Woodworking as a side business and tax implications?

[Ryan Gallo]

I've got a little shop and have made some pretty significant investment in tools over the past couple of years. Still, I consider it a hobby as I haven't been selling any of my pieces and I actually enjoy the design side of furniture-making perhaps even more than the fabrication side of things. I've got a lucrative day job as a software marketer and have pretty much accepted that I'll probably never be able to turn a "side business" like woodworking into a more profitable endeavor than my day job. But, I'd like the option of being able to turn a small profit with my woodworking hobby -- especially if I can defray some of the capital costs by structuring it as a business.

For those in the business, especially those with a sole proprietorship or LLC, I'm curious if you've been able to write your tools off as capital expenditures and -- if the business doesn't post a profit in a given year -- if you can use that loss to offset your personal tax liability from other (more profitable) ventures?

Maybe this is a question best asked in a tax forum but I thought I would start here. Thanks!

[Jerry Wright]

You can do all of the above by filing self employment income and direct related expenses. Don't think you can depreciate large equipment. Any good tax person can help uou do it. Worth a look.

[eugene thomas]

Save your receipts. Sure glad I did when turnedy hobby into side business.

[Ben Rivel]

Of course you can write all your tools off. You can write off anything you want, provided you can justify it should you ever get audited. And you do not need to turn a profit. You can run your business anyway you want included at a loss for many years. The IRS cant/doesnt tell you how to run your business. They just care that you file a tax return and pay taxes! Set up the LLC. There are many benefits to having one.

[Minh Tran]

Can someone explain what it means to "write off the cost of tools" for a business? What does it mean when you get audited?

[Glenn de Souza]

I would be careful here, and if you're serious about it, it would be worth paying for advice from a qualified tax advisor. The IRS has rules regarding the delineation between a hobby and a business. You can read some of them here:

https://www.irs.gov/uac/business-or-hobby-answer-has-implications-for-deductions

This is not to say there isn't a tax opportunity here. It always seems that the devil is in the details, and sound planning, appropriate record keeping is important.

[Martin Wasner]

If you decide to turn it into a business. Incorporate as an S Corp, then lease you're equipment back to the company. Saves you by not have to pay the 15.3% in social security and Medicare. After that, anything the corporation buys you can write off on any schedule the accountant deems appropriate.

David Kumm I'm sure will chime in at some point. He knows his stuff. Way better than a cabinet maker will.

My solid advice, is to not do it at all. This is a tough business. If I could trade jobs with you is do it in a heartbeat.

[Ryan Gallo]

If you decide to turn it into a business. Incorporate as an S Corp, then lease you're equipment back to the company. Saves you by not have to pay the 15.3% in social security and Medicare. After that, anything the corporation buys you can write off on any schedule the accountant deems appropriate.

David Kumm I'm sure will chime in at some point. He knows his stuff. Way better than a cabinet maker will.

My solid advice, is to not do it at all. This is a tough business. If I could trade jobs with you is do it in a heartbeat.

Martin, thanks for the advice. Solid advice, at that. I should be clear that I'm certainly not looking to trade my day job -- in fact, it's the day job that has afforded me the ability to acquire some pretty sweet woodworking gear. And while I certainly wouldn't be looking to make a fortune in woodworking, I could see doing it part-time, as long as I can find the right client... And that's where my marketing background could pay some big dividends.

I'll research S Corps in more detail later today. I like the lease-back concept. I think what's key for me is the ability for this "loss" (at least in the short-term) to offset the taxes from my day job I'm already going to be paying... That alone could justify some pretty nice new capital equipment.

I also don't like the idea of paying for an accountant. I've got my MBA fairly recently and would like to be hands-on, therefore I'd prefer to manage everything myself. But, that can be dangerous -- thanks for the advice.

[Andy Giddings]

I'm intrigued by this - presumably if you have already purchased all of your equipment in your own private name (and before you created an LLC), you would have to transfer or sell your equipment to your business?

[Frederick Skelly]

Check on your insurance too. If you are a business, many companies require you to insure it as such - else they wont pay a claim.

[Marshall Mosby]

You can't stay in one business and think of flourishing the other. If you really love your hobby and believe that you can survive and grind working through it, you should consider making this your day job instead and thrive.

[Wayne Lomman]

If you are going to work from home, you must consider the consequences of no longer having a private residence - it becomes a commercial property. It has an impact on land taxes, capital gains tax etc. If you have to start lying to save tax, don't do it. Better to sell stuff for cash and stay off the grid. That way focus on the positive of making money rather than the negative of avoiding tax. Cheers

[Art Mann]

My wife ran a graphic design business out of our home for about 20 years. We know a little bit about the rules that govern home businesses. The one thing I want to emphasize is that you can not run a business indefinitely at a loss and still expect to depreciate assets and claim others as business expenses. Anyone who attempts to do that will eventually be audited and the IRS is not known for giving people the benefit of the doubt.

[Jon Nuckles]

If you are going to work from home, you must consider the consequences of no longer having a private residence - it becomes a commercial property. It has an impact on land taxes, capital gains tax etc. If you have to start lying to save tax, don't do it. Better to sell stuff for cash and stay off the grid. That way focus on the positive of making money rather than the negative of avoiding tax. Cheers

Just to be clear, selling for cash and not reporting it is still lying and still against the law.

[Martin Wasner]

If you are going to work from home, you must consider the consequences of no longer having a private residence - it becomes a commercial property. It has an impact on land taxes, capital gains tax etc. If you have to start lying to save tax, don't do it. Better to sell stuff for cash and stay off the grid. That way focus on the positive of making money rather than the negative of avoiding tax. Cheers

I wouldn't sweat it with just one guy building stuff out of his garage. They aren't going to rezone a residential area commercial/industrial just because he's doing some woodworking for next to no money. At least not in the USA. If he's got 20 employee's, 100hp of dust collection sitting outside, and trucks running in and out daily they'll just boot him out of where he is and tell him to go elsewhere.

But, if you can do stuff for cash, do it for cash. The IRS get's enough money from me to make up for it.

[Steve Schoene]

The woodworking enterprise will be challenged to earn any profit--it doesn't need a lot of lease expense. It's a lot easier to capitalize the business with the equipment and take the depreciation directly. The other way requires professional help to set it up beyond challenge.

While profits don't have to be earned every year, the business must be run in a business like way, with full records and the such, and if it didn't eventually earn a profit, everything will have to be letter perfect to avoid having losses disallowed. As a tax shelter for income from a day job, not really a very sound idea, in my opinion.

As far as receiving cash to avoid taxes, it is illegal, and cheats the rest of us. Some do get caught. I once had a painter who wanted cash payment for part of the bill. We did, keeping our own records. The IRS did ask about his payments, and not wanting to risk perjury charges ourselves, we gave the data to IRS. Even though we did let the painter know IRS was interested, he apparently didn't think he could really get caught. We next saw his name in paper when he received a multi-year jail sentence,

[David Kumm]

There has been some good advice here- and a lot of bad. If you have a full time job and try to make a hobby into a business, showing a profit consistently 2-3 out of five years is necessary or you will be classified a hobby. The hobby rules are terrible, income is taxable and expenses might be considered itemized deductions at best. If you go S corp, the rules are the same and your accountant will make a lot of money. Double entry set of books, everything must reconcile, separate return that will cost $1000-2500 per year.

My experience with these deals ( over 40 years ) is that trying to make a business out of hobbies, unless there are real economics to them, end up costing more in time, fees, and stress than they make. Make as much as you can on your day job and accumulate enough wealth so what you spend on your hobby isn't significant enough to impact your retirement. Dave

[Bruce Wrenn]

As a self employed for over 30 years, I make a copy of every check before depositing them, This way there is never a question as to how much I was paid. I've only had one audit, and thing came out well. I had side line business while working for others. Had a break in at work, and lost $3500 worth of tools. Got a police to back up claim of loss. New book keeper on my full time job listed my expenses as income. Had to get letter showing that they were expenses rather than income. Same time did equity line on house, but didn't have $600 in interest, so bank wasn't required to file 1099. Got a letter stating so, and came out squeaky clean. Paper work, paper work!

[Matt Day]

If you want more reading, do a search on here. This same topic comes up a couple times a year.

[Rich Riddle]

Honestly, the best advice you can take is to talk with an accountant who's also a licensed CPA. They will know far more than most of us about the business aspect. In my experiences, they save you more than their fees cost.

[Martin Wasner]

There has been some good advice here- and a lot of bad.

Point out the bad advice, if I'm wrong I want to know it.

I went S Corp because as I under understand it, an LLC is basically the same thing as a sole proprietorship, but with the liability distancing of a corporation. A little different game as I'm dealing with a bit more money than one person in a garage is likely going to be doing for a while. I'm spending about $1700 a year I believe in tax prep for the business.

[Alan Trout]

Best thing to do is to talk to a CPA. I have been self employed for over 30 years. I have been sole proprietor, C corp and currently an S corp. My day business and wood/art business are all rolled into one. I pay taxes have expenses and I keep my nose clean. You don't want to jack with the IRS. They are not nice folks. A good CPA is worth their weight in gold. I have never had to pay $1000+ for my CPA to do a return and mine is fairly complicated. You can have a small hobby business but you just have to be smart about it and that is What a CPA is for. They will guide you with what you need to do.

[Ben Rivel]

Point out the bad advice, if I'm wrong I want to know it.

I went S Corp because as I under understand it, an LLC is basically the same thing as a sole proprietorship, but with the liability distancing of a corporation. A little different game as I'm dealing with a bit more money than one person in a garage is likely going to be doing for a while. I'm spending about $1700 a year I believe in tax prep for the business.

Trick with LLC is to make it a Multi-Member LLC, not a Single Member. A Multi-Member offers every bit as much liability protection as a C or S corp with less hassle in the taxes. And it has nothing to do with how much money youre dealing with. Case in point, Amazon is an LLC.

[David Kumm]

Both the LLC and S corp offer some liability protection but not against personal negligence or acts. S corp may have an advantage of not being subject to the health care tax or additional medicare tax but that is only relevant if you make significant money. We use S corps for larger profitable companies that don't expect to transfer ownership or add shareholders often as there are advantages to the LLC form when additional buyers are anticipated. Even the single member LLC can offer some liability protection if there is an operating agreement and the business is operated under those rules. Point is it is way more complicated than can be explained here ( I spend hours and only touch the surface ) and if you are serious, get to someone who knows. The are lots of poor accountants just like there are poor woodworkers so find one that works with successful businesses and is successful himself. An accountant who doesn't know how to make money isn't likely to show you how to. Dave

PS. Start out as LLC. You can always change to S Corp but once S Corp there is no cheap way to change to anything else except C Corp which has few advantages. I have clients ( including myself ) who make a lot of money but aren't S corps because there are disadvantages that out way the medicare savings.

Leasing to an LLC is way too complicated, requires the payment of sales tax on the lease payments and has few if any advantages over the entity owning the assets. Leasing is done with C corps, larger companies, or because the accountant wants more work.

Equipment depreciated in the business is also generally subject to local personal property taxes annually.

The form of business has no relevance on what is deductible.

Assets used partially for profit and partially as a hobby require records relating to hours of usage for both.

Finally- go into business to make a profit, not to save money in taxes. If you make enough money there will be lots of people to help you to manage the money, the taxes, the succession planning, and accumulation of wealth.

[David Zaret]

Check on your insurance too. If you are a business, many companies require you to insure it as such - else they wont pay a claim.

IMHO, *this* is the big issue. as soon as you start woodworking professionally, your personal and insurance liabilities change. no longer will your homeowners insurance company cover the obvious - like a fire or theft. you need separate business insurance, covering your equipment, space, and liability (furniture falls a client's kid or you put a screw into a pipe during install). i've been through this, and found that in my case it's simply not worth the tax advantage of capturing additional income/claiming cost from professional woodworking, namely due to the required structure on the insurance side to keep everything clean and safe.

i have very solid homeowners insurance covering multiple properties, and a great agent. we've talked at length, and what's clear is that as soon as you start mixing in professional work, and the use of equipment for capturing income towards a registered company (LLC, S corp or otherwise), the insurance company covering your home and goods has a clean "out" to not pay a claim related in any capacity to your woodworking. without a formal structure and the capacity to capture income, it's a hobby, and your goods and actions are covered by your homeowners and/or an umbrella policy.

my shop is not in/at my house - separate land, building, full of tools. it's insured through my homeowners umbrella. if i start claiming income for my woodwork, i need separate coverage for anything related to that income. again, perhaps worth it for you, but in the calculus, wasn't for me.

-- dz

[Frederick Skelly]

Both the LLC and S corp offer some liability protection but not against personal negligence or acts. S corp may have an advantage of not being subject to the health care tax or additional medicare tax but that is only relevant if you make significant money. We use S corps for larger profitable companies that don't expect to transfer ownership or add shareholders often as there are advantages to the LLC form when additional buyers are anticipated. Even the single member LLC can offer some liability protection if there is an operating agreement and the business is operated under those rules. Point is it is way more complicated than can be explained here ( I spend hours and only touch the surface ) and if you are serious, get to someone who knows. The are lots of poor accountants just like there are poor woodworkers so find one that works with successful businesses and is successful himself. An accountant who doesn't know how to make money isn't likely to show you how to. Dave

I just wanted to point out to folks who may not have noticed, that Dave Kumm's SMC profile lists him as a CPA.

[jack duren]

It's not hard to run a woodworking business from your home.

[Rich Engelhardt]

IMHO - - put off any decision until after November to see how the election shakes out.
Both sides are talking about tax reforms & one side is talking about very radical tax reforms.

Once you put items into a corp or LLC, it can be very costly & difficult to get them back out.

+2 or +3 to getting a good accountant & a good lawyer & contacting some places like the SBA & SCORE.


Can someone explain what it means to "write off the cost of tools" for a business? What does it mean when you get audited?
If you go out and buy a $1000 table saw, you pay $1000 for it out of your own pocket and watch the value of it go down over the years you own it.

If I go out and buy a $1000 table saw because I need it to fix up my rental houses, I pay $1000 for it, the every year for the next 20 years, I get to apply a portion of that $1000 towards my cost of doing business,,,,so to speak...

NOTE---this is not 100% accurate - but - it will give you a rough idea of how it works.
I pay $1000 for the saw. I depreciate it over 20 years. $1000/20 = $50.
I collect $500 a month rent on the house. My income on the house is $500 x 12 = $6000 BUT I can deduct $50 from that each year for 20 years for the saw, so, my tax liability (what I pay taxes on) now becomes $5550.

You can see how lucrative things become over time. The property itself, according to the .gov, falls apart in 20 years so what I paid for it get's broken down by the number of years I depreciate it - and that comes off my tax liability.
Also, more tools/materials/supplies bought, the more can be written off (or charged to the "company").

With any luck & a good CPA, you won't ever find out what the IRS thinks via an audit!
(I don't pay my CPA $500 each year to do my taxes. I could have anyone do my taxes for a whole lot less.
What I pay him for is to keep me out of an audit.

& I have to add - - there's so many 100% legit ways & so many loopholes, there's no reason to pull anything funny.)

Lastly, take the S corp and LLC advice about "protecting your assets" w/a grain of salt.
If you set up a small corp and it's only you and maybe your spouse that make up the company, anyone that goes after the company is going to go after you personally as well.
In some cases, just getting a $1 to $3 million umbrella policy is a lot cheaper and easier & covers you almost as much.

[jack duren]

He simply needs to show a profit each year to keep from getting flagged.

[jerry cousins]

ditto to dz's comments on insurance - that was a big one for me when i turned the hobby into a business - once a business then separate insurance was required -
and i found that many of the usual homeowner insurance companies - including my own home owner company would not insure the business part - took some searching
jerry

[liam c murphy]

I am/ have a single member woodworking LLC. It's my first year. I use quickbooks and I have an accountant. Honestly, I wouldn't waste my time setting up a company for any other reasons than wanting to run a business. If someone were to misinterpret your intentions, the hassle that could ensue would not be worth the potential cost savings. I'd definitely get an accountant. I might be wrong, but I also think that your accountant's fees should be able to be written off as a business expense as long as they are strictly related to your business.

[liam c murphy]

After thinking about it, I am pretty sure that your capitol expenses would only be deductible from any any taxes owed from profits from the business. I can't imagine why such expenses should have any bearing on how your regular income is taxed.

[Ben Rivel]

Regarding homeowners insurance and business insurance, if your house say burns down and you have to submit a claim with your homeowners insurance company, do they ask/require you to show a previously filed tax return for both personal and your LLC/Corp if you have one? If not, how would they know your tools were for a business versus just used for a hobby?

[Art Mann]

That is not correct.


After thinking about it, I am pretty sure that your capitol expenses would only be deductible from any any taxes owed from profits from the business. I can't imagine why such expenses should have any bearing on how your regular income is taxed.

[Rich Engelhardt]

I can't imagine why such expenses should have any bearing on how your regular income is taxed.If he runs a sole proprietorship, all income is more or less lumped together. The business side can show a huge loss (on paper) which can make a huge reduction in your tax liability.
W/out the loss from the real estate side of our tax return, we were in the 28% tax bracket. W/the losses we show, we dropped down to the 15% and sometimes even the 10% bracket.

I'm not sure how the S corp and LLC affect personal taxes since I'm not using that business model.

[Marc Burt]

Good thread. Perhaps I missed it but I believe the OP asked specifically about depreciating tools he has already acquired. I suspect this is a common interest of many that have "made the leap". While it is obvious that subsequent business purchase you can expense the depreciation, how DO you treat the tools you've already acquired as a hobbyist? Are they just a sunk cost and you've lost the ability to write them off? While of course gaining the real world benefit of not having actual capital expenditures that could cripple a new business. But having the ability to recapture some of the personal expense would be beneficial, but even moreso would be the ability to use that investment to shield some of the earnings of a fledgling business from current taxes. I realize the OP in this case is just wanting to start a side gig but for somebody else making the jump even a $1000 tax savings could mean a big difference.

We all know the real world and taxes don't often intersect.

I've enjoyed reading the thread, yes it is a common topic but there is always something new to add.

[Martin Wasner]

I don't think he can depreciate them, I could be wrong. Unless, he sells them to his company, then the company could write off that expense. That makes no sense to me though when the company can lease them from him. The depreciation is a one time thing. The rental money can go on forever.

Lucky for us the taxation system is so simple...

[David Zaret]

Regarding homeowners insurance and business insurance, if your house say burns down and you have to submit a claim with your homeowners insurance company, do they ask/require you to show a previously filed tax return for both personal and your LLC/Corp if you have one? If not, how would they know your tools were for a business versus just used for a hobby?

ben, i'm not an expert, so YMMV. my understanding - after literally years of discussion with my accountant and insurance guy - is that it's not whether or not they will cover it, it's whether you've given them a clear reason not to cover it. if there's evidence of a business (bank account, business tax ID #, website, accessible past customers), the insurance company will see a business run out of the home, and exclude direct and collateral coverage via homeowners insurance. will they dig for information? unclear, and a risk you have to either take or not take.

if you sell furniture or cabinets or the like, let's say that you have a claim from a client. without business insurance including some form of liability, i bet you'd have a fight on your hands getting that covered under your homeowners. actually, i don't think it would be a fight, i think you'd get categorically denied, then likely dropped.

again - for me, this risk is definitely not worth it, but i don't rely on woodworking income to live.

-- dz

[Robert Engel]

Lots of good advice. My wife is a CPA and we have talked about the same thing. The short answer is "yes" but.....

If you don't show a profit 2 out of 5 (or 3 out of 7 can't remember which) you WILL be audited. But even it you don't, as long as you can show a good faith effort to make the business go, you are ok. However, if your ww'ing on the weekend while working a full time job it will be difficult to show that good faith effort.

Keep meticulous records of your income, expenses and investment. [Disclaimer] this is advice only by word of mouth I strongly suggest you consult a tax attorney or accountant.

FWIW, hers' MY $.02:

I've started 2 businesses and I can tell if there is no personal risk involved thats a very rare thing.


The fact you asked for advice on a forum like this tells me its true what they say about lawyers who have themselves for a client. ;-)

I would start by setting up a DBA bank account, then get an occupational license from your county, hang your shingle out and see what happens.

Lots of things can come up. Lets say you get a job to build a bar for a corporate entity such as a restaurant. If they require a license, insurance etc. you won't be able to do it unless you are a business. They will also want a tax ID # from you.

[QUOTE]I also don't like the idea of paying for an accountant. I've got my MBA fairly recently and would like to be hands-on, therefore I'd prefer to manage everything myself. But, that can be dangerous -- thanks for the advice. What do they say about a lawyer who has himself as a client? The ins and outs of tax law are too complicated.

Bottom line: 1. be smart and talk to an accountant!! 2. be in for the right reasons.

[Martin Wasner]

BTW- if you're showing the government much of a profit, you're doing it wrong. Dump as much as you can back into the business. I spend everything I can afford to on deductible items.

Luckily, my wife has a good job, our house is small/cheap/ugly, and I have a secondary source of income so I don't have to rely solely on the shop for income. Last year I paid myself a whopping $3500, and spend close to $60k on tools. lol

[Peter Aeschliman]

If he runs a sole proprietorship, all income is more or less lumped together. The business side can show a huge loss (on paper) which can make a huge reduction in your tax liability.
W/out the loss from the real estate side of our tax return, we were in the 28% tax bracket. W/the losses we show, we dropped down to the 15% and sometimes even the 10% bracket.

I'm not sure how the S corp and LLC affect personal taxes since I'm not using that business model.

Just to close out on this point. A single member LLC is an entity that gives you the liability protection of an LLC (as long as you don't pierce the "corporate veil" ), but for tax purposes, is treated exactly the same as a sole proprietorship. Meaning, the LLC's income is treated as personal income. So if you have income from a full-time job, the LLC's expenses can be deducted and reduce your taxable income.

This is why, as Robert points out, the IRS is not interested in giving tax breaks to hobbyists. So you need to show a good faith effort to make a profit.

As for whether to hire an accountant... This is not a complex situation. You're talking about maybe $500 of advice. A good accountant will easily pay for him/herself. My wife has a single member LLC for her business, and I just use turbotax to file. It's really not hard as long as you keep good track of your expenses and you get a bit of advice from a CPA at the beginning so that you set yourself down the right path.

I passed the CPA exam about 12 years ago (never practiced tax), but I still talk to an accountant from time to time. There is a lot to know.

[Dave Zellers]

Wait- so you are a tax attorney but you don't play one on TV (internet)?

Now that's a twist!

Good post.

[Robert Engel]

Elvis has left the building.......

[Steve Milito]

I'm not an accountant but have run several businesses. There is a lot of misinformation here.
- You do not need to have double entry accounting. The IRS allows single entry accounting. A small woodworking business can likely run on cash basis, single entry accounting. Companies that maintain a large inventory generally need to report taxes on an accrual basis, but most small businesses don't. You can also elect calendar year as a reporting schedule so that personal taxes and business taxes coincide.
-You can not offset income (personal or business) in one entity with loses on another. Losses are generally rolled forward.
-You should not try to shelter payroll taxes. Generally, the IRS expects profitable businesses to have payroll.
-You need to file quarterly taxes.
-Depreciation is not a gift from the IRS, it's a cost associated with using capital equipment. The entity needs to own the equipment to depreciate it and generally needs to pay FMV for the asset. Thus you shouldn't charge your business full retail cost for your 15 year old table saw. The IRS has a very complicated and detailed system for depreciating capital investments.
-You can lease the equipment from yourself but you would then need to report the rental income. Since you don't depreciate capital equipment on your personal taxes, it's basically all income.
-Although you don't 'need' an accountant it is advisable to have one. I find GAAP( generally accepted accounting principles) to be arcane and confusing; the IRS expects your books to be compliant if audited. Tax law changes frequently and you are required to abide by it; that is you can't use lack of knowledge as a defense.

[David Kumm]

Steve is correct about there being an exception to the double entry set of books rule for S Corps. As a practice I won't file an S Corp return that is single entry. Too many potential issues with the election, verifying the payroll, and transferring the business at a later date. I have seen S corp returns prepared that way ( small businesses with < $250K in assets ) but IMO if you can't run a double entry set of books, you shouldn't choose S Corp- but Steve is correct.

Losses from one entity may be allowed against income from another but there are complicated passive loss rules that must be understood and planned for. Way too involved for here. Dave

EDIT. Steve is also correct that GAAP is irrelevant ( maybe even stupid ) for small businesses.

[John Sincerbeaux]

I have been selling my woodworks for over 10 years out of my home shop. Although the business is extremely small, I keep it very legitimate. I sell my work through galleries, competitions, and private commissions.... ie, it is very easy to prove it is not just a hobby. I have never been audited.

As far as CPA's go, I believe every tax payer in America should use one. And if you're not, you are leaving money on the table.
Further, my CPA says, every tax payer should have a small business on the side.

My real job pays the bills, health insurance, and my retirement nest egg. It also affords some nice machinery but we are "realistic" in how much we write off every year.

[Steve Milito]

Steve is correct about there being an exception to the double entry set of books rule for S Corps. As a practice I won't file an S Corp return that is single entry. Too many potential issues with the election, verifying the payroll, and transferring the business at a later date. I have seen S corp returns prepared that way ( small businesses with < $250K in assets ) but IMO if you can't run a double entry set of books, you shouldn't choose S Corp- but Steve is correct.

Losses from one entity may be allowed against income from another but there are complicated passive loss rules that must be understood and planned for. Way too involved for here. Dave

EDIT. Steve is also correct that GAAP is irrelevant ( maybe even stupid ) for small businesses.
Yes, none of what I posted is 100% accurate, 100% of the time; just rather 'rules of thumb'. There are tax consequences and additional expenses as well as benefits to owning a business. Frankly, IMO, it isn't worth the trouble unless you really plan on putting the effort to generate real revenue.