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.
- 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
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.
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
- 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
- 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.
- 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.
- 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