Selling projects/taxes/LLC's?

[alex grams]

I have sold a project here and there, but lately things have been a little more consistent in sales. This leads me to the concern of everything being kosher in regards to taxes. I was curious out of people who sell stuff they make, how many of you have made an LLC (or other business entity) for tax purposes. It is still a hobby for me, and nothing I plan on doing full time, but I certainly don't want to get in trouble in regards to taxing. I really don't plan on line item adding sales tax, but would probably just include tax in the cost for those items that are taxable.

FYI, I am in Texas if any response or suggestion is state specific. Setting up an LLC in texas is a fairly simple procedure.

[Benjamin Miller]

Setting up an LLC is indeed simple, but it can add a lot of accounting and tax hassle.

It sounds like you just want a sales tax permit. You should be able to obtain one from the state as a sole proprietar, and then you can sell things and collect sales tax without the complexities of an LLC.

Tax and business law is one area where you definitely should pay for a professional if you have any questions or doubts. I have two LLCs, and every time I make a mistake involving taxes, it costs hundreds or thousands of dollars. The IRS is NOT forgiving.

[Nike Nihiser]

For income tax purposes it shouldn't make any difference. Everything gets passed thru to the owner and reported on their personal income tax return. State sales tax laws vary, but if you are generating enough sales you probably will have to collect sales tax (one way or the other) and pay the state. A LLC is primarily to avoid personal liability caused by the business.

[Jim Andrew]

Be careful if you decide to go commercial, and get a sales tax number. Your shop will be considered commercial and the building inspection people will probably shut you down. And if you are a day late getting sales tax in, they will double or triple what you owe.

[David Kumm]

I'm a CPA in real life. Go talk to friends for referrals and don't take the cheapest one. Much better than forums for that type of advice. Dave

[Matt Day]

I think you will also need much more expensive insurance for your home if your shop is attached to your home (in the basement or garage).

[scott vroom]

If you're just making a few dollars on the side with your hobby I wouldn't even bother with the tax aspects. Think about it. If your income is truly that small, your writeoffs (expenses, depreciation, etc) would overrun revenue so that you'd have zero tax liability anyway...so why bother? In addition to what Jim said about bldg inspections, if you operate your home shop as a business your homeowner's policy will not cover liability damages and you'll be required to pay for separate business coverage.

[Steve Peterson]

In California, they have a simple form to fill out to allow you to collect sales tax and send them their cut. They have free evening classes to explain the process, even though it is not too hard. They want to make it easy for small businesses to collect taxes.

Steve

[Richard Coers]

I have sold a project here and there, but lately things have been a little more consistent in sales. This leads me to the concern of everything being kosher in regards to taxes. I was curious out of people who sell stuff they make, how many of you have made an LLC (or other business entity) for tax purposes. It is still a hobby for me, and nothing I plan on doing full time, but I certainly don't want to get in trouble in regards to taxing. I really don't plan on line item adding sales tax, but would probably just include tax in the cost for those items that are taxable.

FYI, I am in Texas if any response or suggestion is state specific. Setting up an LLC in texas is a fairly simple procedure.

I seldom give advice on here any more, but asking if you should make yourself legal based on some possibly illegal past business transactions in a public internet forum, with your city and state posted right up there by your name, IS ASKING FOR AN AUDIT AND POSSIBLE LEGAL ACTION! Ask an accountant in private for gosh sakes!

[Stan Mitchell]

I'm a CPA in real life. Go talk to friends for referrals and don't take the cheapest one. Much better than forums for that type of advice. Dave

As a CPA myself, I fully endorse the advise of David Kumm, CPA.

Having said that, I'm back to working on tax returns.

[Jon Wilson]

Along these lines... I've sold a few items over the past few months. Certainly not enough to live on by any means.

Should I claim this on my personal taxes and if I do would that allow me the deductions for expenses, depreciation, new equipment etc...

I'm not really looking for a rock solid answer that I'd hold you liable for, more just curious. Probably wouldn't worry to much about it unless it makes a big difference.

[eugene thomas]

Every state and area is different. I would talk to tax person and go from their. I made my hobby a business and only had to file my taxes once year till my sales reached certain point.

[John Downey]

I've never seen the advantage of an llc in a part time business. If there is one, I'd like to hear about it.

I think it's a pride thing more than anything else. People think they need it to be "official" or legit. In reality, just keep separate books and a separate bank account, fill out the two or three extra federal tax forms and report it as profit from a small biz on your 1040. That's what I've always done with hobby income.

If you sell retail, you likely do need the state or local license or tax ID # to collect sales tax. This is simple to get in most localities and you don't need any special company status to do it. Years ago I had one, but these days I sell everything out of state and to resellers - it's really nice to not have to deal with sales tax

[Steve Milito]

I've never seen the advantage of an llc in a part time business. If there is one, I'd like to hear about it.

There are a number of reasons to operate a business as an llc. One reason would be to allow multiple investors with clear cut bylaws. A second would be to have a layer of insulation between the business and the owners for liability protection. Generally, the type of entity to operate a business is mostly for legal issues.

As for paying taxes: yes the state and the IRS expects you to pay taxes on economic activity . I recommend you find an accountant if you are generating income or sales from your hobby to make sure you follow acceptable accounting standards and what rules you need to follow.

[scott vroom]

Along these lines... I've sold a few items over the past few months. Certainly not enough to live on by any means.

Should I claim this on my personal taxes and if I do would that allow me the deductions for expenses, depreciation, new equipment etc...

I'm not really looking for a rock solid answer that I'd hold you liable for, more just curious. Probably wouldn't worry to much about it unless it makes a big difference.

Jon, if you are "in the business" you're entitled to file a Schedule C and list all of the expenses associated with your business, and form 4562 for capital equipment depreciation. If the result is a loss, then you're entitled to report that loss on your 1040. Most woodworkers have a substantial investment in tools etc., as well as shop floor space, utilities, insurance, on ad nauseum. Unless you're generating significant revenue, you're likely to report a loss, possibly never showing a profit. At some point running a cottage business at a loss year after year becomes a red flag for auditing....something that you probably don't want to go through. Also keep in mind that if you run your (I assume) garage shop as a business, your homeowners insurance will not cover any claims associated with your home business....you'll need to get either a rider on your policy for business use of your home, or a new separate policy for the business. You've got to weigh a lot of factors in deciding to go "legit", or do as many hobbyists do: take payments for occasional part time projects in cash and move on. The IRS would never admit as much, but I'm pretty sure they would prefer you not report paper losses year after year against your paycheck earnings for what is essentially a hobby. Talk to a CPA.