Sock & Supply and Taxes...

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jrista

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I hope this question is ok here, wasn't sure where else to put it. With the new year, comes a new time for taxes. I was working on getting a business with my woodworking going last year, however that didn't quite happen. A few one-off sales here and there, but getting a web site up, turning enough product to really have enough inventory for a web site or Etsy/Ebay shop, etc. didn't happen either.

So, I'll really be getting this new business going this year, starting probably with an Etsy store. Mostly because they take care of all the taxing and whatnot for you, which is quite convenient (if a bit expensive, I think they take a 30% cut!) Thing is, even though I am starting my business legitimately this year, I spent a heck of a lot of money (and sales tax!) on building up stock and supply last year. I have a lot of wood for turning in general, a ton of pen blanks, quite a lot of pen kits, not to mention some big new tools like a bandsaw and drill press (although I am pretty sure its appropriate to start writing those off once you actually start selling product created with it?) I also have spent money a fair amount on electricity last year, and a full third of my garage space is completely dedicated to this business.

I'm definitely in need of a tax guy to help me figure all of this out, especially the stock and supply bit. I am honestly not sure if I can/should/must deal with the cost and taxes of buying all the stock and supply for my 2021 taxes? Or do I defer on that, much like I do (I think?) for the larger machines? If I don't properly account for all the money and tax spent on supply and stock (I had some official document issues last year that I wasn't able to get fully resolved until November, so I don't have a tax id yet for any kind of tax exempt purchasing...that is something I'm working on and hope to have ASAP) in the year I bought, I am not sure if I lose the opportunity to take any deductions or whatnot for it all? Anyway...

I live in Colorado, south of Denver. I contacted one guy last year, who was hard to get ahold of and never called me back when he said he would... I don't know if any other Colorado turners know of a great tax guy who knows this kind of business who could help me? I have always done my own personal taxes, and I'm reasonably good with money, but this is taking things to a whole new level of complexity I'm definitely not ready for myself, and there is just too much law for me to wade through while still working a day job, and also while still trying to build up an inventory for an online store, while also trying to design and build my own web site, etc. etc.

Thanks!
 
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jeff

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I'll seed the conversation and others with real knowledge might chime in.

When you say you are starting the business legitimately, do you mean creating a formal entity, such as an LLC? If not, you may have an uphill battle with the IRS and the hobby/business differentiation.

One option you might have with all the equipment and supplies you have already purchased is to transfer it to the business as owner's equity.

If you don't get a reseller certificate, you can deduct sales tax with the cost of good sold.

Etsy handles sales tax because they're a market facilitator, but that's it tax-wise. Of course you have to handle the income tax whether or not you have a business (even hobby income is taxable). If you sell outside of a market facilitator you will have to handle the sales tax annoyance yourself.

You might call your local business group, chamber of commerce, etc., and see if they can recommend a small business accountant. You're correct that doing everything right, legally, sensibly, and profitably isn't trivial. It can be done with enough time and effort, but as you say that can be a tough undertaking.

Good luck!
 

sorcerertd

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There are others better versed in this than I, but the little that I will say about taxes is that you should check out the IRS Hobby vs. Business info as there are advantages to each. Either way, the IRS wants their cut. Also, just go ahead and assume the IRS will see stuff you post on the internet, even in a pen makers forum.



Now, just to throw this out there since you mentioned it, Etsy is not as bad as you think, though certainly more expensive than some other options. Without advertising, figure about 8% plus a buck if you sell an item within a year of listing it. It may be different if you do a lot more business than a few pens a month and is always subject to change.
  1. Listing fee .20
  2. Renewal of unsold listings every 4 mos .20
  3. Commission from sales 5%
  4. You also pay 5% on what you collect from your customers for shipping
  5. Payment transaction fee 3% + 0.25 USD (domestic)
  6. Purchase fee for shipping label .25
  7. Offsite ads are free BUT, if you make a sale from a click on an offsite ad, it will cost you 15% on top of everything else. You can opt out of those if you choose. You also have the option to purchase advertising through Etsy.
  8. Probably more that I missed here...
Official info from Etsy:
 

Joebobber

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Here in ND we got ourselves a tax ID number which was $250. That lets us have a business but still file our taxes on a standard 1040. We don't do enough business to quantify going to an llc. Basically the tax ID is a DBA. If you are starting now as a part time thing, a DBA is by far the best way to go. Keeping track of your sales and expenses is a must. You also need to keep track of any shows you go to, as each town has their own tax code, and sales taxes differ depending on city/ county. At the end of the year you will have to send the state a check for sales tax. This year any online sales will be required to send you a 1099.
 
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jrista

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I'll seed the conversation and others with real knowledge might chime in.

When you say you are starting the business legitimately, do you mean creating a formal entity, such as an LLC? If not, you may have an uphill battle with the IRS and the hobby/business differentiation.

One option you might have with all the equipment and supplies you have already purchased is to transfer it to the business as owner's equity.

If you don't get a reseller certificate, you can deduct sales tax with the cost of good sold.

Etsy handles sales tax because they're a market facilitator, but that's it tax-wise. Of course you have to handle the income tax whether or not you have a business (even hobby income is taxable). If you sell outside of a market facilitator you will have to handle the sales tax annoyance yourself.

You might call your local business group, chamber of commerce, etc., and see if they can recommend a small business accountant. You're correct that doing everything right, legally, sensibly, and profitably isn't trivial. It can be done with enough time and effort, but as you say that can be a tough undertaking.

Good luck!
Sorry, for clarity, yes I was going to create an LLC. Longer term, if certain things happen the way they are expected to with the company I work for now, its a strong possibility I'll have the opportunity leave the tech industry and do woodworking as a full time job, and I don't think something like a SP would be sufficient for that.

I hadn't thought about the need to transfer the equipment I have to the business itself, but...that is why I think I need a tax guy to help me navigate these decidedly choppy waters. There is FAR more I don't know about tax law than do, and I don't ever expect I'll even know a reasonable fraction of it all...
 

jrista

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There are others better versed in this than I, but the little that I will say about taxes is that you should check out the IRS Hobby vs. Business info as there are advantages to each. Either way, the IRS wants their cut. Also, just go ahead and assume the IRS will see stuff you post on the internet, even in a pen makers forum.



Now, just to throw this out there since you mentioned it, Etsy is not as bad as you think, though certainly more expensive than some other options. Without advertising, figure about 8% plus a buck if you sell an item within a year of listing it. It may be different if you do a lot more business than a few pens a month and is always subject to change.
  1. Listing fee .20
  2. Renewal of unsold listings every 4 mos .20
  3. Commission from sales 5%
  4. You also pay 5% on what you collect from your customers for shipping
  5. Payment transaction fee 3% + 0.25 USD (domestic)
  6. Purchase fee for shipping label .25
  7. Offsite ads are free BUT, if you make a sale from a click on an offsite ad, it will cost you 15% on top of everything else. You can opt out of those if you choose. You also have the option to purchase advertising through Etsy.
  8. Probably more that I missed here...
Official info from Etsy:

I think I may have seen the advertising bit, and maybe thought that was a regular fee. I guess if it only happens when you make a sale from an ad, then its probably not as costly as I thought. That would certainly make it easier to get started with Etsy, though, if its only around 8%.
 

jrista

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Here in ND we got ourselves a tax ID number which was $250. That lets us have a business but still file our taxes on a standard 1040. We don't do enough business to quantify going to an llc. Basically the tax ID is a DBA. If you are starting now as a part time thing, a DBA is by far the best way to go. Keeping track of your sales and expenses is a must. You also need to keep track of any shows you go to, as each town has their own tax code, and sales taxes differ depending on city/ county. At the end of the year you will have to send the state a check for sales tax. This year any online sales will be required to send you a 1099.
Just for clarity, DBA means "Doing business as"?
 

Joebobber

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Just for clarity, DBA means "Doing business as"?
Yes that's exactly correct. I think everyone starting a business has pretty great expectations about growing. It is important to keep those goals, but starting out you need to have a realistic strategy. In the future an LLC, or INC would be great, but realisticly are you going to come out of the gate doing that kind of volume woodworking as a side hussle? Most likely not. It's going to cost you WAY more time and money going that route. You will most likely need a CPA for your taxes. All the permits and liscences, fees, even registering your business name and are you going to register it in just 1 state? Nationally? I know I wouldn't beable to register mine in MN because my cousin has a large farm and we havethe same last name that we use for our business. You are going to also need a business insurance plan, and I doubt if your shop is your llc that your home owners insurance would cover it. Thst is why it is most realistic to start as a DBA. If you grow as fast as you are looking to, that is when you cross into an llc or INC. But it really makes no sense if you don't have any employees and are just starting out. Honestly I don't even think wherever you livewould let your shop become an llc. If your shop is in a residential zone, I don't know if they would be happy with a LLC operating out of it. Im not sure but that's just something to also look into. There is a HUGE difference between a hobby side gig and a full on Limited liability.
 
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jrista

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Yes that's exactly correct. I think everyone starting a business has pretty great expectations about growing. It is important to keep those goals, but starting out you need to have a realistic strategy. In the future an LLC, or INC would be great, but realisticly are you going to come out of the gate doing that kind of volume woodworking as a side hussle? Most likely not. It's going to cost you WAY more time and money going that route. You will most likely need a CPA for your taxes. All the permits and liscences, fees, even registering your business name and are you going to register it in just 1 state? Nationally? I know I wouldn't beable to register mine in MN because my cousin has a large farm and we havethe same last name that we use for our business. You are going to also need a business insurance plan, and I doubt if your shop is your llc that your home owners insurance would cover it. Thst is why it is most realistic to start as a DBA. If you grow as fast as you are looking to, that is when you cross into an llc or INC. But it really makes no sense if you don't have any employees and are just starting out. Honestly I don't even think wherever you livewould let your shop become an llc. If your shop is in a residential zone, I don't know if they would be happy with a LLC operating out of it. Im not sure but that's just something to also look into. There is a HUGE difference between a hobby side gig and a full on Limited liability.
Thank you for the insight, Joe. This is very useful.

I guess the real starting point is just to find a CPA who can help me. Maybe what I need right now is a hobby side gig... I do want to make sure I can write off the equipment purchases. From 2020 and 2021, that amounts to thousands of dollars, which are solely used for this business, and I've got thousands of dollars worth of stock and supply expenses as well.
 

Woodchipper

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FWIW, check on your state and local laws. My father and I had a sale rep business and asked our CPA/attorney about incorporating. He said we would have to pay corporate tax and personal income tax. Said to keep it as a partnership.
Joebobber, you were charged for a tax permit? I got one from the state for zero. Federal excise tax just used my SS number.
Sign in an office: This is a non-profit organization. We didn't plan on it turning out this way.
 

Woodchipper

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Thank you for the insight, Joe. This is very useful.

I guess the real starting point is just to find a CPA who can help me. Maybe what I need right now is a hobby side gig... I do want to make sure I can write off the equipment purchases. From 2020 and 2021, that amounts to thousands of dollars, which are solely used for this business, and I've got thousands of dollars worth of stock and supply expenses as well.
Does your state require an inventory tax at the end of the year on equipment, inventory, etc.? Yes, go to a CPA. My wife went to a walk-in service and I got shafted for three years on what I could have deducted.
 

dogcatcher

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Find a local Enrolled Agent, they are persons thathave passed the IRS tax law requirements and are licensed to practice before the IRS. The Enrolled Agent is sort of like a CPA, but isn't. Net, you need an attorney, the local, county, and state laws vary so much that what applies here doesn't always apply there. The attorney needs to be one that deals with small businesses and knows the local and state laws that apply to them.
 

Joebobber

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FWIW, check on your state and local laws. My father and I had a sale rep business and asked our CPA/attorney about incorporating. He said we would have to pay corporate tax and personal income tax. Said to keep it as a partnership.
Joebobber, you were charged for a tax permit? I got one from the state for zero. Federal excise tax just used my SS number.
Sign in an office: This is a non-profit organization. We didn't plan on it turning out this way.
Yep. The tax permit also included an ID number. The cost was $250. Personally not very business friendly. It was so dumb, you could do it online and it took maybe 10 minutes. I don't know why they needed so much money but they did.
 

jrista

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Yep. The tax permit also included an ID number. The cost was $250. Personally not very business friendly. It was so dumb, you could do it online and it took maybe 10 minutes. I don't know why they needed so much money but they did.
State revenues. ;P

So, I've been looking around, trying to find a solution that will work for me. I'd heard of LegalZoom before I found their site, plenty actually as I used to listen to talk radio a ton and it was always advertised. Overall, seems to have high ratings and they seem to cover the bases: attorneys, CPAs, etc. People complain about their fees mostly...but, I just went through this ordeal to get an official replacement copy of my birth certificate, and THAT process was riddled with fees all over, not to mention delays and unnecessary complexities and hassles and...well, you know, its breaurocracy! LegalZoom's don't seem terribly expensive to me.

Anyway, I am curious of anyone has used them for their woodworking businesses, and what the experience was like. Worth it? Did they help you figure things out and keep it sorted over the long term?
 

Woodchipper

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I'm skeptical about using online tax and legal services. If they give the wrong information, what is their liability for back taxes and penalties? I'm a freelance writer and photographer. I use a local CPA who does a great job for me. He sent photo copies of the regulations of a home business. Go through it every year (getting close to getting the info ready) and compile the figures. If there is a red flag, he calls to clarify it or deletes it after explaining why. Well the worth the fee which is tax deductible.
 

jrista

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I'm skeptical about using online tax and legal services. If they give the wrong information, what is their liability for back taxes and penalties? I'm a freelance writer and photographer. I use a local CPA who does a great job for me. He sent photo copies of the regulations of a home business. Go through it every year (getting close to getting the info ready) and compile the figures. If there is a red flag, he calls to clarify it or deletes it after explaining why. Well the worth the fee which is tax deductible.
Yeah, I dug deeper into the reviews of them. There are a ton of good reviews, but so many read almost word for word the same, which makes me wonder. Digging into bad reviews, there seem to be some common problems people have faced, seemingly regardless of state, like improper filing, untimely filing, saying they filed when they did not, and putting all the burden of getting paperwork right entirely on the customer (which is odd, they are supposed to be there to help!)

I've decided to try and find a local lawyer versed in small business. I suspect, having read more about it now, that a DBA IS the way to start. I still need to make sure I can deduct everything I need to deduct, and figure out how to buy supplies tax-free if possible, figure out how to properly invoice customers if I'm selling direct, etc.
 

Woodchipper

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Yeah, I dug deeper into the reviews of them. There are a ton of good reviews, but so many read almost word for word the same, which makes me wonder. Digging into bad reviews, there seem to be some common problems people have faced, seemingly regardless of state, like improper filing, untimely filing, saying they filed when they did not, and putting all the burden of getting paperwork right entirely on the customer (which is odd, they are supposed to be there to help!)

I've decided to try and find a local lawyer versed in small business. I suspect, having read more about it now, that a DBA IS the way to start. I still need to make sure I can deduct everything I need to deduct, and figure out how to buy supplies tax-free if possible, figure out how to properly invoice customers if I'm selling direct, etc.
If you buy supplies out of your state, you will probably have to pay sales tax. I would first look for a CPA. A lawyer might not have all the answers. One worth their weight in salt whould be able to answer all your questions as they will be doing your taxes. My father and I had a DBA situation. My CPA has been good in helping me. FWIW, the wife used to baby sit him.
 

raymodart

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I understand your problem indeed, and I encountered something similar a couple of months ago when I opened my online pet store. Because I didn't hire an accountant right away, I started having problems, and they piled up until I realized that I couldn't deal with them without a good accountant. After that, things started to get better, and he even told me how to make check stubs online so that I could pay various taxes or get paid faster. I'm sure that communication with him will give me a worthwhile experience that I can keep and use to avoid various work problems in the future.
 

Robert0s

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Oh, I'm sorry about the situation that happened to you. Your situation proves that security and success are impossible without a professional in the field. If you are insecure about yourself and your field possibilities, don't risk it.
 

Robert0s

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Oh, I'm sorry about the situation that happened to you. Your situation proves that security and success are impossible without a professional in the field. If you are insecure about yourself and your field possibilities, don't risk it. I was lied to by the "professional" who guided me. That's why I do not recommend choosing someone from websites. It would be best better to turn to a company such as e-Delaware. The company is famous for the security it offers to the users, the fast execution time of the orders, and very nice staff. The staff is in charge of the company, a very important detail.
 

egnald

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Greetings from Nebraska. I've started down that path a couple of times now, but before I get too far in to all of the state regulations and requirements (and fees), I get discouraged and give up. As someone else in the IAP community has as their tagline - I am working on having the biggest pen collection in the poor house! - Dave

PS. Hoping you the best of luck with your venture of course!
 
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