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.