I bought my machine late in 22 really as a hobby and then part way through 23 I decided to try and make a few bucks on the side. I established a Sole Proprietorship, got a business name registered with the state, web site, business cards, branding iron, etc…
I didn’t really make any money to speak of in 23, less than $400 but I have been doing a lot of free work to get my name out there and have higher hopes for this year.
I started to do my taxes and claimed the meager earnings and then started wondering what I can legitimately deduct as expenses. I don’t want to get into some trap where the machine must be fully dedicated to the business and I can’t use it for fun and personal activity which is kind of how the home office deduction is.
But if I can deduct bits, machine upgrades, software etc… that would really help.
The machine was bought the prior year so that’s probably out but if I could deduct a spindle upgrade that you be attractive. I saw something about a section 179 deduction that looks like a great way to offset the expense of buying some new equipment (5 pro or laser ) but even smaller stuff would be nice.
I want to be legit but I also don’t want to give the government any more money that I have to.
Yeah, I am not really looking for legal advice so much as a general sense to know whether it is worth engaging an accountant to provide some more specific advice.
With any luck I can find one that needs some woodworking.
As Will stated contacting your accountant is a must. Generally, if you have a business not only are the profits of the business reported, the cost of generating the product/business is also reported as a deduction. Material, supplies, advertising, etc are usually all deductible. Tools and Equipment are also deductible but accounted for differently since they are used beyond one year. You need to maintain proper accounting documenting each transaction. This can be as simple as an Excel spreadsheet with each account recorded (when occurred) and retention of records/receipts. Some software programs are designed to assist in this process like Quick Books or you can use a bookkeeper. While a completely different issue altogether, you will need to collect and file Sales Tax for your state. I caution you I am not an accountant but have one and majored in Business.
I will note one thing — if you need to write off vehicle mileage, you have to have a record of what the mileage on the vehicle was at the beginning of the year — it’s that sort of arcana which is why one has to have an accountant to help with this sort of thing.
I don’t think the mileage I would accrue related to the business specific activities would really amount to much. Unless I drove from GA to CA to pick up a new machine
Don’t discount mileage just because its not a lot. When looking for deductions every little bit helps. I’ve ran my own business for years and one thing I know you need to do is have great bookkeeping and records of everything related to your business. This will help your accountant or yourself if you decide to file on your own.
As far as your question about being able to find deductions to offset the $400 worth of profit should be pretty easy.
Oh yeah, I found enough for last year easy. Just the business setup and web site were enough.
I am thinking more about this year. The only projects I have done so far are donations bust yes I need to be diligent on the records. I just hadn’t really thought about it until now.
As far as percentage use of the machine for personal and business, you’ll have to discuss that with your CPA. I would argue that everything you make on the CNC is part of the business. It’s either for a customer, research and development, or training.
For example: I made a product for free for a friend. I learned how to make the product and now I sell it. The first product was a prototype.
I didn’t start the business until mid 23 so I am not expecting to recoup the cost of the original machine which was used anyway.
Good thought on the research and development. There is always learning to be done. Most of my projects so far have really been explorations into different techniques and learning new things.
Ugh. I just went through my Amazon cart and emails to add up most of what I spent in 23. I better not tell my wife. It pales in comparison to what I spend on my daughters horseback riding.
Then again, I think Amazon lost money for its first 13 years.
Do some research on COGS (Cost of Good Sold) that is how you’ll need to classify things properly.
You can depreciate business assets, i depreciated the entire cost of my Pro 5 with VFD, but i also have a solid business income. You can take a loss for a few years without raising too many flags as you are starting up, but again talk to an accountant.
In terms of a product, the COGS are the things required to make the product that would affect your overall profit. So the cost of the wood, any other screws or hardware needed to create a finished product, the stain, etc. However, keep in mind that COGS have a value at end of the year, if you didn’t fully consume it then you have to account for that value the next year, i.e. half a can of stain. So it can get a little tricky sometimes. A true COGS should be fully consumed in the process of manufacturing the product. But obviously you can have inventory that carries over year over year.
Packaging, boxes/tape to ship a product to a customer is not a COGS, that’s just a regular business expense.
I track all my end mills and tooling and anything else I buy for the business. I log everything and then summarize it for the business at the end of the year.
I would also track your mileage as well, you’d be surprised how much that adds up, there are some great apps out there (MileIQ for example) that make that process super easy, simply swipe left or right to categorize personal or business. If you run to the store to get some stain, that’s a valid business mileage expense, if you go drop off a package you need to ship to the customer, that’s valid business mileage. The mileage rate reimbursed is more than you pay in gas, because it technically accounts for wear/tear on the vehicle as well. I dropped off one package yesterday and that was $36 in reimbursement for me. That adds up.
You should definitely talk to an accountant. Use of the Section 179 deduction has benefits and also some limitations. The thing to remember is that it is basically taking depreciation in advance that would otherwise be spread over several years and if you do not keep / continue using / replace that item for the entire period you basically have to pay back any unearned depreciation that you have already taken. I have used it several times over the years for my two companies including for vehicles. When I purchase my Pro 5 later this year I will be revisiting that provisions.
Again, I am not an accountant nor an attorney - just a guy who has benefitted previously.
When I was a luthier I operated as a business as far as tax purposes. It really helped to have a tax professional do my taxes, there’s a whole morass of how different expenses are treated, some amortized, some not, some partially deductible. But once you get the pattern established from a professional you may choose to do your own taxes in subsequent years. In my opinion, I’d much rather pay a bit than get myself up to speed on ever-so-boring tax code.
I ran my first business for 30+ years. Always had a CPA handle the tax returns. Never had a problem with the IRS. The CPA is responsible so the IRS leaves you alone. (Although we did push the rules a bit some years. )
Now I’m enjoying the tax deduction for my hobby and just selling enough to make it all legal.
Thanks guys. I did see a CPA today and think I will use him. He said something about wanting to live in the grey area but keeping it light grey
He did advise getting a different bank account for business operations just to make the IRS happier even though everything I read earlier said that wasn’t really necessary for a Sole Proprietorship.
I don’t know why but hadn’t really thought about getting a sales tax permit or whatever they call it. Maybe because I hate sales tax.
The really good news is that I thought I bought my machine in Dec of 22 but when I went to look today it was really Jan of 23 so that may help.
Yes, paying state sales tax is a must if you are saying you have a live business. The Federal and State reported sales (same) need to equal that reported for sales tax purposes. On the sales tax form, you then take any sales tax deductions such as interstate sales where the customer did not take possession of the product at the time of sale (had it picked up or delivered) and where the customer is tax-exempt for resale or is a non-profit and provide a copy of its tax-exempt certificate at the time of sale. Some require a form filled out. An audit item is your credit card processing statement (a must we use Square for card pricing) and the business bank account. There are other deductions but the aforementioned are the primary. As a suggestion you need to separate your business and personal expenses wherever you can. The moral of the story is if it doesn’t fall within a deduction you need to collect tax if you want to stay legal.
I started out in a similar fashion, I created an LLC and 2023 is the first year to file my deductions. My accountant said to include expenses from 2022 that are related to my LLC startup. I don’t know what differences there are between an LLC and Sole Proprietorship but the deductions you mentioned I am filing from 2022. I would definitely sit with an accountant to find out for sure.
Thanks. I discussed it with one and if you are a one man shop there aren’t much differences. I thought the LLC provided some insulation of your personal property in the event of a lawsuit but he said that really kicks in more if you have employees.
I am looking at getting a separate checking account now and trying to decide if I want to stick with my personal bank now for simplicity or pick something else as more separation and potentially less expensive.
I have been told by my CPA, that in the states, since our businesses deal with projects that are often long-running (that could cross fiscal reporting periods) you may receive income that is taxable, but not YET subject to sales tax reporting at the time you declare the income. Depending on your accrual methods, you only pay sales tax on the sales tax you receive. Therefore, things like returnable deposits, which are not subject to sales tax i(f cash accrued), but are immediately considered income, are recognized before the sales tax needs to be paid. Eventually, you will pay sales taxes on them, but you may file the income before that. Because of this, the gov (at least in my state) does not regulate the cross-reference of income numbers.
) but even smaller stuff would be nice.
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