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Starting my own business
- Thread starter strantor
- Start date
right, ..."provided that method clearly reflects income" (whatever that means).
I guess I'll go with 22, but I'm quite frustrated with the IRS's instructions... I hope it doesn't seem as if I'm frustrated with you. Thanks for the help.
I would afford you a little cursing
... these IRS forms are confusing!!!
When i was in business small stuff like washers,nuts/bolts,elect tape,solder,etc I treated as consumables & wasnt worth worying about in a small business & i just wrote it off. When i was working for a Ford dealership they would put a $5 charge on each job card as consumables to cover these items. It then becomes income i guess.
My take, and this is based on a lot of reading of IRS pubs and talking to a few CPA types and sitting around asking myself what makes sense and is defensible within the IRS rules, is that if you can justifiably argue that you are not in the business of selling a good but that you are providing a service and certain matierals and supplies get consumed during that process, that you can avoid the whole inventory and Cost of Goods Sold hoops.
I ran into that from day one because I was designing electronic systems and building proof of concept prototypes. So was I going to have to keep track of every resistor and capacitor that I had on hand and only expense them when they were consumed? And was I going to have to track separately the cost of the ones that I consumed in the process of testing circuits compared to the ones that ended up in the final prototype that was delivered to the custmomer? Early on I went down and talked to the IRS folks (and lucked out and found someone that seemed to know what they were talking about) and he explained that the notion of inventory and cost of goods sold is centered around the notion of a business that manufactures things. So they purchase supplies and materials to have on hand and then use them to make a product, some of which they stock and some of which they sell. The purpose and nature of their business is to derive revenue from the sale of those products and therefore the rules are set up to match the expenses associated with those products to the revenues earned from their sale. The assumption is further that you aren't selling custom produces, but rather many identical products from a product line and can therefore establish the cost of the materials and supplies required to manufacture one unit of produce by taking the totals and dividing them by the number of units you can make with them. Then you can easily get your Cost of Goods Sold by multiplying the number of units sold times the average cost to make one of them.
But in a project- or service-oriented business the situation is much different. In my case I was being paid to produce a design and the physical proof of concept prototype unit delivered was incidental to that service. Thus, all of the components that were purchased, whether I used them in a product that was delivered or for development or for testing could be expensed as simple materials and supplies in the year purchased provided it was reasonable to anticipate that they could be consumed in a year's timeframe. One question I asked about purchases of things in quantities that made it so that I knew that there was no way I would use it in a year (or possibly even ever), for instance buying a hundred of something that I only needed a few of but that couldn't be bought in smaller quantities. He said that as long as the items in question where intrinsically consumable (as opposed to something that could be reused over and over until it wore out and thus making it a piece of equiment) that expensing it completely in the year purchased would almost certainly not raise any questions unless the dollar amounts involved were large. But, he admitted that it was a gray area. My attitude is that I will push legitimate gray areas pretty hard if it keeps the bookkeeping down. Besides, as he pointed out, anything that was expensed that way, if never used, would become a source of income to the business if it were ever sold off since expensing it up front means it has no basis. It is very analogous to first-year expensing of equipment and given that you can expense a significant (for a sole proprietor) amount of equipment in the year purchased and if you ever sell it the entire sale price is an income to the business because it has no basis, first-year expensing of materials and supplies seems very reasonable and defensible until you start talking about aggregate expenses that are approaching the first-year expensing limits for equipment. Again, a gray area, but I've passed that rational by a few IRS and CPA types over the years and they have all said that it is not an unreasonable course of action to take, at least at the revenue and expense levels my business is at.
I ran into that from day one because I was designing electronic systems and building proof of concept prototypes. So was I going to have to keep track of every resistor and capacitor that I had on hand and only expense them when they were consumed? And was I going to have to track separately the cost of the ones that I consumed in the process of testing circuits compared to the ones that ended up in the final prototype that was delivered to the custmomer? Early on I went down and talked to the IRS folks (and lucked out and found someone that seemed to know what they were talking about) and he explained that the notion of inventory and cost of goods sold is centered around the notion of a business that manufactures things. So they purchase supplies and materials to have on hand and then use them to make a product, some of which they stock and some of which they sell. The purpose and nature of their business is to derive revenue from the sale of those products and therefore the rules are set up to match the expenses associated with those products to the revenues earned from their sale. The assumption is further that you aren't selling custom produces, but rather many identical products from a product line and can therefore establish the cost of the materials and supplies required to manufacture one unit of produce by taking the totals and dividing them by the number of units you can make with them. Then you can easily get your Cost of Goods Sold by multiplying the number of units sold times the average cost to make one of them.
But in a project- or service-oriented business the situation is much different. In my case I was being paid to produce a design and the physical proof of concept prototype unit delivered was incidental to that service. Thus, all of the components that were purchased, whether I used them in a product that was delivered or for development or for testing could be expensed as simple materials and supplies in the year purchased provided it was reasonable to anticipate that they could be consumed in a year's timeframe. One question I asked about purchases of things in quantities that made it so that I knew that there was no way I would use it in a year (or possibly even ever), for instance buying a hundred of something that I only needed a few of but that couldn't be bought in smaller quantities. He said that as long as the items in question where intrinsically consumable (as opposed to something that could be reused over and over until it wore out and thus making it a piece of equiment) that expensing it completely in the year purchased would almost certainly not raise any questions unless the dollar amounts involved were large. But, he admitted that it was a gray area. My attitude is that I will push legitimate gray areas pretty hard if it keeps the bookkeeping down. Besides, as he pointed out, anything that was expensed that way, if never used, would become a source of income to the business if it were ever sold off since expensing it up front means it has no basis. It is very analogous to first-year expensing of equipment and given that you can expense a significant (for a sole proprietor) amount of equipment in the year purchased and if you ever sell it the entire sale price is an income to the business because it has no basis, first-year expensing of materials and supplies seems very reasonable and defensible until you start talking about aggregate expenses that are approaching the first-year expensing limits for equipment. Again, a gray area, but I've passed that rational by a few IRS and CPA types over the years and they have all said that it is not an unreasonable course of action to take, at least at the revenue and expense levels my business is at.
Where you can run into problems is in states, counties, and cities that have inventory and business personal property taxes. I remember when I was growing up I would spent a really long weekend working at the place where by dad worked because, twice a year, we had to do a physical inventory. This was because the company had to pay a tax on the total value of everything it had in inventory, whether it was stock for retail sale or items to be used to build up air compressors for sale, or bench stock for repair work. I recall working with my uncle (who also worked there) and going down the aisles of parts bins and counting up all the bolts and all the washers. I was only ten or so at the time and so it was somewhat of an adventure for me. In about the third year my dad pointed out to us that it was okay to just look in the opened box of a thousand washers and go, "Ah, it's almost half full, so let's call it four hundred." Definitely speeds things up!
The adults may also have been trying to "occupy the 10 year old so we can get work done".
I kid. they assume you keep track of everything, though most people don't(that I know of)....
It was actually a realy good experience for me. Even the first year I helped out there were entire sections of the shop that I was given a clip board with pad of paper on it and I had to go through and identify the items and count them and I did this with working with anyone at all. Everything from V-belts to multi-ton compressor pumps.The adults may also have been trying to "occupy the 10 year old so we can get work done".
I kid. they assume you keep track of everything, though most people don't(that I know of)....
You'd turn in the paper that you had listed everything on and the secretary would then go through the inventory files -- all manual in those days -- and update the records. At the end, she would prepare a list of items that the inventory files claimed they had but that hadn't shown up on our lists and we would have to go out and find them. The list also had items that were on our lists but that the records said didn't exist. Often it was a matter of the identification we wrote down, usually a part number, not matching the records and so we had to match things up. Oddly, some of the techniques I developed back then actually proved useful when doing similar detective work on integrated circuit layout-versus-schematic descrepancy reports decades later.
I recall one time I had recorded that we had more of one pump type than we were supposed to have and fewer of another type by the same mismatch. When it got flagged by the secretary, everyone - myself included - just assumed that I had miscounted a pump as being the wrong type and she was just going to fix things up, but I went back out and recounted. Same result. These pumps were about five feet tall and were several tens of thousands of dollars a piece, so it mattered. My dad went out with me and saw the same thing, so he took a crow bar and opened up the crates and, sure enough, in one of the crates was the missing pump with the wrong shipping label on the outside of the crate.
http://www.irs.gov/uac/Deducting-Business-Supply-Expenses
I would create an invoice to your company selling yourself a box of whatever the incidentals are. This will do the inventory by incidental and ensure the incidental will be properly recorded (as COGS) and taxed. Then the incidental can ride in your truck until it's time to replenish them, which should not be frequently ... which would cause them losing their "incidental" status.
This is the non-frivilous position and is defensible as such.
You could invoice your clients for incidentals, and it should be a reasonable figure, to cover incidental costs. If you used shop wipes, washers, nuts, and bolts, as incidentals, charge them a buck or so for incidentals.
The key phrase for business write off's is ordinary and necessary to the pursuit of income. Speaking of pursuing income, here is link to an unusual "stage prop" that was judged a write off in tax court ... http://www.thefiscaltimes.com/Special-Features/Slideshow/Deductions/Slide1.aspx
Quickbooks is good software for the small business. I'm biased only because I've been using it for about 15 years.
The third bullet is the key. Your incidentals should be a very small part of your overall income, which a 100 ct washers would be as you use them infrequently enough.
I would create an invoice to your company selling yourself a box of whatever the incidentals are. This will do the inventory by incidental and ensure the incidental will be properly recorded (as COGS) and taxed. Then the incidental can ride in your truck until it's time to replenish them, which should not be frequently ... which would cause them losing their "incidental" status.
This is the non-frivilous position and is defensible as such.
You could invoice your clients for incidentals, and it should be a reasonable figure, to cover incidental costs. If you used shop wipes, washers, nuts, and bolts, as incidentals, charge them a buck or so for incidentals.
The key phrase for business write off's is ordinary and necessary to the pursuit of income. Speaking of pursuing income, here is link to an unusual "stage prop" that was judged a write off in tax court ... http://www.thefiscaltimes.com/Special-Features/Slideshow/Deductions/Slide1.aspx
Quickbooks is good software for the small business. I'm biased only because I've been using it for about 15 years.
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Thanks guys!
Joe, I don't know what IRS pub that came from but it says things a lot clearer than the instructions for the Schedule C.
As it turns out, after sitting in front of turbotax online for at least 7hrs, they don't even have you enter all the items for schedule C. They ask you a series of idiot-proof questions and fill it in for you, and actually showed me having a lot bigger net loss than I calculated, once it went through the depreciation thingamajig and mileage. It said I had a ~-6k net income, which substantially increased my tax return. This is the largest tax return I've ever had. A lot of contributing factors; had another kid, didn't make much money, operated at a net loss, went to school full time, etc. I'm very pleased, however turbotax had me in the reddish-yellow area for probability of an audit. Good thing I've got my quickbooks fully populated.
Thanks again guys.
One more thing, Wbahn, you are the most wordy person whose posts I read completely. Anybody else and I would just skim or skip entirely when I see a 3/4 page long post. You blew my mind a while back on my thread about energy generated from riding a bicycle, and ever since I've been a fan.
Joe, I don't know what IRS pub that came from but it says things a lot clearer than the instructions for the Schedule C.
As it turns out, after sitting in front of turbotax online for at least 7hrs, they don't even have you enter all the items for schedule C. They ask you a series of idiot-proof questions and fill it in for you, and actually showed me having a lot bigger net loss than I calculated, once it went through the depreciation thingamajig and mileage. It said I had a ~-6k net income, which substantially increased my tax return. This is the largest tax return I've ever had. A lot of contributing factors; had another kid, didn't make much money, operated at a net loss, went to school full time, etc. I'm very pleased, however turbotax had me in the reddish-yellow area for probability of an audit. Good thing I've got my quickbooks fully populated.
Thanks again guys.
One more thing, Wbahn, you are the most wordy person whose posts I read completely. Anybody else and I would just skim or skip entirely when I see a 3/4 page long post. You blew my mind a while back on my thread about energy generated from riding a bicycle, and ever since I've been a fan.
Strantor,
That comes from a Fact Sheet, 2006-28. Don't forget that most of this stuff comes from Congress ... and the various interpetations since the law was written.
I thought of your consumables this am. You could create the individual items as non-inventory in Quick books. Then you can put in the part number and descriptions. This will tie the items to a subcatagory in the consumables expense line.
WBahn,
Yes, you were correct in post #106. I just tied it to something at the IRS' website. I'd hate for Stantor to quote something from an "internet forum".
Non-frivilous positions are the best one's to take when dealing with ordinary and necessary expenses. In the case of Chesty Love, the IRS lost ... after all, those stage props were there to garner bigger tips.
That comes from a Fact Sheet, 2006-28. Don't forget that most of this stuff comes from Congress ... and the various interpetations since the law was written.
I thought of your consumables this am. You could create the individual items as non-inventory in Quick books. Then you can put in the part number and descriptions. This will tie the items to a subcatagory in the consumables expense line.
WBahn,
Yes, you were correct in post #106. I just tied it to something at the IRS' website. I'd hate for Stantor to quote something from an "internet forum".
Non-frivilous positions are the best one's to take when dealing with ordinary and necessary expenses. In the case of Chesty Love, the IRS lost ... after all, those stage props were there to garner bigger tips.
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Consumables that are used up in the normal course of business (things like solder, or toilet paper) should be able to be written off as an expense. I would include nuts/bolts/washers in that category.
There should be no need to stocktake such a small inventory of something you use up, ie would you stocktake your remaining toilet paper at end of year? Or just include it as an expense whenever you buy it?
If you get accounts with the your main suppliers (even big hardware stores etc) you can just get one neat bill a month and stick it straight in expenses and not need to mess with hundreds of small receipts.
There should be no need to stocktake such a small inventory of something you use up, ie would you stocktake your remaining toilet paper at end of year? Or just include it as an expense whenever you buy it?
If you get accounts with the your main suppliers (even big hardware stores etc) you can just get one neat bill a month and stick it straight in expenses and not need to mess with hundreds of small receipts.
Thanks for the confirmation. I just wanted to make sure that I wasn't doing something I wouldn't have a chance of defending should an audit come my way.
But I would imagine that she was required to depreciate them over time as a equipment expected to last more than one year. Mmmmm, I wonder what they decided the Class Lifetime for them should be? If I were the IRS I would argue that they should be depreciated at the longest class life. Then, when she leaves the business, she can either sell them and declare the income from the sale or convert them to personal use and forego the remainder of the depreciation. If she first year expenses them, then when she leaves the business she should be required to recapture the remaining depreciable value of them. Hey, if she wants to benefit from claiming that the expense rules apply to her boobjob, then she should have to play by the expense rules that apply to the rest of us.Non-frivilous positions are the best one's to take when dealing with ordinary and necessary expenses. In the case of Chesty Love, the IRS lost ... after all, those stage props were there to garner bigger tips.
Consumables are written off as an expense. The point is, the consumables should not distort the income too much. Quickbooks non-inventory items is the best way to write that as the expense catagory is tied to the item. You would want the item number or description so you can illustrate how many times you've brought that consumable if necessary to the IRS. You have a large consumable value, the IRS will question it. If you show them the parts included in the consumables, you've illustated there was no frivilous activity, you have a better chance of winning the arguement.
Your expense line might say $1000 over the year. If the consumables were tracked in non-inventory and the IRS would want you to explain that, all you would have to do is click on it and you will get a report of every item (actually boxes of them) that made up that price. You could answer the IRS quickly.
Besides, wouldn't you like to know how many boxes of whatever you bought over the year. What if after hiring a worker, you saw a sharp increase in the purchase of consumables ... if that didn't strike you as odd, to say the least, you'd want to investigate that anonmly further.
Granted, Stantor doesn't have an employee problem, that doesn't mean he shouldn't use good practices throughout.
Your expense line might say $1000 over the year. If the consumables were tracked in non-inventory and the IRS would want you to explain that, all you would have to do is click on it and you will get a report of every item (actually boxes of them) that made up that price. You could answer the IRS quickly.
Besides, wouldn't you like to know how many boxes of whatever you bought over the year. What if after hiring a worker, you saw a sharp increase in the purchase of consumables ... if that didn't strike you as odd, to say the least, you'd want to investigate that anonmly further.
Granted, Stantor doesn't have an employee problem, that doesn't mean he shouldn't use good practices throughout.
GetDeviceInfo
- Joined Jun 7, 2009
- 2,284
I'd be driving those small item consumables through an expense account, via the general journal. Let's face it, a box of washers isn't much different than a tin of coffee.
UPDATE:
I started this whole thing because I wanted to go to school full time and work part time. My employer wanted me to work full time and would not agree to a part time arrangement. So I quit and went to school full time and started my own business. I found that going to school full time completely consumed my time and there was no time for work or family. So I ended up going to school only part time. The amount of school hours I'm attending have now dropped to a level low enough for me to be able to support a full time job. So I have been contemplating going back to the job market.
I enjoy the pride of owning my own company but it is more stressful than I anticipated and I don't need all the extra stress right now. Every time one of the kids gets sick I worry that it will be something that requires a doctors visit, and I micro-manage their playtime saying things like "Don't do that; if you get hurt, I can't afford to take you to the hospital." My money comes in waves; I might have 5 invoices paid on the same day and then none for a whole month. I have not been able to amass a large enough nest egg to smooth out the ripple, so on the 25th day with no pay, things start to look very bleak.
The majority of my work comes from one customer. This my main customer gives me a lot of business because they do not have a full time electrical guy. It has been at the back of my mind that staking so much of my business on one customer is not good; If for some reason they are become displeased with my service and decide to call someone else, they take basically my whole business. I have been afraid to charge them too much because I am keeping track of how much they pay me, and if they are doing the same, then they might realize at the same time I do, that they pay me as much or more than they would pay a full time employee; at which time, my service would render itself obsolete. I think this may have happened already. On Friday, their mechanic and one-man maintenance crew, told me that the higher-ups were interviewing electrical guys. That's all the red flag I need. I need to do something fast.
Coincidentally on Friday when I got home, my previous employer had sent me an another email asking me if I would like to come back and work there. I went over and sat down and talked with him. He said that he has gone through more than a handful of guys since I left, looking for someone who was good and dependable. He finally found a couple and hired them on permanent basis. Then a couple of weeks ago one quit and the other got fired, so they are hurting right now. I am currently negotiating the conditions of my return; higher salary, consideration for my school schedule, etc.
So I am going to work full time and only take 2 classes per semester, including summer. So hopefully I can get my bachelor's in 6 or 7 years.
I started this whole thing because I wanted to go to school full time and work part time. My employer wanted me to work full time and would not agree to a part time arrangement. So I quit and went to school full time and started my own business. I found that going to school full time completely consumed my time and there was no time for work or family. So I ended up going to school only part time. The amount of school hours I'm attending have now dropped to a level low enough for me to be able to support a full time job. So I have been contemplating going back to the job market.
I enjoy the pride of owning my own company but it is more stressful than I anticipated and I don't need all the extra stress right now. Every time one of the kids gets sick I worry that it will be something that requires a doctors visit, and I micro-manage their playtime saying things like "Don't do that; if you get hurt, I can't afford to take you to the hospital." My money comes in waves; I might have 5 invoices paid on the same day and then none for a whole month. I have not been able to amass a large enough nest egg to smooth out the ripple, so on the 25th day with no pay, things start to look very bleak.
The majority of my work comes from one customer. This my main customer gives me a lot of business because they do not have a full time electrical guy. It has been at the back of my mind that staking so much of my business on one customer is not good; If for some reason they are become displeased with my service and decide to call someone else, they take basically my whole business. I have been afraid to charge them too much because I am keeping track of how much they pay me, and if they are doing the same, then they might realize at the same time I do, that they pay me as much or more than they would pay a full time employee; at which time, my service would render itself obsolete. I think this may have happened already. On Friday, their mechanic and one-man maintenance crew, told me that the higher-ups were interviewing electrical guys. That's all the red flag I need. I need to do something fast.
Coincidentally on Friday when I got home, my previous employer had sent me an another email asking me if I would like to come back and work there. I went over and sat down and talked with him. He said that he has gone through more than a handful of guys since I left, looking for someone who was good and dependable. He finally found a couple and hired them on permanent basis. Then a couple of weeks ago one quit and the other got fired, so they are hurting right now. I am currently negotiating the conditions of my return; higher salary, consideration for my school schedule, etc.
So I am going to work full time and only take 2 classes per semester, including summer. So hopefully I can get my bachelor's in 6 or 7 years.
