Starting a custom woodworking business

[Mark]

I've turned my woodworking hobby into a custom cabinet business and have been researching a little on how it will affect my income taxes this year. So I have a few questions, Here's my situation:

I do have a day job so this is more of a hobby that will generate a little extra income. As far as tools and startup costs my grandfather was a cabinet builder by trade and left my dad most everything I need, lathe, table saw, jointer, radial arm saw, drill press, and various hand tools. We moved all that machinery to my garage since it's heated and can be used year round. So my start up costs are minimal, I got a finishing nailer and a planer so that's about it so far. Can the new tools that I've bought be depreciated? If so, is there a guideline over how many years tools can be depreciated over?

I have a both an attached and detached garage which I've made the workshop in my attached garage. I've moved everything that I consider personal property to the detached garage so the attached garage is used soley for the business. Can I write off the location of the business? How do I figure out the value of an attached garage? Would I even want to, are there considerations I need to know about before doing this.

This first year I doubt I will turn a profit because of the new tools I bought but the pipeline looks pretty good from word of mouth advertising. Several people have approached me to build them something. So next year I believe I will show a profit.

For materials that I use I pay sales tax on and charge sales tax for the end product. Are these materials fully deductable? Also, items such as saw blades, sandpaper, etc stuff that wears out after limited use, can that be deducted as well or does that have to be depreciated too? Does that fall into a different category as it is not a durable asset?

My truck I use for both personal and business use. Mainly the business use is getting supplies and delivering product. If I keep the truck as a personal vehichle can I at least write off the mileage when I use it for business?

I've been saving reciepts for everything I do concerning the business and I also keep a record of where I go and for what when it's bisness related.

What else am I missing?

Thanks, Mark

[Charlie Self]

Mark asks:

Up to the limit of your income. You need some IRS booklets. Check their site.

It's a little like a home office. You can write it off, up to a percentage of your income, I think. I have a home office and a shop. I do NOT bother taking the home office off, because it creates an IRS flag...been there, done that, do not EVER want to do it again if at all possible. Annual audits are a distinct PITA and IRS is not your "good hands" people.

Basically, you need a good tax guy. Avoid, like the plague, the various chain tax outfits that do a fast rock and roll (usually wrong) on the average person's taxes. Find a good local guy or gal and get them to set you up as an independent business. It costs a couple hundred bucks, but is well worth it in the time and trouble is saves you. Your tax accountant can answer all your questions about deductibility with much greater accuracy than most of us are apt to have for your individual situation.

Yeah, you write off materials, you also write off mileage at whatever IRS's established rate is for a particular year...usually about a dime a mile less than it actually costs to run the vehicle. Last I recall was about 36-1/2 cents.

Talking to your tax person is what you're missing. You need to be set up NOW if you expect to be making a profit next year. You want to deduct every dime that is legal, without missing any, but you do not want to deduct things that aren't legal (though you may want to deduct arguable expenses and wait and see...but have the money ready to pay if IRS says no). Really, the only way to be sure is with a good tax person (and they're not as easy to find as you might think: there's a pee pot full of 'em out there, but not all of them are good, especially for the small businessman).

Charlie Self "Telephone, n. An invention of the devil which abrogates some of the advantages of making a disagreeable person keep his distance." Ambrose Bierce

[Charles Spitzer]

an accountant to answer all your questions and keep you out of jail?

[Edwin Pawlowski]

A good tax accountant will not "cost" you anything. They will be sure you get all your deductions and save you hours of hassle. You may have some cash outlay, but you will get that back in overall savings at the year end. Your business will be set up properly and you will be aware of all the possibilities of income and deductions available to the self employed.

If you go to a tax audit, you don't want to have to say "a guy in the newsgroup told me it was deductible" unless you want to see him laugh heartily. Ed

[Slowhand]

Aint that the truth. SH - what taxes? ;-)

[Scott Brownell]

Mark,

Find a CPA real quick, noone here is qualified to advise you as to your situation. If you don't know any then talk to some business owners that you do know and ask them for references. It's both time & money very well spent. My CPA has been a godsend for 17 years.

Scott

[B a r r y B u r k e J r .]

A good accountant.

Get it set up right, NOW, before the business grows. Don't mess with the IRS or state sales tax police.

Barry

[Ken K]

I am doing the very same thing that you are getting ready to do. The fellow that said get a good CPA was absolutely correct. The one thing that no one mentioned , at least that I saw was the big insurance problem, or should I say the wrong insurance. Home insurance will not cover your tools, or building, If you use your vehicle to do business, most likely that vehicle can be denied when in an accident. The insurance company will not pay if they suspect that you are running a business out or your garage., in the case that you have a fire. Also the real big one is the liabililty insurance, that covers you if something that you build causes an accident, years down the road. My insurance policy does not allow me to build a baby crib. This may sound crazy, but for those of you that have not talked to an insurance agent about this kind of coverage, are clueless. My insurance,liability, shop coverage for $15,000.00 of tools and that is low, and the commerical insurance for my 2000 chevy, comes to $300.00 per mo. They base your insurance rate from past coverage, since I had no past coveraged, mine will start high for the first 5 years, then after I have a sort of track record , it will either go up or down accordingly.

It is base on dollar amount earned.

Ken

been there done that,

also get incorporated, to protect your personel property, Also get some legal help. \

To date I have spent $125.00 . The insurance is the big scare.

[Joe Zeh]

I believe you can depreciate 100% in the first year for equipment under about $20K. You use form 4562. You can also deduct your home office and shop, form 8829 part III. Materials (e.g. lumber) are part of the cost of goods sold. They get subtracted directly from income. Consumables (e.g. nails, glue, sandpaper, biscuits etc.) are also deductable as are office supplies, and machine maintenance. Milage on your truck is deductible at about 36 cents per mile (Quicken has a mileage tracker that is very useful). I think it is wise to get the advice of a tax consultant, but I use Quicken Home and Business in combination with TurboTax which I find just as good and less expensive.

[leonard]

Hi mark

Since this is what I do for a living, I would strongly suggest that you seek a good accountant or tax consultant. I have seen many people get in BIG trouble by listing to People that they think know the answers but are only retelling urban legends and misunderstood law.. Beware of software that claims to have all the answers because it matters which version you get(turbo tax ,taxcut , Peachtree,quicken etc) as to the accuracy you get.

leonard Shapiro Allied tax service

[B a r r y B u r k e J r .]

You may want to do the same. If you are a sole proprietor and employee of am incorporated business, you personal property may not be as protected as you'd think.

Barry

[Ken K]

Already have done this, I know what your saying, I have a good friend as a lawyer, and we are covering the loop holes, but incorporation has to be first step. ken

[Not Telling]

Having my own business has been a lesson learned (the hardway $$$), first get advice from a qualified person. Second only have a Tax lawyer do your taxes. Why? simple if you ever get audited then the lawyer only has to give what they want to give to IRS. Whereas a CPA etc. must supply everything to the IRS. We have a Tax lawyer, CPA, and book keeper. Also, you must incorporate very very important! It should run you about 1500 for startup mabey less mabey more.

[Tom Watson]

You've already gotten much good advice about contacting a professional to deal with the financial/tax end of setting up your business.

My concern would be that you might get put off by the whole idea if you tried to do everything at once.

If you are thinking of making cabinets as a second source of income now, with a view to it being your primary source of income in the future, you might want to follow the 'toe in the water' approach.

Do contact a CPA but try to get one who is knowledgeable about the business you are trying to enter. The first CPA that I went to had unrealistic expectations about shop rates. It wasn't that he was wrong, he simply had no real world experience in the prevailing rate for small cabinet shops. Had I charged according to his counsel, I'd never have won a bid.

Some accountants want you to run a double entry bookkeeping system but I've found Quicken Home and Business to be just fine, and that is after using Quick Books Pro for a few years. Some accountants like Peachtree better. I don't know what you use for your home stuff but it's best if they are the same package.

I would speak with some of the shop owners in your area and try to get some recommendations. I've found those in the business to be of a collegial frame of mind, rather than being competitive to the degree that they would give you no, or bad information.

You will need help from them to find out where to buy your materials and what people to deal and not deal with in your local market.. Many shops pass around contracts or form temporary alliances when their work load gets too high. They may not include you before you prove yourself a bit but you may become mutual resources for each other.

Get yourself on the list for some of the trade magazines that are geared to small shops. Cabinetmaker is one good one and Custom Woodwork Business is another. These are free to the trade. They have plenty of articles on the business end of things.

Go over to

and look through the various forums. The info there is a bit better than on Usenet but the usual caveats apply.

There's no reason you can't start out as a Sole Proprietor. It is the simplest form of business and has the least amount of bookkeeping and reporting involved. As your business grows, you can decide what form might be best for you.

Insurance runs high and low and must be shopped for and budgeted for carefully. I've seen many guys run their monthly nut up too high by buying more insurance than made sense.

I don't know what your zoning situation is where your shop will be located but you might want to look into it. I've seen shops shut down because the neighbors started raising hell about huge lumber and plywood trucks tying up the road in a residential area. Then too, I've seen many shops operate sub rosa in a residential zone with no problems.

There are lots of seminars on business and techniques that you can attend. I've found them through my suppliers.

You are, eventually, going to have to form a business plan, in order to have any structure that will be countenanced by a lending agency. It's also a good discipline in and of itself, because it makes you ask yourself questions that need to be asked.

Other than that: buy low and sell high - get your materials for the right price and charge what the market will bear in you area; charge enough money to make a profit and put a good chunk of the profit back into the business; decide if you want to be a mechanic your whole business life, or if you will want to run a shop with employees.

Don't give up your day job, yet.

Good Luck.

Regards, Tom Thomas J. Watson-Cabinetmaker Gulph Mills, Pennsylvania

[BRuce]

Tom, thank you. Every once in while I find a response to a post falling into the "that's what I would have wrote" category. problem is I do not have the experience to make those statement and sound plausible.

What you have stated is my current plan. I am not trying to quit my day job but gain the experience (and reputation) gradually over the next few years so i can use the income as a retirement supplement.

As for zoning, you are very correct. My planning board was very helpful and suggested that since I would not have 10s of clients running in and out my driveway they would not recommend rezoning. if there were complaints by the neighbors at some point there would be no fine (my request was noted in the log book) we would just start the process then.

I would recommend checking with the local authorities, every location varies.

BRuce

Tom Wats> On 19 Nov 2003 08:34:10 -0800, [e-mail] (Mark) wrote: > >

[Iraxl Enb]

Looks like a lot of folks here have their own businesses, so I hope some can reply to the question, cloaked with the anonimity of the internet...

what are the margins like with your own small business? folks get to buy prosches, of beat up chevys?

irax - thought of starting something so many many times...