Woodworking as a side business and tax implications?

[Ryan Gallo]

I've got a little shop and have made some pretty significant investment in tools over the past couple of years. Still, I consider it a hobby as I haven't been selling any of my pieces and I actually enjoy the design side of furniture-making perhaps even more than the fabrication side of things. I've got a lucrative day job as a software marketer and have pretty much accepted that I'll probably never be able to turn a "side business" like woodworking into a more profitable endeavor than my day job. But, I'd like the option of being able to turn a small profit with my woodworking hobby -- especially if I can defray some of the capital costs by structuring it as a business.

For those in the business, especially those with a sole proprietorship or LLC, I'm curious if you've been able to write your tools off as capital expenditures and -- if the business doesn't post a profit in a given year -- if you can use that loss to offset your personal tax liability from other (more profitable) ventures?

Maybe this is a question best asked in a tax forum but I thought I would start here. Thanks!

[Jerry Wright]

You can do all of the above by filing self employment income and direct related expenses. Don't think you can depreciate large equipment. Any good tax person can help uou do it. Worth a look.

[eugene thomas]

Save your receipts. Sure glad I did when turnedy hobby into side business.

[Ben Rivel]

Of course you can write all your tools off. You can write off anything you want, provided you can justify it should you ever get audited. And you do not need to turn a profit. You can run your business anyway you want included at a loss for many years. The IRS cant/doesnt tell you how to run your business. They just care that you file a tax return and pay taxes! Set up the LLC. There are many benefits to having one.

[Minh Tran]

Can someone explain what it means to "write off the cost of tools" for a business? What does it mean when you get audited?

[Glenn de Souza]

I would be careful here, and if you're serious about it, it would be worth paying for advice from a qualified tax advisor. The IRS has rules regarding the delineation between a hobby and a business. You can read some of them here:

https://www.irs.gov/uac/business-or-...for-deductions

This is not to say there isn't a tax opportunity here. It always seems that the devil is in the details, and sound planning, appropriate record keeping is important.

[Martin Wasner]

If you decide to turn it into a business. Incorporate as an S Corp, then lease you're equipment back to the company. Saves you by not have to pay the 15.3% in social security and Medicare. After that, anything the corporation buys you can write off on any schedule the accountant deems appropriate.

David Kumm I'm sure will chime in at some point. He knows his stuff. Way better than a cabinet maker will.

My solid advice, is to not do it at all. This is a tough business. If I could trade jobs with you is do it in a heartbeat.

[Ryan Gallo]

If you decide to turn it into a business. Incorporate as an S Corp, then lease you're equipment back to the company. Saves you by not have to pay the 15.3% in social security and Medicare. After that, anything the corporation buys you can write off on any schedule the accountant deems appropriate.

David Kumm I'm sure will chime in at some point. He knows his stuff. Way better than a cabinet maker will.

My solid advice, is to not do it at all. This is a tough business. If I could trade jobs with you is do it in a heartbeat.

Martin, thanks for the advice. Solid advice, at that. I should be clear that I'm certainly not looking to trade my day job -- in fact, it's the day job that has afforded me the ability to acquire some pretty sweet woodworking gear. And while I certainly wouldn't be looking to make a fortune in woodworking, I could see doing it part-time, as long as I can find the right client... And that's where my marketing background could pay some big dividends.

I'll research S Corps in more detail later today. I like the lease-back concept. I think what's key for me is the ability for this "loss" (at least in the short-term) to offset the taxes from my day job I'm already going to be paying... That alone could justify some pretty nice new capital equipment.

I also don't like the idea of paying for an accountant. I've got my MBA fairly recently and would like to be hands-on, therefore I'd prefer to manage everything myself. But, that can be dangerous -- thanks for the advice.

[Andy Giddings]

I'm intrigued by this - presumably if you have already purchased all of your equipment in your own private name (and before you created an LLC), you would have to transfer or sell your equipment to your business?

[Frederick Skelly]

Check on your insurance too. If you are a business, many companies require you to insure it as such - else they wont pay a claim.

[Marshall Mosby]

You can't stay in one business and think of flourishing the other. If you really love your hobby and believe that you can survive and grind working through it, you should consider making this your day job instead and thrive.

[Wayne Lomman]

If you are going to work from home, you must consider the consequences of no longer having a private residence - it becomes a commercial property. It has an impact on land taxes, capital gains tax etc. If you have to start lying to save tax, don't do it. Better to sell stuff for cash and stay off the grid. That way focus on the positive of making money rather than the negative of avoiding tax. Cheers

[Art Mann]

My wife ran a graphic design business out of our home for about 20 years. We know a little bit about the rules that govern home businesses. The one thing I want to emphasize is that you can not run a business indefinitely at a loss and still expect to depreciate assets and claim others as business expenses. Anyone who attempts to do that will eventually be audited and the IRS is not known for giving people the benefit of the doubt.

[Jon Nuckles]

If you are going to work from home, you must consider the consequences of no longer having a private residence - it becomes a commercial property. It has an impact on land taxes, capital gains tax etc. If you have to start lying to save tax, don't do it. Better to sell stuff for cash and stay off the grid. That way focus on the positive of making money rather than the negative of avoiding tax. Cheers

Just to be clear, selling for cash and not reporting it is still lying and still against the law.

[Martin Wasner]

If you are going to work from home, you must consider the consequences of no longer having a private residence - it becomes a commercial property. It has an impact on land taxes, capital gains tax etc. If you have to start lying to save tax, don't do it. Better to sell stuff for cash and stay off the grid. That way focus on the positive of making money rather than the negative of avoiding tax. Cheers

I wouldn't sweat it with just one guy building stuff out of his garage. They aren't going to rezone a residential area commercial/industrial just because he's doing some woodworking for next to no money. At least not in the USA. If he's got 20 employee's, 100hp of dust collection sitting outside, and trucks running in and out daily they'll just boot him out of where he is and tell him to go elsewhere.

But, if you can do stuff for cash, do it for cash. The IRS get's enough money from me to make up for it.