Business Startup - Taxes

[oppermancjo]

Good day, all. I've decided to turn my hobby into a small side business. I have a few people that I sell cords to for winter heat and I've also started to bundle wood and sell it to a nearby campground. I don't expect to make millions and be able to quit my day job but it is certainly helping to make some cash on the side.

My question is if anyone has any advice on whether or not I should form a legit business or just continue to do it on the side. My thought is that if I form a business, I can "take a loss" and write it off on taxes. Probably get a new trailer and some other equipment in the process? I'm sure things vary from state to state. I'm located in Michigan. I've attempted to do some research on my own but I come across a document that says one thing and then another that says something different. To say the least, I'm confused.

I'm planning to consult a professional but just thought I would throw it out on the forum as there seems to be a wealth of knowledge out here.

Thanks you!

 

[rmh3481]

Your best bet is to look for an Accountant, someone who is a local CPA. Then form a subchapter s corp or an LLC which are designed to keep your personal assets out of any problems. You can also use one of these to reformat your credit if you had any problems with lets say a recent home foreclosure or a divorce and so on if you need it. State laws vary so its best to get some competent advice.

 

[TMFARM 2009]

i will say this, you will get a bigger return shutting down a business now days.
here's an example for ya..
i had two small business's paid average $6,000.00 a year each business in taxes...closed them down got $11,000.00 back on one and $8,000.00 on the other for the year...go figure...

 

[woodman44]

I do bundles and a few other things. I did a llc. You can write stuff off and you do not carry the liability. May not be best for you but I would at least look into the LLC.

 

[D&B Mack]

I started a corporation, it is a side business as well. You will need to talk to a CPA and get the info on tax structures for your state. LLC and incorporating may be a difference in MI. Good Luck!

 

[upsnake]

The easiest is a sole proprietor, you don't have to do anything you just file a Sch C on your tax return and as long as you don't ending up showing losses for too long (Where the IRS deems that it is a hobby and not a business, another topic for another day), then you just put your inc and expense on Sch C, and the business is just an extension of you.

The next option would be to form an LLC, you need to file paperwork with the State of MI, it is around 25 dollars, (which then you need to refile each year). You will need an EIN at that point which you can get from the IRS's website. Then you can still file still use Sch C on your personal income taxes to report your income and expenses, but this time your business liability is separated from you personal liability.

Then if you really wanted to step it up a level you could incorporate, thus forming a S corp. You would need the EIN still, then you would need to go to state of MI business page and file your articles of incorporation, I think it is also like 25 dollars, due annually. The one big difference with S corp is that you need pay yourself a wage whether you actually make any money or not.

The profit in a S corp is not subject to self employment taxes, where as the profit from the first two option is. So what ppl try to do is form a corp, don't pay any wages (which essentially have SE taxes paid on them, the corp pays half and you the employee pays have of the fica SS and fica Med), take it all as profit and avoid SE taxes. May be facing an IRS agent with a at some point.

Any way with paying yourself wages you now need to file quarterly reports to report your withholding, and your unemployment insurance taxes, etc. It is just a lot more paper work to do an S corp right.

If it was me I would form an LLC.

Oh ya and talk to an accountant or CPA, b/c even though the Arborist site is pretty awesome, I don't think telling an IRS agent, but I read it on the Arborist site is a valid defense.

 

[ponyexpress976]

I used legal zoom to set mine up. Since i could be declared legally brain dead when it comes to reading legal documents, this seemed like the best option for me. My accountant (and Im assuming most do this) will also sit down with a new/prospective client for an hour at no charge.

 

[avalancher]

Unless you are doing a lot of business, and by a lot of business I would say $10,000 a year or more, then I wouldnt do anything to attract attention to myself by officially going into business for a number of reasons, unless you just like the peace of mind that goes along with "doing everything legal like".

First off, being in business you are going to have to have insurance, and that takes a big bite out of your profit. You either have to add that amount to your product and possibly price yourself right out of the market, or absorb it yourself.

Then, depending if your state has a sales tax, you will have to collect and turn in sales tax.Again, you will again have to add it to your price and possibly price yourself right out of the market, or absorb it yourself.

Then their is the price of book keeping.Do it yourself and save a few coins, and spend time doing them when you could be bucking wood, or hire it done and it aint cheap.Again, add it to the price or absorb it yourself.See where I am going with this?

Dont get me wrong, being officially in business has its perks like being able to write off expenses, but in the firewood business I have found it just aint worth it.While I am licensed and insured for tree removal, the firewood end of the business is kept on a cash only basis and i do far better.

By the time you get done with your expenses to generate the cord of wood, giving uncle sam his share in the form of income taxes,paying or doing the bookwork, there really aint much left. Here is my math on the deal.

One cord sells for $180 around here.It costs me $45 to generate it, including fuel, expenses for chains etc and $15 thrown in the "repair account" for new equipement that wears out like saws, splitters, etc.I have never spent a dime on repairs from other than this account, and generally buy one new saw a year,mostly because I wanted to.
Then 30 percent to uncle sam. Thats another $15 and some change.
Insurance around here for folks that just want to sell firewood is $600 a year.Divide that among the 70 cords I sell each year and thats another $9.00 per cord.

Then their is vehicle insurance.If you are in the business of delivering, they are going to charge you commercial rates.For my pickup they want $960 a year, adding another $14 to each cord.

By the time I get done paying all the taxes and costs, I netted right around $70 per cord.My answer?do it for cash.doing it on a cash basis, I net right around $130 per cord.It takes me four hours generally to cut,split and stack and deliver a full cord when i am able to fill my trailer and pull home a bit more than a full cord per trip, netting me a decent wage.Delivery times will vary, and so will cost factors based upon fuel costs,etc, but over the years I seem to always come out right around the $25 an hour range with firewood. Anything less just aint worth it IMO.

 

[showrguy]

avalancher hit the nail on the head.........
i've been self employed most all of my adult life (i'm 45 now), the paper work, taxes, accounting, ect. can wear on you ......

 

[oppermancjo]

Thanks for the advice!

Thanks all for the great advice. Avalancher put it in perspective. I'm still going to meet with a CPA or at least someone that has more knowledge than I. My father has a contact with the MSU extension and he has done the family farm's taxes for years. Another question I've had is whether or not I can claim some exemptions with it being agriculture. Not sure if that will work for the lumber industry or not.

I'll do some more research and keep you all informed!

 

[avalancher]

Thanks all for the great advice. Avalancher put it in perspective. I'm still going to meet with a CPA or at least someone that has more knowledge than I. My father has a contact with the MSU extension and he has done the family farm's taxes for years. Another question I've had is whether or not I can claim some exemptions with it being agriculture. Not sure if that will work for the lumber industry or not.

I'll do some more research and keep you all informed!

That is about the best thing that you can do for yourself, ask a pro. Asking around here is great, but often an opinion around here is tainted by experiences that may not exist in your local area, the state you reside in, and just plain old ignorance of the tax laws.I for one am no expert on tax laws, what I have learned after being in business in one form or another could easily be written on a Kleenex. I have a very dim view of the IRS,federal and state tax officials, and any opportunity I can to "level the playing field" I will take.Might land me in jail some day, but for now I take advantage of any opportunity to earn a few bucks off the books.

Years ago I ran a general contracting business, and made very good money but never could afford the real big toys that an uncle always seemed to manage.I worked small jobs on the side for cash in addition to the big ones that were strictly legit, he kept everything on the books. After admiring his new helicopter one afternoon, I admitted that there was no way I could afford such a toy, much less the lessons to fly it. With a grin he told me "boy, its a tax write off.Didnt cost me a dime." He was pretty proud of the fact that he had never paid a dime in taxes, and hired only the best accountants to keep track of his money. Over the coarse of six years I was audited twice and came out of it okay, he never was until after being in business for over ten years.

He is currently serving 8 years.