Selling projects/taxes/LLC's?

[alex grams]

I have sold a project here and there, but lately things have been a little more consistent in sales. This leads me to the concern of everything being kosher in regards to taxes. I was curious out of people who sell stuff they make, how many of you have made an LLC (or other business entity) for tax purposes. It is still a hobby for me, and nothing I plan on doing full time, but I certainly don't want to get in trouble in regards to taxing. I really don't plan on line item adding sales tax, but would probably just include tax in the cost for those items that are taxable.

FYI, I am in Texas if any response or suggestion is state specific. Setting up an LLC in texas is a fairly simple procedure.

[Benjamin Miller]

Setting up an LLC is indeed simple, but it can add a lot of accounting and tax hassle.

It sounds like you just want a sales tax permit. You should be able to obtain one from the state as a sole proprietar, and then you can sell things and collect sales tax without the complexities of an LLC.

Tax and business law is one area where you definitely should pay for a professional if you have any questions or doubts. I have two LLCs, and every time I make a mistake involving taxes, it costs hundreds or thousands of dollars. The IRS is NOT forgiving.

[Nike Nihiser]

For income tax purposes it shouldn't make any difference. Everything gets passed thru to the owner and reported on their personal income tax return. State sales tax laws vary, but if you are generating enough sales you probably will have to collect sales tax (one way or the other) and pay the state. A LLC is primarily to avoid personal liability caused by the business.

[Jim Andrew]

Be careful if you decide to go commercial, and get a sales tax number. Your shop will be considered commercial and the building inspection people will probably shut you down. And if you are a day late getting sales tax in, they will double or triple what you owe.

[David Kumm]

I'm a CPA in real life. Go talk to friends for referrals and don't take the cheapest one. Much better than forums for that type of advice. Dave

[Matt Day]

I think you will also need much more expensive insurance for your home if your shop is attached to your home (in the basement or garage).

[scott vroom]

If you're just making a few dollars on the side with your hobby I wouldn't even bother with the tax aspects. Think about it. If your income is truly that small, your writeoffs (expenses, depreciation, etc) would overrun revenue so that you'd have zero tax liability anyway...so why bother? In addition to what Jim said about bldg inspections, if you operate your home shop as a business your homeowner's policy will not cover liability damages and you'll be required to pay for separate business coverage.

[Steve Peterson]

In California, they have a simple form to fill out to allow you to collect sales tax and send them their cut. They have free evening classes to explain the process, even though it is not too hard. They want to make it easy for small businesses to collect taxes.

Steve

[Richard Coers]

I have sold a project here and there, but lately things have been a little more consistent in sales. This leads me to the concern of everything being kosher in regards to taxes. I was curious out of people who sell stuff they make, how many of you have made an LLC (or other business entity) for tax purposes. It is still a hobby for me, and nothing I plan on doing full time, but I certainly don't want to get in trouble in regards to taxing. I really don't plan on line item adding sales tax, but would probably just include tax in the cost for those items that are taxable.

FYI, I am in Texas if any response or suggestion is state specific. Setting up an LLC in texas is a fairly simple procedure.

I seldom give advice on here any more, but asking if you should make yourself legal based on some possibly illegal past business transactions in a public internet forum, with your city and state posted right up there by your name, IS ASKING FOR AN AUDIT AND POSSIBLE LEGAL ACTION! Ask an accountant in private for gosh sakes!

[Stan Mitchell]

I'm a CPA in real life. Go talk to friends for referrals and don't take the cheapest one. Much better than forums for that type of advice. Dave

As a CPA myself, I fully endorse the advise of David Kumm, CPA. ;)

Having said that, I'm back to working on tax returns.

[Jon Wilson]

Along these lines... I've sold a few items over the past few months. Certainly not enough to live on by any means.

Should I claim this on my personal taxes and if I do would that allow me the deductions for expenses, depreciation, new equipment etc...

I'm not really looking for a rock solid answer that I'd hold you liable for, more just curious. Probably wouldn't worry to much about it unless it makes a big difference.

[eugene thomas]

Every state and area is different. I would talk to tax person and go from their. I made my hobby a business and only had to file my taxes once year till my sales reached certain point.

[John Downey]

I've never seen the advantage of an llc in a part time business. If there is one, I'd like to hear about it.

I think it's a pride thing more than anything else. People think they need it to be "official" or legit. In reality, just keep separate books and a separate bank account, fill out the two or three extra federal tax forms and report it as profit from a small biz on your 1040. That's what I've always done with hobby income.

If you sell retail, you likely do need the state or local license or tax ID # to collect sales tax. This is simple to get in most localities and you don't need any special company status to do it. Years ago I had one, but these days I sell everything out of state and to resellers - it's really nice to not have to deal with sales tax :D

[Steve Milito]

I've never seen the advantage of an llc in a part time business. If there is one, I'd like to hear about it.



There are a number of reasons to operate a business as an llc. One reason would be to allow multiple investors with clear cut bylaws. A second would be to have a layer of insulation between the business and the owners for liability protection. Generally, the type of entity to operate a business is mostly for legal issues.

As for paying taxes: yes the state and the IRS expects you to pay taxes on economic activity . I recommend you find an accountant if you are generating income or sales from your hobby to make sure you follow acceptable accounting standards and what rules you need to follow.

[scott vroom]

Along these lines... I've sold a few items over the past few months. Certainly not enough to live on by any means.

Should I claim this on my personal taxes and if I do would that allow me the deductions for expenses, depreciation, new equipment etc...

I'm not really looking for a rock solid answer that I'd hold you liable for, more just curious. Probably wouldn't worry to much about it unless it makes a big difference.

Jon, if you are "in the business" you're entitled to file a Schedule C and list all of the expenses associated with your business, and form 4562 for capital equipment depreciation. If the result is a loss, then you're entitled to report that loss on your 1040. Most woodworkers have a substantial investment in tools etc., as well as shop floor space, utilities, insurance, on ad nauseum. Unless you're generating significant revenue, you're likely to report a loss, possibly never showing a profit. At some point running a cottage business at a loss year after year becomes a red flag for auditing....something that you probably don't want to go through. Also keep in mind that if you run your (I assume) garage shop as a business, your homeowners insurance will not cover any claims associated with your home business....you'll need to get either a rider on your policy for business use of your home, or a new separate policy for the business. You've got to weigh a lot of factors in deciding to go "legit", or do as many hobbyists do: take payments for occasional part time projects in cash and move on. The IRS would never admit as much, but I'm pretty sure they would prefer you not report paper losses year after year against your paycheck earnings for what is essentially a hobby. Talk to a CPA.

[John Downey]

There are a number of reasons to operate a business as an llc. One reason would be to allow multiple investors with clear cut bylaws. A second would be to have a layer of insulation between the business and the owners for liability protection. Generally, the type of entity to operate a business is mostly for legal issues.

Yeah, "part time" was the key phrase. For the kind of thing the OP is talking about there's not any point - no investors, little liability, hardly any legal footprint to speak of. Income tax handled as part of the individual return and whatever applicable sales taxes are collected, that's just about it.

[Mike Henderson]

Along these lines... I've sold a few items over the past few months. Certainly not enough to live on by any means.

Should I claim this on my personal taxes and if I do would that allow me the deductions for expenses, depreciation, new equipment etc...

I'm not really looking for a rock solid answer that I'd hold you liable for, more just curious. Probably wouldn't worry to much about it unless it makes a big difference.
The IRS is leery of people taking a lot of deductions for what is really a hobby. If it's a hobby, you can offset your earnings with your expenses, but you can't claim any additional expenses. In other words, you don't get to claim a loss on a hobby.

If it's really a business, you get to claim all of your expenses and that may lead to a business loss. If you have losses year after year, you're probably going to have to convince the IRS that you're really in business and not just working at your hobby. You can do that, of course, but you'll have to prove that you're making a real and substantial effort to make your business a success.

Mike

[Rich Engelhardt]

The IRS is leery of people taking a lot of deductions for what is really a hobby. If it's a hobby, you can offset your earnings with your expenses, but you can't claim any additional expenses. In other words, you don't get to claim a loss on a hobby.

If it's really a business, you get to claim all of your expenses and that may lead to a business loss. If you have losses year after year, you're probably going to have to convince the IRS that you're really in business and not just working at your hobby. You can do that, of course, but you'll have to prove that you're making a real and substantial effort to make your business a success.
.

Here's the way I view my CPA.
I don't pay him $300 each year to do my taxes.
I pay him $300 each year to keep me from being audited & to keep our small rental business on the straight and narrow.

In this order - these are the people you need to discuss your business/tax matters with:
#1 - your CPA. Forget about having your sister's husband's cousin do your taxes. Find a CPA that does small businesses.
#2 - your insurance agent.
#3 - a lawyer.

Also - there are a ton of small specialty type associations you can go to for business advice.

[Steve Gojevic]

I seldom give advice on here any more, but asking if you should make yourself legal based on some possibly illegal past business transactions in a public internet forum, with your city and state posted right up there by your name, IS ASKING FOR AN AUDIT AND POSSIBLE LEGAL ACTION! Ask an accountant in private for gosh sakes!

x2

10 years ago I would have said this would be a "paranoid statement", but given the ease of snooping in by tax agencies (now that revenue is even more needed) I have to agree. If they were to conduct an audit they may assume some much higher past income for back penalties, especially if you had no records. There has been at least one case where a tax agency from one state went to a mall at a neighboring state (just across the border) and took license plate numbers of cars from their state. Apparently the neighboring state had much lower sales tax rates. Legally you need to pay the sales tax for your state when you bring the goods in, and the tax agency was going to make sure you did. I don't know exactly what they did with the plate numbers or the final outcome, but some people had reported a "letter" from the agency.

You might have worded it "I am thinking of selling..." instead of "in the past when I sold...".

The above is just my opinion and I am not a lawyer or accountant.

Steve

[James Tibbetts]

The OP had also mentioned deducting expenses, amortising equipment, and buying new equipment. If the income is derived from an activity that the IRS deems to be a hobby, I don't believe that any amortization or equipment costs deductions would be allowable. Material costs would be. An LLC puts you in the realm of a "real" company and adds these deduction advantages.(Probably subject to the percentage of use for the business.)

[Steve Milito]

Yeah, "part time" was the key phrase. For the kind of thing the OP is talking about there's not any point - no investors, little liability, hardly any legal footprint to speak of. Income tax handled as part of the individual return and whatever applicable sales taxes are collected, that's just about it.

I mostly agree. I can imagine some 'products' that I would only want sold under some structure other than a sole proprietorship such as children's toys or the like. Yet, from my understanding, the level of protection one gets from forming an llc is controversial and mostly untested. I don't see any value in forming a corporation if all you are doing is selling a few cutting boards to friends.

[Steve Milito]

The OP had also mentioned deducting expenses, amortising equipment, and buying new equipment. If the income is derived from an activity that the IRS deems to be a hobby, I don't believe that any amortization or equipment costs deductions would be allowable. Material costs would be. An LLC puts you in the realm of a "real" company and adds these deduction advantages.(Probably subject to the percentage of use for the business.)


You are allowed to make some deductions but they are more rules and limitations. My personal opinion is that you absolutely need an accountant if you need to report self generated income.

[Art Mann]

My wife was the sole proprietor of a design business for 15 years. She did not form an LLC and that has absolutely nothing to do with deductions and depreciation schedules. Furthermore, the IRS doesn't get to decide what is hobby and what is professional. If you are selling goods and services and reporting that as income, then whether the equipment is deductible in the IRS view is more dependent on whether you show a profit over the years than whether you are part of an LLC..

[Dave Anderson NH]

I have had my Chester Toolworks business for about 8 years now. I started by spending the roughly $120 in NH to get registered as an LLC which also has a $100 per year renewal charge. I went out and bought QuickBooks Pro for accounting and use it religiously. When it comes time for taxes I do it myself with TurboTax which allows the information from QuickBooks to be automatically imported to the TurboTax program. The main difference if you have been doing your own taxes via computer is that now you will have to file a schedule C as part of your 1040. I also went to the trouble of getting a Federal Taxpayer ID number since I export to both private individuals and a dealer in Germany. I only lost money 3 out of the 7 years I filed and that is more than acceptable to the IRS. I'm small potatoes and am unlikely to be audited, but if I am I can document everything because I have been careful in my record keeping (wife with bookkeeping background helps). The one major warning I would make is that if you want to organize as a business, it better truly be a business with a profit motive and not a mask for a hobby. In my case I have purposely kept it small because I am still working full time, but will expand greatly after I retire. I started early so that I would already be a known name with a track record the day I retired and I could grow more rapidly. I also am fortunate in that NH does not have a sales tax so I don't have to play tax collector. If the Fed starts to allow the sates to collect sales taxes for internet sales into their state I will quickly fold my tent since I suspect it would become a major hassle that I don't need.

[alex grams]

Thanks for all of the input. I am probably in the same boat as 95% of the people on this board, sold a cutting board here and there, sold a bowl here and there, but nothing beyond friends and family. However, lately one was a gift and the person ran a small store and asked me about possibly providing some for their store to sell (they would be marking sales tax on their final transaction to their customer).

I guess I should have narrowed my question to those who sell stuff, how many have taken steps to protect against possible sales tax issues(and at what point beyond just friends and family gifts/sales do you care to take these steps) and who really has the concern enough to create an LLC to limit your liability.

James,
I didn't make a reference to "The OP had also mentioned deducting expenses, amortising equipment, and buying new equipment". While this may be a side effect and possible perk of forming an LLC, it is not a factor that would drive that decision.

Thanks again for all of the advice. This is certainly an interesting topic to consider for me (and obviously a bunch of other creekers).

[Art Mann]

I have had my Chester Toolworks business for about 8 years now. I started by spending the roughly $120 in NH to get registered as an LLC which also has a $100 per year renewal charge. I went out and bought QuickBooks Pro for accounting and use it religiously. When it comes time for taxes I do it myself with TurboTax which allows the information from QuickBooks to be automatically imported to the TurboTax program. The main difference if you have been doing your own taxes via computer is that now you will have to file a schedule C as part of your 1040. I also went to the trouble of getting a Federal Taxpayer ID number since I export to both private individuals and a dealer in Germany. I only lost money 3 out of the 7 years I filed and that is more than acceptable to the IRS. I'm small potatoes and am unlikely to be audited, but if I am I can document everything because I have been careful in my record keeping (wife with bookkeeping background helps). The one major warning I would make is that if you want to organize as a business, it better truly be a business with a profit motive and not a mask for a hobby. In my case I have purposely kept it small because I am still working full time, but will expand greatly after I retire. I started early so that I would already be a known name with a track record the day I retired and I could grow more rapidly. I also am fortunate in that NH does not have a sales tax so I don't have to play tax collector. If the Fed starts to allow the sates to collect sales taxes for internet sales into their state I will quickly fold my tent since I suspect it would become a major hassle that I don't need.

You didn't have to form a LLC in order to use Quickbooks or Turbotax. You could have obtained a tax ID without forming a LLC. You only complicated your taxes. Forming a LLC doesn't prove anything to the IRS. It costs $120 a year in your State. What is the benefit to forming a LLC in your case? Was it to limit personal liability somehow?

[Dave Anderson NH]

Art, I wasn't implying that I needed to form an LLC to buy an accounting program or get a Fed Tax ID number, which by the way you can do online like I did. I chose to do it for liability reasons and because it presents a more professional image on both a website and when dealing with a bank and suppliers. The Customs people also look at you more favorably when you have a tax number on the customs forms. This was important to me since I ship a significant percentage of my sales internationally.

[Steve Milito]

Thanks for all of the input. I am probably in the same boat as 95% of the people on this board, sold a cutting board here and there, sold a bowl here and there, but nothing beyond friends and family. However, lately one was a gift and the person ran a small store and asked me about possibly providing some for their store to sell (they would be marking sales tax on their final transaction to their customer).


Most states don't charge sales tax on items that are for resale. You're state probably has a WEB site with the rules and forms.
State taxes in my state can be paid online. There's a fairly straight forward way to set up the accounts to to so.



I guess I should have narrowed my question to those who sell stuff, how many have taken steps to protect against possible sales tax issues(and at what point beyond just friends and family gifts/sales do you care to take these steps) and who really has the concern enough to create an LLC to limit your liability.


An llc mostly protects the investors from each other. For example, in a general partnership each partner is responsible for the actions of another. So if you own 10% of a partnership and the majority partner runs up a bunch of financial liabilities, you may be personally responsible for the entire obligation. A llc can protect you from that. You should talk to an attorney but I really don't see any reason that you can't sell some woodcraft for resale as sole proprietorship.
You should also understand that the owner of the store is required to 1099 you for any sales that total $600 or more in any given fiscal year.


James,
I didn't make a reference to "The OP had also mentioned deducting expenses, amortising equipment, and buying new equipment". While this may be a side effect and possible perk of forming an LLC, it is not a factor that would drive that decision.

Thanks again for all of the advice. This is certainly an interesting topic to consider for me (and obviously a bunch of other creekers).

None of those issues have anything to do with the form of the entity that does the activity. Sole proprietors, S corps, General Partnerships, and C corps can all do that. The issue is that you need to be a real business to take full advantage of those tax breaks, especially if you want to offset income from one endeavor with losses from another. The IRS does not permit you to offset your income as a computer programmer by allowing you to depreciate your table saw, unless you can demonstrate that you woodworking endeavor is a real attempt at making money and not something you do solely for it's own enjoyment; even if it generates some income.

[John Downey]

I guess I should have narrowed my question to those who sell stuff, how many have taken steps to protect against possible sales tax issues(and at what point beyond just friends and family gifts/sales do you care to take these steps) and who really has the concern enough to create an LLC to limit your liability.


What do you think the advantage of operating as an LLC would be? All the advantages others have listed here do not seem to apply to your situation as you have described it.