tax question: switching over from hobby to business?

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.

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Reply to
Ignoramus17245
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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).

Reply to
Leon Fisk

You almost certainly can't lease stuff to yourself as a sole proprietor. From Grant's initial post, I suspect that it the class of business he has set up.

Jon

Reply to
Jon Elson

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

Reply to
Jon Elson

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

Reply to
Jon Elson

Well, I have a Bridgeport mill converted to CNC, a Sheldon 15" lathe, a Pexto shear and a finger brake, a HUGE Lincoln square-wave TIG welder, a PC board etcher, a surface mount pick and place machine, and a laser photoplotter in my basement! Since it is MY shop, a sole proprietorship, OSHA hasn't any reason to poke around. (They'd most likely find stuff to complain about, like no guards on things.) There is no way my business could make money in an industrial park rented block building. I'd be bankrupt in 3 months.

Jon

Reply to
Jon Elson

But, DO get one of the $30 a year tax prep programs! They are great. They have this insane "interview" mode, I turn that off immediately and start filling out the forms. I use "Tax Cut" but there are a few others. It handles depreciation schedules (where this thread started) and all the important Schedule X's that you need for a full 1040 return.

Every once in a while the IRS has a complaint about my return, they find some bit of income I missed reporting or whatever, they just sent a notice, and I send them a check for the usually nominal amount. The way it has been working for the last 6 or so years is I get nearly a full refund of all taxes paid from the IRS, and have to send about $1500 to the state, as the federal deductions don't help as much there. I've been doing this for 22 years now, the last 19 or so without any accountant, and have never been audited.

Jon

Reply to
Jon Elson

Niches are elements of small-scale profitability. Proper niches are bits of the marketplace too small for bigger competitors to exploit, but sometimes the government makes them for you, the little hermit crab toiling away, hiding in your legal niche from the predatory regulators and other overhead that the big boys pay dearly for.

Reply to
Richard J Kinch

Ah, yes, I got that one wrong.... Fellow I know that did this was incorporated.

Jon

Reply to
Jon Anderson

Indeed, this is no hyperbole! I live in a two story, the whole downstairs is shop space. Now, I have the water heater, washer and dryer, and a small amount of personal stuff stored, so we rate 40% of my rent as a business expense, and I get a similar cut of my PG&E bill taken off.

Jon

Reply to
Jon Anderson
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Reply to
Jon Anderson

In the same boat here. Manual and CNC knee mills, Hardinge manual chucker, Hardinge w/Omniturn, Roll-in saw, drill press, MIG welder, 3 roll aways, three Lista/Vidmar cabinets, several other shelving/cabinets, 4x8' workbench, and lots of other stuff in less than 900sq/ft. I live on a short dead end road. PG&E right of way for 60KVA transmission lines on one side, landlord's property on the other. House above me is landlords also, never had a complaint from anyone living there, and that's the only place close enough for me to worry about. Landlord built this place in the 60's with the downstairs intended to be shop space. He used to make repro Model T parts here, and thinks it's really cool I'm using it as a shop too. Shop and house total about 1700sq/ft and I pay $870/month.

I'd love to go commercial, but would need to quadruple my income to even consider it.

Jon

Reply to
Jon Anderson

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