Taxes and Write-Offs

[therealcrazy8]

Write-offs are something that have always interested and confused me in a way. I have a few questions pertaining to write-offs.

1. I have not yet registered with the state. I wanted to wait to register with the state until I had everything together and ready to go. My only concern is that if I am not registered as a legal business with the state yet, while I am buying "business needs" (computers, inventory, etc.), that I may not be able to write off those items. Would my worries be accurate, or can I buy my business needs before I am a legally registered business and still be able to write them off come next tax season?

2. This question may require me to look into my specific state (Minnesota) laws, but it is kind of a general question also. Where do write-offs typically come in as far as the over all picture? So to break that down...
2a. What if your write-offs end up being more than you made that year?
2b. Do you, or is it wise too, only allow yourself $X.xx/yr for write-offs?
2c. Is there (this likely may change state to state) a general % you receive back from you write-offs/business expenses?

 

[BlackLabTechs]

Accounting advise is one of the worse subjects you can get online due to the risks involved. With the types of questions you are asking, I would highly recommend speaking with an accountant. I've always done my own taxes and once I setup an LLC, I went straight to an accountant and attorney before starting anything.

For us in the states, we all have Federal taxes but the difference is our business structure being (Sole proprietor, LLC (with s or c corp election), partnerships, S and C inc's, etc.) Again I would advise getting an accountant. The most important thing you can remember is "A good accountant will save you more money per year then they cost you".

 

[therealcrazy8]

Good to know. Thank you very much.

 

[SprinterTech-WI]

I did ours for a fee too many years... Get an accountant asap

 

[acscva]

Get help from experienced accountant/cpa.

 

[callthatgirl]

The goal is to bring home enough to qualify for Minnesota Care.

Agreed, get a bookkeeper and tax person. They are not the same thing, so if you can get a 2 in 1.

 

[vickie thivierge]

....the fear of Taxes strikes again.

First of all.....you can write off anything that is used in, on or around your business in the year you declare your business on your Tax Returns. If you purchased the items last year for a business you're starting this year you can still include those items for the year you file as a capital expenditure. If you have some stiff kicking around the house from years ago....and you're going to use it in your business....you can contribute it to your business and take a write-off base on current value as well as depreciation on a case by case. Basically when in doughy about what to write off...write it off anyway! For more information on write-offs I can recommend " Taxes for Dummies," or make an appointment with a CPA to discuses write-offs.

I'm also going to recommend taking a few business classes at your local JC....or join you local association of Small Business.

LOSSES.....You can carry a loss in your business for about three years with out too much being said, however after three years of reporting a loss you should to start asking yourself why your in business.

When you do write-offs for taxes, unlike deduction taken from your paycheck.....you don't get any of that money back. A write off is just that you write it off....deducting it from your income so you pay less taxes. When the write-offs exceed the income and you have a loss and you may be able to do a "carry-over" to the next year on that loss. Again....get the book or talk to a CPA.

ALSO......State & registration for a Tax ID, state electronic repair license and city business license.....Yes....., you should do that right away. Their is nothing worse that someone discovering you're operating a business with out the required licenses. Trust me on this, you don't want the city, state of federal government sending you nasty letters about noncompliance and charging you penalties for operating with out the appropriate licenses.

Clearly.....if you are asking these questions....you should really look into getting a bit more education before you dump a bunch of money into opening a new business. I highly recommend contacting the Small Business Association in your town or state. They have FREE resources for starting a new business.

 

[Markverhyden]

Agreed with the comments about getting professional advice. That being said a lot depends on how you are going to be setup. Sole Proprietor vs LLC vs Inc vs, etc, etc.

You can write off purchases/business expenses up to the amount of business revenue you have. You can carry that loss forward as @vickie thivierge said. But doing that can cause unwanted attention. There are more complicated mechanisms where you can transfer personal assets to the business, blah, blah, blah. And that's where the experts come in.

If you want to keep it simple do not make any purchases until you are in a year where you expect to book revenue.

 

[therealcrazy8]

Agreed with the comments about getting professional advice. That being said a lot depends on how you are going to be setup. Sole Proprietor vs LLC vs Inc vs, etc, etc.

You can write off purchases/business expenses up to the amount of business revenue you have. You can carry that loss forward as @vickie thivierge said. But doing that can cause unwanted attention. There are more complicated mechanisms where you can transfer personal assets to the business, blah, blah, blah. And that's where the experts come in.

If you want to keep it simple do not make any purchases until you are in a year where you expect to book revenue.

I did look at all of the setup details last night for my state, and it looks like i may want to do LLC/sole proprietorship

Vickie - Thanks a lot for all of that info. I didn't read it yet, but I can tell there's a lot there so I will be sure to read that once I get home. Thanks again

 

[vickie thivierge]

Hold off on the LLC until you have your business up and running, give yourself at least a year before you do this.

The issue being you'll be expected to pay $900.00 at the end of the year just for the joy and pleasure of being incorporated. For your first year of business your money is better spent elsewhere. Also....if your going to have an attorney do your corp....which I highly recommend...that's an additional cost of around $1500.00.

 

[glricht]

LOSSES.....You can carry a loss in your business for about three years with out too much being said, however after three years of reporting a loss you should to start asking yourself why your in business.

Many years ago, my wife ran an Antiques and Gifts business. She had a CPA do her business taxes and he told her that she could report a loss, but if the business had a net loss three years in a row, the IRS would re-classify it as a Hobby and not a for-profit business.

 

[therealcrazy8]

Hold off on the LLC until you have your business up and running, give yourself at least a year before you do this.

The issue being you'll be expected to pay $900.00 at the end of the year just for the joy and pleasure of being incorporated. For your first year of business your money is better spent elsewhere. Also....if your going to have an attorney do your corp....which I highly recommend...that's an additional cost of around $1500.00.

Thank you so much for everything you have shared. I greatly appreciate you saving me that money. Based on what I have been looking at as far as designations go, I will hold off on the LLC for now. I am assuming that I would want to register under "sole proprietorship" then.

 

[vickie thivierge]

YES!

Sole Pro....is what you are.

 

[Markverhyden]

YES!

Sole Pro....is what you are.

Yep. After 10 years I'm still a sole prop, no need to spend all that money. But if I ever hire anyone as a W2 I'll be spending the money to insulate my personal affairs from any potential liabilities.

 

[BlackLabTechs]

I did my 1st year (2015) as sole prop as I was still trying to decide if I wanted to start my own business or not. by mid year, my decision was made. In my area, rough price for LLC start is $900. includes attorney and state fees. I'm serious about the business and going to give it my all. My uncle in an unrelated business just incorporated last year. after seeing the paperwork and hassles of switching everything over (bank accounts, cc's, the books, etc) I just decided to do it up front and get started down the right road. Didn't need that headache taking away my focus in a few years. Remember when you go LLC or Incorporate you are creating a separate entity. Bank accounts, credit cards, large assets etc should be in the business name. Mix in too much personal stuff and people can get to your personal assets. Called piercing the veil. I would recommend at least talking to attorney and accountant before making such a quick decision. It will be time and money well spent!

 

[morandaminds]

Great information that I will definitely be using. I'm still a sole proprietor after 6 years, but have recently moved an employee from a consultant (1099) to full employee (W2). I'll be looking into going LLC this year. Thanks for the heads up.

 

[NETWizz]

Write-offs are something that have always interested and confused me in a way. I have a few questions pertaining to write-offs.

1. I have not yet registered with the state. I wanted to wait to register with the state until I had everything together and ready to go. My only concern is that if I am not registered as a legal business with the state yet, while I am buying "business needs" (computers, inventory, etc.), that I may not be able to write off those items. Would my worries be accurate, or can I buy my business needs before I am a legally registered business and still be able to write them off come next tax season?

2. This question may require me to look into my specific state (Minnesota) laws, but it is kind of a general question also. Where do write-offs typically come in as far as the over all picture? So to break that down...
2a. What if your write-offs end up being more than you made that year?
2b. Do you, or is it wise too, only allow yourself $X.xx/yr for write-offs?
2c. Is there (this likely may change state to state) a general % you receive back from you write-offs/business expenses?

1. It may be harder to justify legitimate business needs if you cannot prove to the IRS you owned a business. I cannot think of anything better to demonstrate than than a business licence, etc.

2. Write offs depend on business expenses. They come in different for each business. The truth is it is a very broad from legal fees, lawn care, business office supplies, etc.

2a. If you write-off more than you made, then that is because you are spending MUCH more than you made. A write off simply means you are using tax-free money to pay for business expenses. Basically, let's say a client pays you $1000 and your business owes 30% tax... Your business would keep only $700. However, if you spend that $1000 to pay for business expenses, you would NOT owe that 30% tax. Now let's say you make $1000, but you spend $5000. Your write-offs would be the 30% of $5000 or $1200, but with write-offs you cannot get more back than you pay.

Simply put write-offs reduce your tax liability, but they will NEVER push it below $0. i.e. Your business will not get a tax refund. Credits are different. If your business gets a $5000 tax credit and you otherwise owe $1000, then you will get a refund of $4000.

2b. You budget your expenses and expenditures NOT your write-offs. If you can get a write-off come tax time, you take as much as you can off your taxes to try and pay the least amount of taxes possible. That said, there is no such thing as allowing yourself $x in write-offs.

2c.It depends on your tax liability, what the money is used for, how much you earn, how much you spend, etc. It is NOT cut and dry. You really need to keep receipts of ALL business expenses and be able to justify them should the IRS audit your business.

Good Luck

 

[BlackLabTechs]

Simply put write-offs reduce your tax liability, but they will NEVER push it below $0. i.e. Your business will not get a tax refund.

No, but losses can be carried forward to next years return. So if you lost 2k on paper this year and made 3k next year, you'd only pay taxes on 1k next year.

**** Advise with your accountant as it's not as simple as this. Restrictions of how much and how far it can be carried. There's also short term (1 yr or less) and long term (> 1yr) gains that determine tax rates as well.