What is the general approach to tax deductions and a woodshop?
I started my shop December last year added most of the equipment this year and now, after rolling out all the machines, hooking up the dust hoses and plugging in to 220V, I pretty much fill up my whole 3 car garage.
Although I have not done any commission work yet, ultimately this is the plan, over the next three years.
I work for a salary, we own a rental and my wife has her own business.
Obviously, I needed all this machinery to maintain my rental… (Just jokin)
So, can I use all my equipment and lumber purchases for a tax deduction?
Replies
I have an almost identical situation, and aked our accountant the same question.
The short answer was "no".
Your results may vary.
Hi Jellyrug ,
Until you claim income from your ww , no business deduction , but.................Materials supplys and tools required to improve and maintain your rental may be a write off .In the future say, if you were to go more full time into an actual ww business you then may be able to convert your shop tools and expenditures to business use and then begin to write them off or use them to help offset any income tax you will owe the first year or so maybe .Above all check with a tax/cpa pro in your area for precise rules in your state.Save your receipts .
good luck dusty
Maybe your rental needs a new kitchen ,
If you are setting up the shop with the intention of making a real business out of the operation, you could, in theory, claim the expenses on your 2004 taxes. However, being that you won't apparently have any income from the business you can expect the IRS to more than likely question whether you are in business or merely trying to write off your hobby. For the most part, if you don't claim the expenses this year, you will still be able to use them in following years, so you won't be losing anything by waiting.
If you do convince the IRS that you are legitimately starting a business, you can expect them to be watching for some income in the following years or they are going to be back asking for back taxes, with interest, and possibly penalties. You don't have to make a profit in the first few years of the business, but you do have to look like you are seriously trying to make some money.
That said, I would highly recommend that you talk to a tax professional about all of the ins and outs of setting up a business and the sooner the better. There may be certain things you need to do this year, like getting a business license and a sales tax number from the state, that will help establish your claim for business expenses in 2004.
Good luck, John W.
How badly do you want to be audited? Federal tax law, in simple terms, states, your business expenses can only be used to offset your business income. No income, no deduction. State lasw may vary. In California, if you are a friend of Ahhnuld's you may qualify for a refund, even if you don't pay any taxes. (This story made the papers this week.)
Edited 12/28/2004 6:01 pm ET by 3DOG3
Under section 162 of the Internal Revenue Code, the ordinary and necessary expenses of a business may be deducted.
Under section 212, an individual is entitled to deduct all ordinary and necessary expenses paid for the production of income or for the management or maintenance of property held for the production of income.
Under section 167, assets used in a trade or business or held for the production of income may be depreciated over time.
Under section 179, many of the assets used in a woodworking business may be deducted immediately, rather than depreciated over time.
Under section 183, no deduction is allowed for activities not engaged in for profit (e.g., hobbies).
In general, no business exists until revenue is generated. However, if I were placing ads in newspapers and otherwise holding myself out to the public as a cabinetmaker, I would feel comfortable treating myself as engaged in business for the purpose of these rules.
The rental of real estate is an activity engaged in for the production of income. Hence, even if you were not engaged in the cabinetmaking business some allowance for depreciation would be permitted.
If an asset is used partly for business purposes and partly for personal purposes, a portion of its cost may be deducted or depreciated.
Hope this helps.
The general method is to look for paying work. If you are looking for work for your business, you have a reasonable basis for deducting your expensees.
If you are not looking for work for your business and you are making things for your personal use, you have no basis for deducting your expenses.
As others have suggested, find a good CPA and get help there.
I'd look for a good business and tax accountant. A CPA will know the answers also, but a good accountant charges a lot lower rate than a CPA, they do taxes, CPA's do taxes and a lot of other stuff.
Unless you're planning on a corporate merger, you don't need a CPA.
Regards,
Once you do have income from the business the full cost of hand tools can be deducted from the income in the year of purchase. Larger tools can be depreciated out over as little as 3 years. A $3000 unisaw probably wouldn't qualify as a hand tool! But if your audited and don't have receipts then the expense won't be allowed. All expenses necessary for the business (materials, travel, wages) are deductible, but only if they can be proved. Some expenses can be carried over to future years to a limited degree (start up costs).
PlaneWood by Mike_in_Katy (maker of fine sawdust!)PlaneWood
I second the suggestion to consult a tax professional. I think some posters in this thread are using "income" for what I would call "revenue." If your understanding of the two terms doesn't match the IRS definitions, you could be headed for trouble a few years down the road.
I think that the consensus from previous posters to seek advice (& in concert with the post immediately preceding this one) is sound.
I went professional in 1992 & took equipment into the business that I accumulated over the previous 10 or so years. My accountant then allocated a value to these(technically second-hand) tools & equipment, some of which was written off in that tax year (ie: the year in which were used to earn income), the balance placed on a depreciation schedule & written down accordingly.
Don
If you intend on starting a business or even want to give the impression of doing so I strongly suggest you actually START a business.
Place an ad for fictitious business staement and get a small business account at a bank. Do what ever you can to run your purchases through that account and get some income into that account.
If you intend to try and show the purchases from a personal account it may not look as good.
Once again consult a pro.
Cor.
As most have advised, consult a tax pro.
I'm currently doing as you are attempting to do..and can only claim deductions for equipment, etc as offsets to incoming revenue.
Additionally, my accountant tells me that I must declare income (not just revenue, but a profit that I pay income taxes on) at least once every three years..otherwise it looks like my intent is not to be a profitable business.
It also seems that the IRS has "flags" that trigger audits..part-time business for which there is little income seems to be one of those "flags"....part time photography businesses, crafts- and hobby- related businesses, etc all might be considered such "flags".
At least one poster suggests having business accounts, DBA certificates, etc...all good suggestions..and what legitimate businesses do....
In the end, you'll have to demonstrate to the IRS that you're a legitimate, if part-time, business and that your true intent in buying all of this nice equipment and materials..is to make a profit upon which you'll pay income and self-employment taxes.
I've never been audited..but don't want to be audited either.....proceed cautiously and with professional tax advice.
lp
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