# Tax rules on machinery?



## wquiles (Jul 8, 2009)

I have been thinking about "converting" the machining hobby into more of a home business for the last 7-8 months, but I am not sure about the general rules/guidelines to go about. The reason I want to do something at this point is that I got laid off on Monday, so I have some time now in my hands while I look for another full time job. 

I am trying to determine if this is an opportunity to get perhaps some tax advantages on the machinery/equipment that I have if I setup as a small business (Schedule C, if I remember right). What are the rules/regulations for home business and for deductions? I recall somebody had mention something about being positive/upside x out of so many years to qualify (so that you are not always declaring a loss every year), but it would be good to know what are the rules/guidlines.

I am asking the question here since I "think" several of you do machining as a home business. Any of you that do machining is setup and/or incorporated as a small business owner? Advice/tips/links/suggestions?

Will


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## Lyndon (Jul 8, 2009)

My recommendation is always the free IRS publication that you can download called "Tax Guide for Small Business" http://www.irs.gov/publications/p334/index.html

It has a plain language explanation of all the various business types and what kind of reporting is needed, types of accounting, etc. Best of all it's paid for by your tax dollars, so you can just download it as a pdf.

To answer the question, last I remember you can't show a loss more than 3 years out of 5. BUT, that's just a guideline. If you show a loss for 5 straight years and you have good books that show you are a real business, ( just really sucky at it  you'll be fine. They're just trying to be sure people don't game the system. 

As far as deducting the machinery goes, you can deduct the fair market value it had when it went into business service. So if you paid $1k for a used lathe and it's now worth about $700, you can deduct $700 from your business income.

If you get serious about this it's worth spending an hour with a tax professional to talk about setting stuff up. Doesn't have to be an expensive $200/hour CPA. An IRS-certified Enrolled Agent (EA), like the guy who does my taxes, will probably charge you less than $50 for a 1 hour consult or maybe do it for free if he thinks he'll get your business later.

I've been a Schedule C on the side for the last few years and some time before that was a Schedule K (partnership) and never had any trouble.


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## PEU (Jul 8, 2009)

wquiles said:


> I got laid off on Monday
> 
> Will



Major Bummer 

What kind of work you plan to do on this new venture?

If I were you in your same situation, I would look for a new job and at the same time start making a business plan or layout your ideas to get a realistic image of what you would be able to do and when you would be able to turn a profit from the new activity.

Hope you can get thru this hard time the best way!


Pablo


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## QtrHorse (Jul 8, 2009)

Sorry to hear about the lay off.

As already stated, you can show a loss for 3 years but they start to frown on it after that. Again, I don't know the specifics of it all. I just know what my tax lady tells me.

I don't even think you need to be registered as a business. From the way I understood it, you can sell items on Ebay or forums just like this one and say it is a business. The important part is to keep good records. You could go 8 years without any problems and then they will want to see records.

Again, don't take my word on any of the above as law. Their is a reason I pay my tax lady to do my taxes and to help me save $$ at the end of the year. She knows the laws and I don't.

Try to find a small firm that has their own tax/ accounting business, they tend to be a little cheaper and will offer more free advice durring the year if you have questions compared to a typical B&M tax service company like Charles Schwab and others.


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## Tekno_Cowboy (Jul 8, 2009)

Sorry to hear about your lack of a job.

I've been working on getting a home business going for the better part of the year, since I got laid off in January. Thanks for the info Lyndon! And thanks for asking the question Will. This thread should help me with my set-up too. :thumbsup:


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## gadget_lover (Jul 8, 2009)

Sorry to hear that you got laid off Will. Your boss was probably jealous of your flashlights. Yeah.. That's it!


Seriously, there are two domains for the questions you are asking. Some are IRS/accounting, some are legal.

Each state has different laws regarding taxes (sales, income, inventory, etc) so you should check into what Texas does with those. Each city/county is free to make their own rules about business licenses. My city charges a very small annual license tax. When I was making $200,000 a year the city license was only $500. When I made less than $50,000 it was only $25.

The EA (enrolled agent) is a good source for tax info. I second that idea.

Depending on the work you find yourself doing, it might be a good idea to incorporate. A lawyer can advise you. The basic idea of a corporation is that the business makes the money, you work for the business. Assets get transferred to/from the corporation. The business gets sued in the case of a problem.

I have had a Sole Proprietorship (fancy name for working for myself and by myself) for the last 10 years. Doing business as a SP has the advantage that all income from all sources are treated the same, ordinary income. When I bought a new computer to use, it was a straight deduction from my ordinary income.

Sales carry the burden of tracking the sales and paying sales taxes. In California, the formula for paying the sales tax includes breaking out the taxes by county and (in some cases) cities. The idea is that some counties may have a higher tax to pay for special projects, and it's up to the seller to figure out how many people in that county bought your goods so you can send them the extra 10 cents from the sale.

Here's the kicker for Ca sales tax. Once you add up all those numbers, if it's less than some minimum ($100???) you don't bother with it!

I'd second the suggestion that you read the guide recommended by Lyndon. There are rules about what you can deduct and what you can't. There's the whole area of paying monthly or quarterly taxes. There's the self employment tax to take into account. Lots of little gotchas.  A good tax person will guide you through all of that.

It seems daunting, but it's really not too bad.

Daniel


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## precisionworks (Jul 8, 2009)

You really need to find a good, small business accountant. Mine has saved me thousands in machinery write downs, and we discuss each capital equipment purchase when doing taxes for that year.


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## wquiles (Jul 8, 2009)

Thank you all for the excellent tips and suggestions. Now I know what to ask for - I guess you can say I now have more homework to do, but it will be more focused. Much appreciated :thumbsup:


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## darkzero (Jul 8, 2009)

Oh man, sorry to hear that Will! Best of luck on getting your new gig up! I'm sure it will be great!


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## Mirage_Man (Jul 8, 2009)

Sorry to hear about the layoff Will. I can't help with machinery and tax issue but I have no doubt a man of your talents will find employment quickly. :thumbsup:


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## HarryN (Jul 9, 2009)

Hi Will - I have been through it, so I understand the challenges.

As far as running things like a business, if you are serious, then you really need to be a business. Don't fool around - set up a corporation and run your business within that corporation. You don't need a lawyer, the forms are available already in every state capital office.

The reasons are as simple as they are complicated, but in general, think about just who has input on writing the tax code - You - or a major corporation. 

Feel free to send me a pm to get an email discussion going on the topic if you are interested.

Take care,

HarryN


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## saltytri (Jul 9, 2009)

Will: 

I have some experience in helping people set up the mechanics of small businesses. Follow the advice given by Lyndon and others.

1. Shop around for a good accountant. Friends who have businesses are frequently the best source of information on which accountants in your area offer useful and practical advice at reasonable rates.

1a. Listen to the accountant when he/she recommends that you set your books up with QuickBooks. If you do it this way, all your data will be in a digital format that any tax preparer can use to efficiently advise you and prepare returns.

2. Do all your business through a corporation or an LLC. While I have detailed knowledge only with respect to my own state, it is generally true that the LLC is preferable because it offers the liability protection of a corporation with fewer formal requirements and less periodic maintenance. An accountant can give you reliable advice on what is best for you in your state and in your tax circumstances. You don't need a lawyer for this.

3. Consult this web site for detailed information on creating your LLC:

http://www.sos.state.tx.us/

4. Worry later about whether you might have a hobby loss issue with the IRS. You have plenty of time to make deductible investments in your new business before that becomes a problem. If you have a good idea for turning your skills and knowledge into income, concentrate on doing just that and you'll likely know whether you can make a go of it well within the time that you have to get legitimate deductions for your expenses without the IRS sticking its nose under your tent.

Good Luck!

David


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## precisionworks (Jul 9, 2009)

> it offers the liability protection


Your accountant will advise the form of business - Sole Proprietorship, S-corp, C-corp, LLC, etc. What ever you do (as a for profit business) you'll want to have Business Insurance - here's why ...

Your homeowners policy covers your equipment now, buy will deny coverage if the agent or company learns that is used for business purposes. Lots of people mistakenly think that homeowners is adequate - it is, if you have no business.

You'll want some minimum level of business liability insurance. Americans will sue at the drop of a hat, especially someone who appears to have significant assets. And it is possible that something you do may cause harm to someone else - imagine another person living in "your" house & driving "your" BMW ... which now belongs to them.

All your equipment can be covered by business property insurance.

Premiums are a tax deductible expense.


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## gadget_lover (Jul 9, 2009)

The business insurance is not always a large premium either.

Good advice Barry.


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## saltytri (Jul 9, 2009)

If insurance is the subject, you need to have a pretty specific conversation with a commercial agent. There are several elements to insurance on a business. One point to keep a careful eye on is products liability coverage. This can be a coverage in addition to other more standard provisions of a policy. In other words, it is entirely possible to have a "business policy" that excludes coverage for harm caused by your product. You might have to pay extra for the coverage that is most relevant to a manufacturing business. These sorts of considerations vary from place to place, carrier to carrier and industry to industry.

Here's a major point that sometimes gets overlooked: I'll bet you a stick of 6061 that your personal auto coverage specifically excludes any business use of your vehicles (except commuting - don't everyone panic!). This is a parallel to what Barry said about homeowners coverage. So, you get in your BMW to drive to Ace Hardware to get a drill bit and, on the way, you carelessly run over a lawyer. Poetic justice aside, your next stop will be bankruptcy court because your auto carrier won't cover the loss. You need business auto coverage or, if available to you, an endorsement on your existing policy that allows some degree of business use. The liability protection of a corporation or an LLC probably won't protect you from a suit against you personally for your own negligence. I can't say for sure that this is the case in Texas but, given that Texas is a notoriously favorable jurisdiction for claimants, I'd willingly bet another stick that this is the case there.


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## will (Jul 11, 2009)

One item that has not been mentioned here. Have you been able to get some idea as to the amount of work you might be able to get? How good a salesperson are you? Where will look to get jobs to do. ?

Certainly transform your shop from hobby to business. 

Best of luck looking for a new job... times are tough right now.


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## mdocod (Jul 11, 2009)

Great thread idea!

Sorry to hear about your job loss. Perhaps this will be fruitful in the long term anyways, think positive! (Lets roll full throttle on this M6 regulated pack eh?)

I have been filing schedule C for home business income/loss for several years now. I'm a young guy at 25 and my wife even younger at 22. She started doing Mary Kay several years ago and IIRC this was our 3rd pr 4th year reporting on that (all years a loss after all things calculated like milage etc). I left out a number of deductions on that business to show some minor (a few dollars) profit to help avoid the possibility of red flagging for an audit as I'm not very organized and it would be a huge hassle to gather everything up for such an invasion of constitutional rights. 

Over a year ago I decided to put the drill press to work and start building battery adapters under the name "Odd Mods" which I did register with the state and do pay sales tax on for in-state sales (very rare at this level of commerce, As long as I'm under $50 in collected sales tax per year in-state I only file yearly, this type of law probably varies by state, check it out where you live)... 

I have been using turbo-tax for small business (schedule C) to figure things out at the end of each year. it does well enough but I always seem to run into a few snags in syntax translations from program to human. I believe that honesty and integrity is key in performing proper deductions and income claims. Claim everything that is income, even if (in my case) my mother pays me $50 to fix her computer, or $400 to fix her minivan, etc etc, I report anything traceable and most cash stuff if I remember to write it down, which will look good and honest to an auditor should the situation arise. For deductions, be reasonable but bold IMO. I bought an M6. I'll get more use out of it for designing future battery packs than I ever would have just pointing it around the yard for fun. Tax deduction. On the other hand, the drill press that started it all, was a gift from my step-dad. I'm not claiming a penny of it and never will even though one could probably get away with it if they wanted to. The mill I bought recently has been used almost 100% for business related activities and will be deducted from income in full. The decision to spread out the deduction of a piece of machinery over several years will often generate the best results, especially if the machinery is VERY expensive, but this can make the long-term paper-work more difficult. As I understand, in most recent years, anything up to ~$133,000 (varies by year) worth of normally "depreciated" equipment for a business can be deducted as an expense in full in the year that those items are purchased. For our small garage equipment, we can basically deduct anything we buy in the year it is bought regardless of how long we expect it to last. 

The more I research the tax code, the more I see massive hurdles and road blocks in place for growing businesses. FYI the IRS tax "code" is ~90,000 pages long. I sometimes wonder if I should be focusing more of my efforts on trying to take back freedom and injection common sense into our government rather than playing with flashlights, I realize this is more of a "CPF underground" point to be making, but I think it is very relevant here and I wouldn't mind seeing a few flashaholics gathering up a blind-a-bunch-of-politicians gathering or something. How do you compete with 90,000 pages that is actually full of contradictions and can be used to nail you no matter what you do?

Button down the hatches and keep good records (I don't do a good enough job of this but should), Debt is piling up in many state budgets, and the debt has been piling up for a very long time on the federal level. The tax audinazis are coming....


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## gadget_lover (Jul 11, 2009)

In repsonse to Mdocod;

There are many ways to play the deduction game, and only a tax professional stands a chance of maximizing your deductions while staying legal. You do things differently as a sole proprietor than you would as a corporation. As an SP I have my other income to deduct expenses from, so I could (theorietically) make $100K on my day job, $5K in my SP, and deduct $30K worth of tools that I bought to use exclusively for the business. As a corp, I'd have to play with those numbers to get the full $30K back over several years. 

Mdocod recommends "bold" deductions. I tend to go the other way. As a computer consultant, I wrote off software, hardware and other tools that I bought just to use in the business. I had separate computers for play and for work, and did not put games on the work systems. I did not deduct my wife's computer even though she used it for my accounting. She used it for personal use 98% of the time.

I fully expected an audit, because in the course of 15 years my deductions, income, marital status and employment varied wildly. 

The funny thing is that we have not been audited, even though it seems to ME that it must look like we make things up. My guess it there is no audit because the deductions have always been reasonable. Who knows? 

Good news!

As a business you are entitled to buy supplies that you will be reselling without paying sales tax. So that $100 bar of titanium from the local metal supply shop will not have that extra 7 or 8 or 9 percent extra.

The same goes if you buy a finished product to resell. You collect the sales tax from the end user ( and send it to the sate ), but you don't have to pay tax when you buy it wholesale. This can have a big influence on your cash flow.

You do have to watch the "I need deductions" trap. Many people feel that deductions are a good thing. That's only true if you were going to buy it anyway. Buying a used machine for $1000 is still a better buy than a $5000 machine even if you can take a $2000 deduction for the newer machine.

You also get to learn about depreciation. You can depreciate a machine over time, but that's an accounting trick. At some time you will sell it. If you have depreciated it 100%, whatever you sell it for will be profit, and you will pay tax on that. Many businesses foolishly give away or donate old equipment so that they don't have to deal with the income. Fools.






Running a business is LOTS of fun.

Daniel


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## wquiles (Jul 11, 2009)

Man, I have to really thank you all again. This thread has surpassed my expectations with the great information about running a machining (or other) small business. My intention is not to run this small business to replace the job that I lost, but rather to complement it, and hopefully to be break-even or better (self supporting - I guess meaning turning a profit  )

Much appreciated 

Will


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## precisionworks (Jul 11, 2009)

> How do you compete with 90,000 pages that is actually full of contradictions and can be used to nail you no matter what you do?


With a small business CPA.



> My guess it there is no audit because the deductions have always been reasonable. Who knows?


That's it in a nutshell. I've been audited twice, both times while working as an insurance agent. My deductions ran about 35% of total gross income, which triggered both audits. Detailed record keeping meant that IRS collected no additional taxes ... but the CPA was paid over $1k for each audit - and that was over ten years ago.

All my expenses are paid with either a check from my business checking account, or paid with my business credit card. When people pay in cash (currency) they get a receipt just like those who pay by check. The CPA figures out the depreciation schedule for any new or used equipment purchased, and generally keeps me out of trouble. Over all the years I've filed a Schedule C - well over 20 - my average annual tax prep fee is around $300. Cheap at twice that cost, IMO.


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## jtr1962 (Jul 11, 2009)

gadget_lover said:


> The funny thing is that we have not been audited, even though it seems to ME that it must look like we make things up. My guess it there is no audit because the deductions have always been reasonable. Who knows?


A lot of the determination to audit depends upon not only what deductions you took but also your total income. I've never been audited either in about 15 years of filing as a business (mostly as a sole proprietor but also as an S-corp for a few years). I think mostly it has to do with the fact that my gross income _before_ deductions wouldn't even put me in the lowest tax bracket. In short, there's nothing there for them to gain by auditing me except maybe a little extra FICA tax. And I only deduct what I actually purchase, so I'd probably come through an audit fine.



> As a business you are entitled to buy supplies that you will be reselling without paying sales tax. So that $100 bar of titanium from the local metal supply shop will not have that extra 7 or 8 or 9 percent extra.
> 
> The same goes if you buy a finished product to resell. You collect the sales tax from the end user ( and send it to the sate ), but you don't have to pay tax when you buy it wholesale. This can have a big influence on your cash flow.


And I'll add if you only sell your finished product to OEMs, who in turn resell it to the final customer, then you don't have to collect sales tax, period.

The best advice I can give anyone starting a business is to focus on the nuts and bolts of running the business first. Don't worry about doing things one way or another just for some slight tax advantage. It's better to focus your energies on making whatever it is you want to sell, and worrying about the tax consequences down the road. Worst case even with no planning or setup you file a Schedule C and still get to deduct your expenses. If the business turns a decent profit for a few years then you can think about setting it up as an S-corp or an LLC.


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## mdocod (Jul 11, 2009)

I should clarify what I meant by "bold."

I don't mean sneaking in things that "look" legitimate but aren't really, but being honest and really looking at what things you are buying because of the business. I buy lots of tooling, and it gets used primarily for business purposes, but I may at times use it for some personal side project. It could always be argued that the side-project was machining practice that will translate to the business in one way or another anyways, regardless, what I am saying is that, if I buy a drill bit for the business, and use it primarily for the business, I'm deducting 100% of the cost of that tool as a business expense, even if I occasionally use something for a personal project. As I understand it, this is normal for small businesses that revolve around lots of tools and expected by the IRS.


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## jtr1962 (Jul 11, 2009)

wquiles said:


> My intention is not to run this small business to replace the job that I lost, but rather to complement it, and hopefully to be break-even or better (self supporting - I guess meaning turning a profit  )


That's not too difficult a goal to meet with a business you'll be running out of your home. I've turned a profit every year, albeit not a large one, without even really advertising beyond word of mouth. The nice thing about a home business is that you have very little overhead beyond the initial purchase of equipment or inventory. If you get a customer or two, it's hard NOT to make a profit. That's the way it's been for me. When I don't have customers, I'm not buying parts, so I'm not losing money even if I'm not making any.


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## jtr1962 (Jul 11, 2009)

mdocod said:


> I should clarify what I meant by "bold."
> 
> I don't mean sneaking in things that "look" legitimate but aren't really, but being honest and really looking at what things you are buying because of the business. I buy lots of tooling, and it gets used primarily for business purposes, but I may at times use it for some personal side project. It could always be argued that the side-project was machining practice that will translate to the business in one way or another anyways, regardless, what I am saying is that, if I buy a drill bit for the business, and use it primarily for the business, I'm deducting 100% of the cost of that tool as a business expense, even if I occasionally use something for a personal project. As I understand it, this is normal for small businesses that revolve around lots of tools and expected by the IRS.


That's fine. I do the same. For example, my soldering equipment is used 95% or more for business projects. I do use it for personal stuff also, but building one or two regulator boards for myself is trifling compared to making 1000 for a customer. The business use is close enough to 100% that it doesn't matter (and we're talking a $100 deduction here anyway).


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## gadget_lover (Jul 11, 2009)

The last time I looked, the rules for personal use of business computers was such that if you used it for both, the deduction was proportionately reduced by the percentage that it was used for pleasure. The same for home offices. If you use a room for 100% bussiness, you can deduct the cost of that space. If you use it for a sewing room part of the time, or a guest room, then there's formulas to follow.

Mind you, I have not checked the rules in several years, so they may well have changed.

As JTR said, it's hard not to make money if you are careful about things. Buying a $20,000 machining center to make $1 novelties will probably not work well. Neither will making 1000 of something when you only have orders for 10. 

The reason that a small business making parts will make money is that you are selling your time and tools. If you are not careful, you find your time is going for a few $ per hour and you are using up your tooling faster than the income can replace them.

My favorite example of a bad business model is Pizza Delivery. Both my boys swore that it was a great job. At the end of the year both had ruined their cars for a gain (after gas and taxes, tires and tickets) of less than $10K. They had sold their cars at the rate of $1.50 per pizza. Their time was free.

Daniel


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## Alan B (Jul 12, 2009)

Sorry to hear about the job, Will. Good luck on the search.

I have been doing small businesses and form C's for a long time. I have settled on a very simple system based on a couple of spreadsheets. If you look at TurboTax and the Form "C" you can determine what you need to record. Many systems such as Quickbooks record far more information than is needed and take too much time and effort to deal with. Especially if you are manufacturing and selling. The version of Quickbooks that will handle that is far more than the usual version. Short of that it won't handle the sales tax districts.

I have one spreadsheet for income/sales and one for expenses. The columns are pretty much just for what is essential, no more. When I buy or sell something it generally takes one line in one of the spreadsheets to record the essential business and tax information. Then any paper is stored in boxes labelled with the time period, usually six months. The box contents are in reverse time order, but rarely do I need to go into those as the essential info is in the spreadsheet. The boxes are from Uline, sized for binders. The ones I use are about 9x12x2 inches. I don't use folders as little receipts leak out and I don't need the access off files.

I write simple scripts to extract the data from the spreadsheet via a CSV file and make reports for entering in TurboTax and STP (my sales tax program). Once you figure out what these forms really need, and put that in the spreadsheet, it is not hard to summarize it for the reporting. My wife uses a similar system but does it all in Excel. 

I also write Python scripts to extract other useful things from the spreadsheets like parts needed for outstanding orders, parts pulling lists for each order, etc. So I get a lot of value from having the info I need in the sheets instead of what some accountant decided was interesting.

A lot of excellent advice is in this thread. One thing to keep in mind is that this is a small part time business. It should not have too much overhead in bookkeeping or professional services, or it will not be practical.

Whatever you decide to do, make it fit your business. Try to make it incremental so that when tax day comes you are not faced with boxes full of unentered receipts.

On taking the business deduction for tools, there are a couple of ways to go. One would be as mentioned, to figure a lower starting value. Another is to use the tax rule that says you can buy a piece of equipment but deduct it when you put it in service. So if the machine is essentially the same as it was when you purchased it, and now you are putting it into service in the business, you might consider it to be at the full purchase price. If at some point they audit you they might make you reduce the deduction, but it is unlikely.

I'm not a tax expert, you should get expert advice at some point.

Good Luck,


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## precisionworks (Jul 12, 2009)

> if the machine is essentially the same as it was when you purchased it, and now you are putting it into service in the business, you might consider it to be at the full purchase price.


Correct, according to my CPA. I'd been accumulating machine tools for many years before going into business in 2003. The "starting price" for depreciation purposes was what I'd paid for the machinery some years prior ... not the current price or value of that machine. But at least I got to put every machine tool on schedule C & start using it to offset income from the business.

One of my customers told me "Charge enough today so that you'll still be in business tomorrow". For in shop work, both welding & machining, my current rate is $1.00 per minute, plus supplies. Portable welding is $1.50 per minute plus supplies. Rush jobs go to time and a half or double time, depending.

When people NEED something done, and the job is done well, they gladly pay. Be careful to charge the same as other shops in your area, and don't ever charge less.


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## mdocod (Jul 12, 2009)

gadget_lover said:


> ....
> 
> My favorite example of a bad business model is Pizza Delivery. Both my boys swore that it was a great job. At the end of the year both had ruined their cars for a gain (after gas and taxes, tires and tickets) of less than $10K. They had sold their cars at the rate of $1.50 per pizza. Their time was free.
> 
> Daniel



hehe..... I've been delivering pizzas for about 7 years now... I have seen a lot of people quit coming to the same conclusion.... Long term it is perfectly profitable if you work on your own vehicles and know which vehicles to purchase and for how much. People who try to use really old clunkers [especially old european cars] spend too much money/time working on them, people who use brand new cars wind up buying a new car every 4 years at massive expense. There's a happy middle ground where medium age vehicles in reasonable condition (50-125K Miles and 5-10 years old) have tons of life left in them if they were kept up by previous owners, (there are ways to determine how well a vehicle was maintained via inspection). Common sedans in this age ground can be had for $1500-$6000 (I go for the lower end of that spectrum). The trick is to understand vehicle values going in to a purchase decision. Many used car lots would have you believe that a 7 year old for taurus with 100K on it is worth $8000. Don't fall for it.


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## HarryN (Jul 13, 2009)

As a practical matter, if you cleanly separate your business from your personal taxes, life is a lot easier.

I used a CPFA for years for our personal taxes and my wife's small business. It really was not a complicated business, but it reached the point where he told me a simple truth - tax preparers are really trained to do EITHER personal or business taxes, in general, not both. Even though he is pretty good, we had reached the max of his capability to do a single "mixed" tax return.

After we incorporated ( C corp ), I was able to fairly easily ( as taxes go) complete my own personal taxes, and I hired a "business focused" CPA to do our business taxes. This dropped the costs quite a bit, and there are deductions and credits that are available for business that are not (easily) available to an individual.

Not often mentioned, but if you incorporate, consider to make your tax year different than the calendar year. It makes tax management simpler, and it is a lot easier to hire a CPA to do your taxes when the deadline is not April 15.

Maintaining completely separate bank accounts, tax records, credit cards, etc. also made my wife a lot more calm, at least calm by wife standards. :shrug:


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## Alan B (Jul 13, 2009)

Having separate bank accounts is good even for a very small business, even if it is just a form C operation.

I do find, however, that recording business activities in a spreadsheet with the proper details (categories, purpose, brief note on what was purchased, etc) is much easier than trying to figure it out from a bank statement potentially months later. So the spreadsheet is the primary source of information and the bank statement is just a backup document that goes into the filing system and is rarely consulted.


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## jtr1962 (Jul 13, 2009)

Alan B said:


> I have been doing small businesses and form C's for a long time. I have settled on a very simple system based on a couple of spreadsheets.


I've been doing the same, only with one spreadsheet for everything. As soon as I purchase supplies, the date, amount, and category gets entered on the spreadsheet. Much simpler than hunting through an envelope of receipts or looking at my PayPal history come tax time. After doing that twice, I vowed that I was going to just keep track of my expenses as they happened.



> Having separate bank accounts is good even for a very small business, even if it is just a form C operation.


I personally find there's nothing to be gained by maintaining separate accounts. I'm going to pay my business expenses with the same credit card I've had for the last two decades anyway. My accounts are already set up to do this online. Any payments made to me are checks in my name, so I can just deposit them in my savings account. Even if I had a business account, ultimately the profits would be taken out and put into my savings eventually anyhow. Might as well put them there from the get go. Why duplicate what I already have? My business philosophy is to keep it as simple as possible. I don't legally need a business account, so I'm not going to have one. Nothing to be gained except extra complexity and more bookkeeping. I hate the bookkeeping part of business as it is-if they got rid of the income tax I probably wouldn't bother keeping any kind of records at all beyond the parts lists I use to determine how much to charge customers. I'd rather focus my efforts on making whatever it is I'm planning to sell. I've seen lots of people start businesses and get too bogged down worrying about paperwork and record keeping while losing sight of the reason they're in business in the first place. I'm only making money producing something a customer wants to buy. I'm not making money doing paperwork. I do the minimum needed during the year such that I also minimize the time I spend doing my taxes.


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## KC2IXE (Jul 13, 2009)

I'll tell you to be real careful WHERE you incorperate - in NY State, they have an "Inactive Corp tax" - basically, do $1 in business, you pay income tax on that $1 - do NO business, and you pay out like $2000 minimum!!! (Learned that the hard way)


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## Alan B (Jul 13, 2009)

I do agree that you don't have to have business accounts - but it is useful to have separate accounts for business activities that have little (not necessarily zero) personal activity, even if they are not officially 'business' accounts.

A lot of the 'business account' requirements come from what you choose for the name of your business. If it doesn't have your name in it then a DBA (doing business as) periodic legal announcement is required, and separate business accounts are likely required by the bank to accept payments in the business name. Putting your name in the business name makes things a lot less complicated.

In my case a PayPal and a checking account handle everything. There are some nonbusiness activites occasionally in those accounts but if I need to find a business transaction I don't have to look through a bunch of other activity in a bunch of accounts. If there was an audit we would not have to traipse through all our personal stuff to find the business items.

Since the account I use for business is at the same institution as I use for personal things it is trivial to do a transfer when needed. A business should not need that anyway, and separate accounts do make it somewhat more clear when the business is making a profit or needing infusions.


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## PlayboyJoeShmoe (Jul 13, 2009)

I got nothing to add except to say...

I've now seen Will twice in person and he is one heck of a nice guy! Sux to have lost a job!


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## gadget_lover (Jul 13, 2009)

I thought that one of the requirements of a corporation was that you needed seperate accounts. The corp has it's money and you have yours. Is that not true?

Daniel


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## Alan B (Jul 13, 2009)

Having a corporation is different from having a business. It is a separate entity. So it would have to have separate accounts. Corporations in effect take on a life of their own.


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## jtr1962 (Jul 13, 2009)

gadget_lover said:


> I thought that one of the requirements of a corporation was that you needed seperate accounts. The corp has it's money and you have yours. Is that not true?


Not required legally as far as I know (for an S-corp anyway but a C-corp might be different) but most banks won't allow you to deposit a check made out to your company in a personal account. When I was an S-corp I used to deposit checks made out to my company in care of my name in my personal account. Those usually seemed to clear no problem. No way was I going to open a corporate account ($$$$) for the measly few thousand a year I was making. Truth is, I didn't consider the hassle/expense of having an S-corp worthwhile given my income, so I dissolved it after a few years.


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## Alan B (Jul 13, 2009)

Not a legal requirement perhaps, but cashing checks in the business name has to be handled one way or another, as you did with c/o.

I would also think that "standard accounting practices" which are required(?) for corporations would require more separation between a corporation and individual accounts.

I knew someone who had a corporation set up for a small business. They were late filing their taxes one year and got hit with the corporate level fine. Another reason not to mess with a corporation for a small business. Big Bucks for Everything!!

The other "protection" from having a corporation against liability is also not too effective these days, from what I hear. I don't know how much protection it actually gives anymore.


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## jtr1962 (Jul 13, 2009)

Alan B said:


> Another reason not to mess with a corporation for a small business. Big Bucks for Everything!!
> 
> The other "protection" from having a corporation against liability is also not too effective these days, from what I hear. I don't know how much protection it actually gives anymore.


Those are actually the two reasons I dissolved my corporation. It was getting too expensive (the state was hitting me for all kinds of corporate fees-$50 here, $25 there, it all adds up). And it really wan't giving me any kind of benefit I considered worthwhile. I only have a few clients. They're good friends I know and trust. In general I can feel out "sue-happy" customers and just refuse to do business with them. A tip-off is when someone discusses liability concerns before they even start discussing your product. So the liability protection was moot. About the only other tangible benefit of the S-corp was avoiding FICA taxes (and the fees more than made up for those savings). In short, Schedule C like we both do seems the easiest, best way given our current situation.


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## precisionworks (Jul 13, 2009)

> but it is useful to have separate accounts for business activities


+1

My "accounting software" consists of four manila folders, one for each quarter of the year. With a business checking account & a business credit card, it doesn't get any easier. I pay tax on all (in state) purchases, so I do not have to collect & remit tax to the State.

Sometime in early February, it takes me two or three hours to get the records ready for the CPA - nearly 100% of all expenses show as either a business check or a business credit card transaction. All the income is receipted in carbonless ticket books from the office supply, under $5 each. Until you get really big, or have employees, you need little else.

KISS


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## Lyndon (Jul 14, 2009)

While it's true that anyone can sue you at any time for any reason, a corporation can offer liability protection. BUT you have to do everything right, and one of those things is that the corporation must have separate bank accounts.
If someone is going to sue you over work your corporation did, they can. But a competent lawyer can get the suit dismissed because it was the corporation that should be sued, not you personally. However, if the plaintiff can show that you effectively were doing the work yourself, having poor or no corporate records, using your personal bank account to accept payment, buying parts in your name, not the corp's, etc... Then the suit against you will stand.

I'm not a lawyer, that's just how lawyers have explained it to me  
That said, I work as Schedule C, not corporation. If anyone wants to sue me, bring it on. With the drop in housing prices, I probably have a negative net worth at this time :-(




jtr1962 said:


> Those are actually the two reasons I dissolved my corporation. It was getting too expensive (the state was hitting me for all kinds of corporate fees-$50 here, $25 there, it all adds up). And it really wan't giving me any kind of benefit I considered worthwhile. I only have a few clients. They're good friends I know and trust. In general I can feel out "sue-happy" customers and just refuse to do business with them. A tip-off is when someone discusses liability concerns before they even start discussing your product. So the liability protection was moot. About the only other tangible benefit of the S-corp was avoiding FICA taxes (and the fees more than made up for those savings). In short, Schedule C like we both do seems the easiest, best way given our current situation.


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## wquiles (May 20, 2010)

Well folks, it is official. Now that I have been laid-off again (twice in 10 months!), while I keep looking for another day job, I have now officially started my own machining/engineering, for-profit business - now my work/projects are no longer just a hobby.

Based on the feedback of many here, and local small business owners in Texas where I live:
- I created a new business name: ATDMS, so officially within Texas that is my "doing business as" formal alias as a sole proprietor. I wanted to use ATDES (for Engineering Services), but it was already taken 
- I have a website on my business name (www.ATDMS.com), which I have to start populating, including putting "a few" pictures, etc..
- I also got a Texas tax license, so that I can legally sell/collect taxes and also take advantage of the tax-free purchasing power on things/supplies/etc. that I modify/re-sale, etc.
- I opened a separate bank account on my business name - just the easiest way for me to keep things separate (plus the account is free on my bank).

I plan to keep stuff (income/expenses) in an Excel file, but I still have to figure out some simple way to create invoices and such, so those of you that have some suggestions, please send them my way 

Will


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## gadget_lover (May 20, 2010)

Congrats Will. I hope it all works out for you. 

As far as invoices, you can generate them easily enough with a spreadsheet, but it's really nice if something ties the invoice to the accounts recievables and to the cutomer file too.

That can be done by hand easily enough, but I LIKE complex gadgets. Quicken for business, peachtree and many others will do that for you. The cost is high but it' sometimes worth it.

Daniel


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## Anglepoise (May 20, 2010)

gadget_lover said:


> Congrats Will. I hope it all works out for you.
> 
> l



+1

.......also can your new company purchase all your 'Hobby' equipment from the individual, you, to the newly formed company. It needs equipment to function and its purchases can I presume be written off over time.

But anyway.......congrats.


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## precisionworks (May 20, 2010)

> I still have to figure out some simple way to create invoices and such


My method is stone age, but works well for me. By a 2-part, carbonless invoice book, like this

http://www.officemax.com/office-sup...rdering Forms&ci_src=14110944&ci_sku=20597196

Customer gets the original (white) copy & you keep the bound yellow copy. When paid, the date of payment & check number are noted on the yellow copy.

FWIW, try to find a CPA with lots of sole prop experience - he or she will save you a ton of money


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## PEU (May 20, 2010)

Congrats Will !

BTW, I see you posted your personal email in the webpage, you can host your mail at google and use your own domain, looks more professional


Pablo


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## wquiles (May 20, 2010)

Thank you guys - great tips/suggestions 




PEU said:


> Congrats Will !
> 
> BTW, I see you posted your personal email in the webpage, you can host your mail at google and use your own domain, looks more professional
> 
> ...


Interesting. Please tell me more about this. How specifically do I do this?


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## StrikerDown (May 20, 2010)

Quickbooks Pro works well for running a small business. You can create estimates, PO's, Invoices, statements, etc. Basically everything you need and it centralizes all of your records on the computer so your bookkeeper/CPA has easy access, saves time and money all around. I ran a motorcycle business with it and kept all my inventory in it also. It worked very well. Most bookies/CPA are well versed in it.


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## PEU (May 21, 2010)

wquiles said:


> Interesting. Please tell me more about this. How specifically do I do this?



You basically go to: http://www.google.com/a/cpanel/domain/new and follow instructions then you need to ask your hosting provider to set the MX record (mail exchange) to point to google, also they need to add a CNAME record
This is explained in the next page at that address when you click learn more.

I use the personal free service, there is business service but its used when you need a lot of accounts.

Last time I switched a domain to google it took a couple of hours (after the hosting provider added the required modifications to their DNS)

If you need help, you have my email, I will be pleased to help.


Pablo


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