountant to much information - he don't want to know.
Karl
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Grant,
I would find an enrolled agent for your taxes. Accountants are the worst thing for you if you are wanting to know what you can and cannot do. My tax guy is not only an enrolled agent, but is the president of the local association of enrolled agents. It costs me about $320 last year, with audit insurance, and I'm damned happy to pay him. I literally would not still be in business if not for him.
You can lump all your current assets in and depreciate them over time. If it's not a huge amount, you can probably depreciate it in a single year. BUT, once you do that, if you later sell one at more than the depreciated value, you have to claim the difference as profit and pay taxes on it. And collect sales tax.
Talk to an enrolled agent, you might be better off leasing the equipment to the business. Being a lease, the cost is a write off. And, the money your business is paying your private self is unearned income which has a tax advantage. A friend of my dad's ran a business out of his garage in San Jose for 20 years and leased the machinery to his business. He's not only a genius with high power electrical stuff, he really knows the ins and outs of legally keeping as much of his earnings as possible.
None of the above should be taken as legal advice, tax laws in Washington are different than California. But an enrolled agent will know exactly what to do to help you.
Couple years ago, I foolishly signed up for a Trump class. I'd attended a freebie seminar just to see if I could learn anything, wasn't really interested in playing in the real estate market. Wasn't going to sign up for the paid class until the speaker talked a big story about how the class would discuss doing business with the government and that interested me. Anyway, one of the tidbits I did get from the class was the overwhelming value of enrolled agents. I already had my tax guy lined up, but it was nice to learn I had the best guy on my side.
Jon
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But Grant would get rental income, which he would need to report, it is a wash.

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On Wed, 27 Aug 2008 13:41:43 -0500, Ignoramus17245

From what Grant has said in the past his type of work has risk involved, ie being sued. If the company owns the equipment an unfavorable outcome from a lawsuit could easily take all the equipment/tools that he owns.
If you incorporate and rent the tools to the corporation they would have a degree of protection from lawsuits. In other words keep the corporation as poor as possible so it has very little assets to lose.
I would check into insurance first and foremost. My Dad ran a little manufacturing business for a bit. The liability insurance couldn't be had economically.
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And if the business owner mixes private and corporate business, then his corporate veil may be pierced and personal assets taken anyway.
It takes a substantial effort to maintain enough separation. Something that I decided is not worth doing and is unlikely to succeed, for me (I had a corporation for appx. 10 years). My own approach is to avoid things that could expose me to big liability.
i
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On Wed, 27 Aug 2008 20:01:34 -0500, Ignoramus17245
<snip>

<snip> =A partial solution here can be to set up some sort of straw man/cut-out company or corporation that actually sells the goods/services after "buying" these for cash. Make sure that this is like a floating crap game or incorporated in Panama. The most that the sharpies can get that way is the busted stapler.
Unka' George [George McDuffee] ------------------------------------------- He that will not apply new remedies, must expect new evils: for Time is the greatest innovator: and if Time, of course, alter things to the worse, and wisdom and counsel shall not alter them to the better, what shall be the end?
Francis Bacon (1561-1626), English philosopher, essayist, statesman. Essays, "Of Innovations" (1597-1625).
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On Wed, 27 Aug 2008 20:01:34 -0500, Ignoramus17245

It was always questionable if it would actually work as intended. There was also "estate planning" involved, which I understood added some more protection.
One never really knows about this kind of stuff until actually tested by a suit. Just about everything has some sort of liability though. If it appears that you have lots of money, the greater are the chances someone will try and make an issue of it (shrug).
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Ignoramus17245 wrote:

Yes, I noted that, though to be precise, there is a difference between renting and leasing. I also noted it is considered unearned income and is taxed differently than earned income. I believe one of the benefits is that SSI is not applied to unearned income. I've not done it myself and so don't really know all the details, but know several people that have. A good tax person can tell him if it's worth doing in his case, but it is an option.
Anyone in Grant's shoes really should cough up the money for an enrolled agent. If they feel the money didn't save them enough to justify, they can always go elsewhere the next year or DIY.
First year I went to my current tax guy, he saved me 3 grand. And noting I'd used H&R Block the year before, asked questions about that return. Turns out H&R missed a number of deductions. He filed an amended return for the previous year and I picked up another $500 or so. I was very very happy to write him a check for $280 for his services! With taxes, the devil is in the details, and the details can really add up to big savings.
btw, anyone in the Sacramento area that wants a first class enrolled agent, email me privately for his contact info.
Jon
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What I do know is that the IRS is looking for businesses to produce cash, either as salary or dividends. They also want the owners to pay themselves a reasonable salary (what is reasonable to them, may be a pittance compared to market, but it should be something).
They may frown upon shenanigans such as paying oneself rent etc, and having no income or SS paying salary. I am all for saving on taxes, etc, but not at the cost of being flagged for an audit, or worse. A good accountant would tell Grant what ratios to follow, etc.

I had a similar experience, went from a zombie accountant who never cared, except for the quantity of customers, to someone who cares. i

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Ignoramus17245 wrote:

An accountant will make sure HIS ass is covered first. If he can save the customer some money, that's great, but not his first priority. Few if any accountants will tell you this.
There are thousands upon thousands of loopholes and deductions in the tax code. There is nothing wrong with taking advantage of them. I advocate nothing illegal. You seem to have an attitude that taking advantage of legal loopholes is wrong. That's part of how people with money accumulate and keep it. I'm not advocating trying to juggle things to show no profit. Unearned income is not subject to SSI. Nothing illegal or shady there. Us little guys have just as much right to take advantage of the loopholes as the big guys.
I asked my tax guy once if the IRS gives anyone credit for failing to take full advantage of any and all legal loopholes and deductions. His rely was "No, they just think you're stupid if you don't" And, they are very happy to accept the extra money.
Jon
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Jon, I understand and respect your opinion. My own opinion is based on certain other considerations, that I am not willing to explore here since it is not on topic of this newsgroup.
i

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Jon Anderson wrote:

I was astounded to find a bunch of state loopholes (Missouri) for anything that goes with capital equipment. Basically, any tools, materials, upgrades, consumables, repair parts, etc. that go on or into a piece of capital equipment are not subject to state tax! I have a tax number (merchant and manufacturer's exemption number, they call it here) so I don't pay tax on the components that go into something I sell. But, apparently, as I read the tex court rulings, if I were to buy a manual Bridgeport and convert it to CNC for my own use, for instance, all those parts would be tax exempt since they were an "upgrade". Don't take this as legal advice anywhere but Missouri, but your state may have a similar arrangement. I used to pay tax on a lot of the stuff that didn't actually become part of the sold product, but not anymore.
Jon
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Ignoramus17245 wrote:

The IRS has NEVER hasseled me about no profit for several years on end. If you are making duck decoys or fishing flys, they can say it is just a hobby. If you are cutting metal for people, advertising or running a web site, it makes it pretty clear you are TRYING to make income. The business in home deduction is an unbelievable bonus, I can't BELIEVE how much that cuts my taxes! Totally beyond belief. Many years I consider that I have made a significant profit, somewhere in the general neighborhood of my "day job" salary, but when you run the numbers through the tax forms, all the home costs (taxes, utilities, insurance) adds up to make the business look like a big LOSS, and so I often don't pay ANY TAXES on ALL my income - day job + investment + home business! I can't BELIEVE they let you get away with this, but they DO! I've been doing this for about 22 years, now, and have gone through several different product genres, but all small electronic manufacturing.

A sole proprietor can't really pay himself "salary". He can "draw" from the till, but his money and the businesses money are all considered the same. This is GOOD, as you have to pay income taxes on "salary". With a sole proprietor, you only pay once, at the end of the year, as income taxes. You don't have to pay double the payroll tax to the IRS like when you deduct taxes from a payroll. And be thankful, if you thing the income tax is complicated, try out setting up a payroll tax system! it is a TOTAL nightmare, let me tell you. I was so frustrated when I had a part-time helper, it took me almost as long to deal with the IRS and state paperwork as the hours he worked! ARRGHHH!

There are additional taxes for the "self employed", where 50% or more of your net income comes from the home shop. But, these are a VERY simple flat rate, just one line on your 1040 (or one of the attached schedules) and my tax program does it automatically.

I will say a good CPA is VERY helpful to set up your business accounting system properly, show you all the forms that need to be submitted and how to account for different classes of expenses and income.
Jon
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