Hey its that time of the year and I'm gearing up to do my tax's but
there are a some things i need advice on. here's my story: i was in
school as a metals major up till last spring when i ended up leaving
school for financial reasons. i ended up getting a really good day
job and spent a large amount of my money (1000-4000) investing in
equipment so i can start operating my own studio. i intend on
starting a business selling my creations so to me i consider these
start up expenses. however i do not have a tax id and i haven't sold
anything. so my question is can i write that off as a business
expense? or would i have to file for a tax id and what exactly is
involved in becoming a "business"?
In Australia, tax is pretty clear.
Business expenses have to relate to the current business you are
So if you were in Australia, you couldn't claim jewellery equipment
as a legitimate business expense, if you weren't working in a
jewellery business or a jewellery related business.
You "may" be able to claim some of the equipment as a self education
expense, if the costs were incurred when you were studying.
A business expense reduces the tax you have to pay. So say for
example you paid $1000 to the tax man, and you bought $2000 worth of
equipment. You would only get the $1000 you have paid, as a tax
refund. Now that would flag you as running a business at a loss,
which you can do for a couple of years, but if you continue to run a
business at a loss the tax man may audit you. I saw my father-in-law
audited, and it wasn't pretty.
Regards Charles A.
find yourself a good tax advisor, not one of the big box "we'll get
you every cent back" folk. the IRS has profit rules to differentiate
between business and hobby. you can get an IRS tax ID online, or you
can use your SS#. there is a separate schedule for small business to
use with form 1040. you will need to establish a start date for your
business, and it is best that you LLC or INC your business. then you
also need to keep a set of accounting records just for your
business. every state is also different as to how to establish your
business. contact your BBB or Chamber of Commerce and they probably
can give you a reference to someone who knows the ins and outs in
your area. good luck.
The IRS is strict about the deduction of losses from "business" that
aren'treally businesses. They will generally characterize them as
losses from hobbies, and deny them. If you Google 'IRS hobby loss'
you will find lots of links discussing this topic.
You really need to consult a tax accountant if you will file a U. S.
federal tax return. Don't forget that every state has different tax
laws to observe when those taxes are filed. The other reason you
should deal with the tax accountant is that s/he will get you set up
to keep the necessary records. Use that advice to construct your
IMHO, every student who majors in the arts or entertainment, or is
potentially a professional athlete, should be urged to take a couple
business courses so that questions like yours are addressed before
you launch into your career.
Judy in Kansas, who has worked on slipping geraniums to be set out
in a few weeks. It's a nice warm, sunny day and perfect to work
outdoors. Now to put in some studio time.
I've actually had to do this before, for my ex-wife more than a
decade ago, but the basic rules are still the same.
1) If you are both the owner and the only one working your business,
the IRS considers you a "sole proprietor", basically meaning that
your business and you are one in the same.
Sole proprietor status has simpler rules:
1a) You will use your Social Security number as your tax ID.
1b) Your business must be profitable for at 3 least out of every 5
years, or 5 out of 7 years, depending on your trade.
Ask the IRS, and they will tell you which window they will look at
1c) You will be using the cash method for book-keeping, not accrual.
Cash method means you must record your income and outgo as taking
effect the instant they take place.
1d) You may expense a lump sum amount of startup costs, such as
obtaining equipment, or researching the feasibility of your business,
up to some threshold amount, see IRS website for what it is this
1e) Capital quipment included in your initial costs do not need to be
amortized, but you have the option to do so. Other equipment MUST be
amortized if you want to deduct them as expenses. The IRS website has
tables for which equipment must be amortized, and over what amount of
time, beginning at the time the equipment is actually placed into
The exact formula is doing this is called MCARS.
If you are converting your hobby equipment to business use as capital
equipment (computer, CNC machine, electric welder) you may elect to
consider the start of service to be the middle of the year.
1f) Small tools and consumeables are never considered capital
2) As a sole proprietor, the IRS considers any income as flowing
directly to you. So that you may have some separation of your
business from yourself, the IRS provides what is known as Schedule C.
This schedule allows you to list your income, list your expenses, and
the difference between the two is income to be entered on the
appropriate line of your 1040, and you attach schedule C to your 1040
when you file.
2) Expenses must be REASONABLE and RELEVANT to your business and have
no personal component. Follow these rules and you will be safe.
2a) For example, if you are flying alone to a workshop for training,
you may expense the airline ticket, the tuition, and either actual or
per-diem cost of room and board depending on the location you attend,
see IRS tables.
2b) If you are taking your family along, only your tuition plus your
own separate airline ticket can be expensed. You can only expense
that fraction of the cost or room and board which represents you.
2c) If you are driving, you may expense either the actual cost of
fuel and oil for your car, or use IRS business mileage.
You may record odometer readings to prove your mileage, or you may
use the "extemporaneous method" (simpler to use the latter) to simply
record a date when you traveled to some location, the IRS has tables
for major cities, else you are expected to use your best judgement to
determine straight-line miles. Miles must be from your business
location to where you must go. Home to business location does not
2d) If you always go to the same place every day, then you are likely
a statutory employee and can't be a business.
2e) If you pay money to any one place exceeding a threshold given on
IRS website, you must file form 1099.
2f) You may expense property and usage taxes on all of your capital
3) If you make your jewelry at home, you have the expense option
known as home office: you may take that proportion of square footage
of the room you have chose for your EXCLUSIVE business use. You will
multiply your escrow payments and utilities by that proportion and
expense the result.
3a) If you are making it in a separate space such as a shed, you need
to amortize the shed as capital equipment.
3b) If you have purchased a separate car for your own EXCLUSIVE
business use (you may not run errands or take your kids to soccer
practice), then you may amortize the car as capital equipment, as
well as repairs and fuel, plus either odometer or extemporaneous
4) NEVER be afraid of the IRS. So long as your intentions are always
clean and your attitude is good, they will be more than happy to help
you, and they will always be cheerful and polite to you.
They have an interest in ensuring that you are paying no more tax
than you absolutely must. I've dealt with them many times to resolve
either questions or problems with my return. They're more accurate
than an accountant, and they are free (though you may get placed on
hold for up to a half hour during busy times of the year).
The IRS has designed these simplified rules for home business because
they are fully aware these owners are not sophisticates and may very
well not be able to afford a tax preparer.
5) Because you sell things you will be required by your state to
obtain a business license, and through monthly forms pay sales taxes
on all which you sell. That said, if you are purchasing consumables to
create into your products, this is considered "sale-for-resale" and
therefore no sales tax is to be paid. That said, you need a written
sale-for-resale agreement between yourself and where you are
purchasing. Besides taxes though, a business license also gives you
the advantage of buying either at wholesale rates or from those
business who deal in wholesale only, such as gem shows.
In any case, state sales tax is a business expense for federal forms.
6) If your wife is performing activities for your business, and you
are already filing married jointly, then she is automatically
considered part of the sole-proprietorship.
You may elect to consider her either your partner, in which case she
files her own schedule C, or as an employee, in which case you must
pay her a fair wage plus payroll taxes and you can expense her cost
Andrew Jonathan Fine
The real question is what is your tax liability if you do not take
the deductions for your equipment? If it is zero or very low, there
is not much point in fighting for a deduction that is shaky at best.
If you don't have any income from a metalsmithing source, be that
your own business or a job, you are on thin ice. But that does not
mean it is impossible. But taking those expenses as deductions this
year might not be in your best interests. If you start a business
this year or some future year the equipment you have accumulated can
be expensed as start-up costs.
When I started my business (almost 30 years ago) my accountant had
me estimate the value of my equipment and then that was set up as a
basis for depreciation and that investment was spread out over the
next several years. Don't take my word for it. Check with a CPA.
(Ooops! It is too late to make an appointment, filing is due today.)
But I am pretty sure it is not a "use it or loose it" deduction if
you can save it for the future.
If you do decide to file a Schedule C for 2012 for a business that
has no sales, your SSN is your tax ID. I would advise you do NOT
describe your business as "artist"or"craftsman"or"silversmith". Say
you are "manufacturing". That sounds less like a hobby. If you are
making a profit and paying taxes the IRS is not going to be
influenced by what you call yourself. If you are taking a business
loss against other income, yours or your spouse's, you need to be
able to show that you intend to make a profit and that this is not
just a tax dodge. There are lots of things that will seal that deal,
such as renting commercial space and unambiguous marketing expenses
like trade shows or catalog printing. $4000 is a lot of money if you
are a student, but it is not enough to impress the IRS that you are
seriously in business. Don't reinforce that impression by using artsy
Ah.... And ever is it so clear down under indeed. It seems they Make
a Lot of sensible rules and should be used as example of good
policies for us inthe U. S. Jewelry sales could be better here in
the states if we followed Australia's economic and tax policies. To
begin with the minimum wage in Australia is over 17 dollars in U. S.
money. (it's 8 in the states). So unlike short sided and antiquated
trickle down economics we have been forced for 33 years.....
Australia believes every citizen deserves a living wage. The single
payer health care is pretty good too.Combine this with the fact that
bank regulation prevents casino style derivative trading that the
US. Left unbridled........ Guess who hasn't had a recession in 21
years? It's not the U. S.
So thanks for sharing the sensible tax rules of Australia. :)
People new to self-employment often misunderstand the finer points
of deducting materials and supplies.
1) Tools and consumables (like pickle) are for use, not for resale,
so even though you might get a discount or trade rate, you still
have to pay sales tax when you buy them. But they are fully
deductible on the Sch. C.
2) Things like silver and stones are part of the cost of the jewelry
that you make. As Andrew points out, you do not pay sales tax on
these items -- the final buyer pays the tax. And you don't deduct
them directly on the Sch C. Instead, they are part of the cost of
the item ("cost of goods sold"), and as such the stone and amount of
silver used are deducted from the profit of the item only when that
item is sold. It can take a very long time to finally deduct the
cost of such purchases.
It's tempting for the new business owner to buy a bunch of fun stuff
thinking it will all be deductible and they'll never have to pay
sales tax again. Well, not exactly. It all follows logic, and you'll
get the hang of it soon enough.
check your state sales tax laws, if I purchase anything from a
vendor in SC, then as a resident, I pay sales tax at that time
(unless the vendor absorbs the tax as part of the cost). When I
complete the sale of something through my shop, I am again required
to pay sales tax as the vendor (whether I charge the customer is up
to me, but the tax is paid).