I've just started a part-time woodworking business this past year in
part to write-off the costs of building a barn workshop. I don't plan
to be all that active in the business at first, but expect to pick the
business up when I retire in about 10 years. I don't intend to make a
fortune at this and I don't expect to make a profit the first few
The IRS has certain rules in what constitutes a business versus a
hobby. You must have an active plan to make a profit and always be in
the process of marketing yourself. Has anyone had a similar
experience with the IRS, good or bad. I don't want any suprises down
the road when my significant deduction is denied due to a hobby
Many people form businesses to avoid paying sales taxes and to be able to
write off expenses. IIRC you do have to start showing a profit within a few
years of forming the business. Naturally if you are making a profit you can
remain in business. If you continue to loose money and remain open that
sends a red flag. They ask, how can he remain in business and loose money
every year. Remember the saying, Pigs get fat and Hogs go to slaughter.
Check with a CPA to be safe.
When I first ventured out of the warm embrace academia into the cold,
bitterness of the Real World and got my first Big Boy job it was as the
chief Unix Geek for a small ISP, as a contractor. For tax purposes I
got a business liscense and ran my relationship with my employer as one
business providing services to another. I did the bulk of my work
onsite, on equipment and in space they provided, however a portion of
my work was done from home.
Specifically I did all my invoicing/accounting at home, any odd
after-hours only maintenance I could do remotely and any after hours
emergencies were done from home. All of this work was done on my own
computers, from my own internet connection. Since being a computer geek
was (and still is) a hobby in addition to being a job there was a lot
of crossover between the equipment usage, very similar to the situation
What I had to do vis-a-vis the IRS was to only deduct the percentage of
my dual-use geek expenses that were used in conjuction with my little
business and be able to justify/document the perctage deducted. I never
did feel comfortable doing this all by my lonesome so for the two
tax-years I was working this way I dropped the $100 a session with a
tax planner cost me to get some help coming up with and documenting the
deductions I was taking. I was never questioned by the IRS about any of
this. This was in 2001-2002.
More recently I've helped an artist friend, who hocks her wares on the
internet from her apartment, with her taxes doing the same percentage
game with her rent, art supply and internet costs. She was never
questioned either of the two years I helped her.
Still given the much larger sums you're likely be trying to deduct I
suggest talking to an expert before you start laying out cash.
Depending on how large your initial capital expenditures are going to
be it may be worth your while to incorporate as an LLC and have the
business purchase the equipment/workshop and reap the tax benefits in
stages either by amortizing the expense over several years or treating
it like a capital investment and counting the depreciation of those
assets against your profits over the years. Or some combination of the
Talk to a CPA, it'll cost ya maybe a few hundred for their time to get
all this setup but it'll save an order of magnitude more in headaches
down the road if something goes awry.
The IRS has also changed the rules for what can be deducted as "office
space" in a part time business. Unless your barn workshop is strictly
used for business purposes I'd check with a qualified accountant before
attempting to write off the cost of the building.
First of all, in order to be able to 'write off' anything, there has to
be a taxable income to write off against.
Whatever you are claiming to be an expense to your business, like rent,
you'll have to declare that rent (that your business pays) as income
because you are the owner of the building. Maintenance deductions become
complex as well.
Get some help from a creative accountant/tax consultant. A seemingly
small move today can save your butt a few years down the road. The
revenuers live by one rule: ignorance of the law is NOT a defence.
You need to talk to an accountant that is familiar with tax law.
The building may be considered a capital asset which you cannot write
off your taxes by depreciation.
There may be ways to offset some of your tool costs and utility costs
and perhaps property taxes and maybe a mortgage if you financed the
All deductions though come off the taxable income from the business.
You may be able to claim more if you have another income source but be
sure your accountant gets it right.
You will need a business registration and submit monthly and yearly
sales tax returns. That is if you sell retail.
I am a tax consultant(sorry no free advice),You really do need to spend a
little money and consult a tax qualified advisor. He/she can answers all
your questions and may be able to help you plan a legal and painless way to
your goal. I have been doing this for more than twenty five years and there
are some good ways to reach your goal but beware there are pitfalls and
there is a lot of myth.
Allied tax service
You might want to go to misc.taxes.moderated. There are some helpful
people there, though it is very slow because it is moderated.
I sell a few pieces now and then, but I don't claim anything other than
exactly what goes into the sold work. I also never abuse my tax-free
purchasing. Odds are they will never even look at your return, but If they
catch you doing it wrong they will come down on you with the wrath of God;
and for a few hundred (or even thousand) dollars I just don't need that.
I wouldn't even think about claiming your workshop; in fact I just expanded
mine and claimed zero. There isn't much excuse for not making money in a
part-time woodworking business. Your only real expenses, labor and
materials, are totally variable. If you aren't doing enough business to pay
for your tools, then you aren't a business; at least that is how I expect
the IRS would look at it.
One thing I would add to the above responses (which are all valid) is to
keep separate books and records. Even a separate bank account would
be good. Don't comingle monies. Finally, really treat the venture as a
One other thing to think of--Insurance.
Your homeowner's insurance covers your hobby tools. But, if it's a
business, it may not.
You'll never hear a peep from the insurance company, but if there is a loss,
they are smart enuf to check and see if you have been claiming that this was
a business, which may be enuf of a material non-disclosure to void your
Better check that aspect out too.
Many insurance companies have a *small* amount of insurance for home-based
business equipment that's available as a rider on your HO policy.
The downside is that it probably wouldn't cover a large theft. It's usually
around 5k, in my experience.
Of course, you would want to let them know you have a hb business *before* a
loss. Otherwise, they have the right to deny coverage. That's not the sort
of thing you want to find out after the fact.
Do check with your Insurance company. Some will freak out if they find
out you have a wood shop and cancel your home owners policy. Some will
cover only a small portion of a wood shop ($500). Some will only cover
if the shop is detatched. They all want to see a dust collector of some
sort. You should have a flamable liquids cabinet of some sort. You
should have smoke detectors (Fine Woodworking did an article about this
a year or so ago, and said that a heat detector works better). It isn't
hard to have no profit for several years while you are building a
business. Intent to make a profit is important .Also, when you do
eventually move, the part of the home that has been improved or built
for business is taxed differently than the rest of the house (at a
higher rate). I think that you have to stop using it for 2 years in
order for it to be taxed as part of the house. Do check with your CPA
And some may even refuse to insure you. When I went to my insurance company
having had 10 years of claims free home insurance, they refused to insure me
for my technical writing business citing that I would be more prone to being
sued than an average company. I dumped them altogether and found someone
Hmm... last time this came up with my tax preparer/bookeeper, she told
me that the IRS considered any small business that loses money for more
than 3 years a hobby. Especially if it is not your livelihood, not
your job, not the source of income that pays your bills, but more just
a way to write off your purchases while building up your tool
Imagine this: Hey, I bought all those tools because I was gonna be a
full time woodworker. Then the old lady got pregnant got pregnant
again, and we needed braces for our oldest, so it just didn't work out.
Thanks for letting me have all those exemptions and deduction; it
worked out great! Especially since I never really got around to
starting the biz!
Anyone can tell you anything. I have been self employed for about 25
years and many of my fellow contractors have been pretty damn smarmy
until their first, full audit. Nothing like watching an audit agent
(usually someone that has college level bookkeeping and couldn't pass
the license requirements for CPA exams) simply disallow a legitimate
dedcution out of hand. It will make your eyeballs burst from the heavy
I have also been audited by some really nice, knowledgeable people that
don't even finish the review. Things look good, professionally
prepared, and they were just checking to make sure we were doing the
things we needed to do.
STAY AWAY from the bar stool experts, the know it alls that read the
business section, and the guys that feel like they are pretty slick at
preparing their own returns. Not getting caught by the IRS doesn't
mean you are doing anything at all right. It just means you haven't
been caught. No matter who does your taxes, NO return will stand a
full audit if you get a jerk auditor.
Best advice you have gotten here: go see a professional, someone that
specializes in construction. They will know about all the pitfalls
that beginning contractors/woodworkers fall into.
what he said (below). Agood accountant will save you tons of grief (and
penalties) in the long run.
I had my first audit shortly after my ex filed for divorce (she called the
IRS and told them I was cooking the books). I got lucky (I guess) and got a
really nice auditor. He went over the books, found a couple of things he
thought were a bit out of bounds (my heating bills were really higg), and
asked to see receipts. He also wanted to see the office part of the
business, which was in the house. My ex wouldn't let him into the house to
see the office or look at the receipts (this was far enough into the divorce
that she had the house, but hadn't been forced to turn over my business docs
yet). The auditor really needed to see them to do his job (I had taken the
home office deduction, and he was supposed to check square footage). He
offered to haul my ex into federal court for obstruction of justice (I
declined for some reason).
In the end, he took a look around the shop, and decided that the heating
costs weren't so crazy after all (the shop was a 200+ year old barn, and
after spending about an hour in it doing the audit, he was pretty cold, even
though the heater was blowing full blast), and decided to skip the home
He stated that he fact that my books had all been prepared by a
professional accountant, and that the records were fully itemized made it
pretty clear that I if there were any errors, they were small. He also
pointed out some deduction I hadn't taken, and said that the missed
deductions probably ballanced any shortages..... Of course, he also pointed
out that the fact that the initial report came from an ex that was clearly
just trying to cause grief made a difference too.....
Bottom line: an accountant is cheap (mine costs about $300 a year)
As others have mentioned, there are numerous things to beware
Your homeowner's insurance may not give you adequate coverage.
Your local utility providers (like power and telco) might want
to charge you higher business rates.
I think the IRS guideline is that they expect a legitimate business
to make a profit 3 out of 5 years (but of course if you can
document bona fide business expenses and it's really your source of
income you won't have problems with legitimacy).
You don't have to go to the trouble of incorporating -- a local
DBA registration is probably sufficient. But you will have to
do the state and federal paperwork on your income for tax purposes.
Some states may require you to file your sales tax reports bi-weekly
even if they're zero. You have to deduct social security, medicare,
and withholding tax, and issue yourself a W2 or 1099 at the end of
If you're buying depreciable assets, you may not be able to deduct
them all at once. You'll have to run a depreciation schedule.
Is it still worthwhile? You might not want to make the business
official until you're actually making enough money to offset all these
Not meant as a criticism, but if you are not incorporated, ie operating
as a sole proprietorship, you do not need to issue a W-2 or Form 1099 to
yourself. You simply report the business on your personal return as a
Schedule C. You would not withhold any taxes on yourself.
You would only need the Forms W-2 and 1099 if you are paying others.
Mike Berger wrote:
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