Tax deductions for tools/products/etc.?

[Detailed Josh]

I know this is more of a question direct at your local tax agent, but what can you "write" off and what if you guys actually done? Is there is a time frame for these things or just the year? For example I've been accumulating supplies/tools/etc. the past few months, but still not completely ready to start a full registered legal business. Would anything before the actual business "start date" not count or would it be for this tax year?

[rmagnus]

My understanding is if it's for your business it's deductible. Create a business entity and sell the equipment to the business. Keep god records and get a CPA.

[Detailed Josh]

My understanding is if it's for your business it's deductible. Create a business entity and sell the equipment to the business. Keep god records and get a CPA.

Even disposable products like the polish and compounds we use?

So basically everything I bought up to this point I would have to "sell" to the business I create (aka myself..so silly)..??

[Kyle@PrecisionPolish]

I'm in Canada so it may be different but cra just told me to keep a record of everything. If it was purchased 6 months prior to registering the business I could still write it off.

[Phathooddetail]

yeah even meals, or when you drive and do quotes, anything related to the business you can use

[BillE]

Make an appointment with a CPA (or someone who is versed in 'taxes') and have them explain the various deductions.

I'm not trying to be a 'smart a**' but there are SO many ways to use and claim deductions it is mind numbing!

Bill

[mwoolfso]

Even disposable products like the polish and compounds we use?

So basically everything I bought up to this point I would have to "sell" to the business I create (aka myself..so silly)..??

In most cases, products you use to sell services or equipment fall under "cost of good sold" or COGS. They are deductible in the sense that COGS offset your revenue to produce a gross profit. Then, other expenses such as meals, insurance, payroll, etc.. further reduce your gross profit; ultimately yielding a "net profit". The corporation would pay taxes solely on those net profits. If you drew a salary from the corporation you may have to pay taxes on the salary as well. It all depends on how you and your accountant go about managing the books together.

When you start a business you can literally "sell" the market value of tools, equipment and non-tangible goods to the business. In one sense, you are selling the products right back to yourself but in IRS or business terms, it is the corporation that would own the product. You, as a steward for the business, simply use them to keep the company afloat; generating revenue, ordering more supplies, paying taxes, etc..... oh yeah.... servicing your customers too!

[Dr_Pain]

I agree that your time may be best served with visiting your CPA.

Some deductions differ depending if you set up a LLC, Inc, Sub-S corp etc.. If you want to reimburse yourself for all the costs so far, you can, but you will have to make sure that everything you are reimbursing yourself is categorized properly. Reimbursing yourself is just a technicality of drawing money from an entity you are already drawing money from (salary and distribution). At the end of the year, your corp and personal income tax liability still fall under your burden. If your corp tax burden (even after paying your quarterlies) exceed what you have in the biz bank account, you will have to come out of your personal pockets to pay for it.

In terms of classification, make sure you have a solid discussion with your CPA about what goes where because equipment (for example) get depreciation (lump or yearly). The main question you will have will be "what can I write off" and the answer is .......

Consumable goods related to the business (from polish to papertowels)
Rent (even if you are doing it out of your garage... they have calculation for all that)
Uniform (for work or embroided shirts for advertising
Telephone and other utilities used for and by the business
Mileage (either as a write off or as a reimbursement for your personal vehicle)
Vehicles (if they are primarily used for the business)
.... and the list goes on and on!!!

The question you won't get an answer for is " Can I buy stuff for the house and write it off? like papertowels, computers, cleaning supplies for the house etc... Your CPA (and I) will tell you to keep it legit but everyone is tempted by the gray areas. Get audited once and have to pay 10s of thousands of dollars in back taxes, fines and penalties (and attorney/CPA fees) and you will see that the little latitudes in the gray area don't pay

[Detailed Josh]

Yeah I figured most of this will have to be talked with a CPA, but I just wanted to find out a little for myself before that conversation. Plus it's nice hearing from others who have done this.

I'm probably going to go LLC as I don't want shareholders/etc. so I don't' want a corporation.

So what about buying stuff. If I "Josh" buy products/tools/etc. does it still apply to my eventual business, or will I have to get a separate credit card/cash that's technically for the business and not "me"? So much red tape...lol.

[Tinwhiskers]

Yeah I figured most of this will have to be talked with a CPA, but I just wanted to find out a little for myself before that conversation. Plus it's nice hearing from others who have done this.

I'm probably going to go LLC as I don't want shareholders/etc. so I don't' want a corporation.

So what about buying stuff. If I "Josh" buy products/tools/etc. does it still apply to my eventual business, or will I have to get a separate credit card/cash that's technically for the business and not "me"? So much red tape...lol.

Umm...a LLC is a corporation.

Also, are you currently paying taxes on the money you take in from detailing? It doesn't sound like its your full time job yet and I know a lot of guys who just take cash. If not i would forget about write offs and quietly delete this thread. :bolt:

[cardaddy]

Short answer for HOW you buy it is you should get a card that you use ONLY for the business purchases, (even before you open the business account officially for instance). Just makes it easier to keep up with stuff.

You can however buy anything and everything for the business from your personal account, then once you have a business account, you write a cash ticket and pay yourself back out of the business account.

As for deductions you can take... that is like asking what color blue is the sky! I've known people to write of their haircuts! (Because while they were there they talked to their barber about whatever their business was, and may, or may not have sold him a product or service.) Meals are a gray area, as if you eat while on the job that's not covered (generally) as you need to eat whether working or not. But... if you talk to someone there, (that you are eating with) about your business and how you can provide a service for them, (or actually DO provide a service for them as a result of the meal/meeting) then you'll probably be able to deduct the standard percentage of the meal.

I'm taking it you have applied for an EIN. That is the first step, and one that the IRS will look for. Once you have declared it then you have a traceable number that is assigned to your business from that point forward. (Never mind you may indeed operate with a SS number, you'll still need the EIN in most instances.)

Bookwork is insane, but necessary. It will be what saves you from the sharks. Once you do find out everything you can write off, you may be surprised. It's been mentioned 'rent' of your home. Actually that'd fall under business use of the home. There you'll be able to deduct the percentage of your home that you use exclusively for business. Including internet, phone, (all your cell phone), portions of your heating and AC bills, even your homeowners insurance! It's very easy to have a TON of cash flow and after writing it all off, you may find that you end up going in the hole. Doesn't mean you are actually losing money day in, day out, just that you have honed in on the accounting skills that are legally allowed. Keep in mind also that while you may indeed claim a loss, and may do that for more than a year, that the IRS will make you declare your business as a hobby after something like 3 years in a row not making a profit. That is where you need to be careful with your accelerated deductions, stuff like Section 179 and the like.

Bottom line, if you're new to it all, FIND A CPA YOU LIKE AND USE THEM! After a few years you may get comfortable enough to do it without a CPA, especially after you 'learn the ropes' (so to speak). But with the myriad of options and avenues to look at it just makes sense to talk with a professional when setting up your bookkeeping methods. Once that's done you will be on your way to likely the most rewarding thing you've ever done. :)

[Tinwhiskers]

yeah even meals, or when you drive and do quotes, anything related to the business you can use

Not exactly true. Meals and entertainment are not 100% deductible and no meal is deductible if its just to feed yourself. It's only partially deductible if you take a client, vendor, etc. out.

[BillE]

Excellent advice from Tony!

Bill

[civdiv99]

OP, you asked a hot button question.

Anything in the code that is subject to interpretation as to specific circumstances is ripe for abuse, and deductions for ordinary and necessary business expenses under Code Sec 162 is one of those areas. The comments (note I'm not calling it "advice") are accurate in that you have to discuss your individual situation and activities with someone experienced in this area, because there will be areas that are subject to interpretation.

A couple of general thoughts just to add to the discussion -

Regardless of your business form (proprietor, SMLLC, s-corp, etc.), there are several things you should consider that may just seem obvious but are also overlooked by many a starting proprietor:

1. Open and maintain a separate bank account for the business (more about why later).
2. Compartment all of your business activities (revenues from jobs, purchases of products and supplies, and purchases of equipment) in that company account. (stay with me)
3. If a simple proprietor/single member LLC, you can make owner contributions of cash to the company as needed, and you can make "draws" back from the company as available. There is no tax impact to this. What you want to avoid is commingling everything.
4. Therefore, have a debit or credit card for the business. Don't buy non-business stuff with it. Deposit all business revenues into the business bank account FIRST, then take it as a draw if you have more cash in there than needed and ya want to go to the carnival or something.


Here is why I suggest the above. The highest "look at me" flag you can wave to the government is that of a cash-basis Schedule C proprietor. Period. Whether you are profitable, or not. (I'll 'splain why in a sec).

By far the most likely scenario, IF someone is going to get examined (audited to you guys), is via what is known as a correspondence audit. The boys in black sunglasses don't show up at your door. They just send you an innocuous sounding letter that basically says: "We'd like some more information......." And what they will want can range from evidence of your business receipts, purchases, whatever. The detailer who has all of that activity judiciously compartmentalized can respond to those letters efficiently and effectively. The ones who are as honest and upstanding as any American, who kept good records every day, but otherwise lumped everything together with the rest of his life has a tougher climb. I know, that probably sounds obvious, but trust me, it's easy to "slide."

What's the deal about depositing business revenues first, THEN dipping into the cash? Because there are 2 different scenarios that are subject to abuse:

1. The obvious one - deducting whatever you decide to rationalize, ending up with a tax basis loss on Schedule C, and therefore offsetting other income on the return with your loss. Be prepared to receive a correspondence audit, supporting your position. It's no big deal, and the proprietor doesn't need someone like me to answer it (but I damn sure suggest you get at least local pro consultation and advice before launching your answer). Your risk? A loss history is subject to re-characterization by IRS as a "hobby." There ARE in fact a number of other factors that play into that, including the manner in which your business has been conducted, etc. 7 factors actually, which I will not go into here. But 1~4, above, are things that do not lend themselves to retroactively changing 2 years later. Enough on that.
2. The other thing that is subject to abuse is the Earned Income Credit. The credit is a refundable credit based on a handful of factors, but primarily income and dependents. It doesn't take too much "what if" with a computer to see that boosting receipts another $5K (just throwing something out here as example) can sometimes result in more income, but more earned income credit, and a net reduction in tax/increased refund. Bet yer ass that is considered when you get a correspondence examination.

I could write a damn book on how you capitalize your business, method of contributing property, capitalization regs, etc. So, if you are doing this as a business with a profit motive, you NEED to hook up with a local practitioner to get started on the right foot. Do that, and then you (hopefully) only need to see the guy once a year just to go over stuff and knock out a return, or when you have significant purchases (capital assets) or want to expand, etc.

Finally, I'm not going to get into the vehicle regs in a forum post. It would literally take me half the day to summarize the differences between personal vehicle partly used for business purposes, a company owned vehicle used exclusively for business, a company owned vehicle that the owner/shareholder uses sometimes for non-business purposes, etc. That's what yer local pro is for; what's good for detailer A may not be appropriate for detailer B.

In a nutshell - if you are new at managing the business affairs in a "don't bite me in the ass later with #### I don't understand" situation - consider the cost to spend an hour with a cpa well worth it, and you can post a "whoo hoo" to the forum if you some day get a correspondence audit (which MUST be dealt with and will NEVER go away), but you have your stuff all "slam-dunk."

Civdiv99

[Detailed Josh]

Amazing posts especially Civdiv99! I'm not even official/started yet so that's why I'm figuring this all out so I make sure I do it all legally, and avoid situations like Civdiv99 said could occur.