Newbie question about starting a knifemaking business on the side

T

tradhunter

Joined
Jul 27, 2009
Messages
32
Guys,

I have played things straight my whole life, but was wondering if I can take advantage of an IMO a tax loophole. I don't want to be unethical, and I definitly don't want to break any laws but....

The plan is to buy some new knifemaking equipment with the goal of honing my skill to the point where I can sell my knives for at least enough money to keep my hobby self-funded (in a perfect world). Normally, I would buy the equipment, hone my skill to a commercial/professional level, and then take the plunge and open my side business (self-proprietor).

However, wouldn't it make more sense to start the business now, buy the equipment as startup costs, and simply take a loss for the next couple years. The loss could be claimed on my taxes that way. Like I said, not trying to be unethical, but it seems like a lot of benefits with little drawbacks. Unless I am missing something, but this is where you fine gents come in.

Thanks.
 
I can't speak for your situation, or your state laws (fill in your profile so we know where you are and folks may be able to help a bit there). I'd suggest you talk to an accountant if you don't already have one and ask him/her for an opinion based on the rest of your finances. It may be a good idea for you, or it may not. It depends a lot on your specific situation.

-d
 
I ran my knife making hobby/business as a secondary business for five years. The equipment and material costs made for a net loss each year. I was able to deduct travel to shows, lodging,all material and other knife related purchases, etc. ( even bulding my smithy). After five years, the IRS declares any business that does not make a profit a hobby ( actually you have to make a profit one out of three years). I was able to buy a lot of equipment and deduct it for those years. Talk to your accountant and see what he/she says.

The important thing is to keep all records and receipts so if there is ever a question, you can show the proof of how expensive this hobby is. Using your credit card ( or better, get a card for the knife business only) makes it easy to show how much you spend on knifemaking.

Stacy
 
I would just treat it as a hobby for now as far as the govt. is concerned. That way you neither pay taxes on gains nor are able to deduct for losses, which pretty much evens out the ethical field. You can't deduct business expenses from your personal income taxes, and if you don't make any money on the business you won't pay any business taxes anyway. I wouldn't even bother registering as a business for a while. If it looks like you'll actually start making money and you want to register your now profitable hobby as a sole-proprietorship, the folks at the state or county office where you register will provide you with the necessary info about taxes.

Take this for what it is worth. I'm by no means an expert. I'm not an accountant either, but will be in less than a year.
 
Along with whats already been said above, claimed it as a hobby-loss (buying tools)
but still claiming it. 3rd year it showed a profit and my accountant said it looked just
about as it should have.
Ken.
 
wordsmith said:
...You can't deduct business expenses from your personal income taxes...
Click to expand...

Are you sure, I think (thought I smelled something burning) like Stacy mentioned above, a net loss of your business could be deductable on your personal income tax return.

I'd ask the accountant also, and I'd make sure there're no gray areas with insurance coverages and zoning laws. If you stay within the law, what's unethical about it.
 
Hi Friend,

You have to fill out IRS's Schedule C (P&L for biz part of your cash flow), http://www.irs.gov/pub/irs-pdf/f1040sc.pdf, and include it as part of you IRS filing. That's where you get to deduct all your biz expenses (and show any income). There's nothing wrong with taking a start-up loss. It is quite common to take three years to ramp a business up to a positive cash flow. (In fact, many start-ups struggle or fail, because they don't have enough start-up capital to float the biz that long.) Here's a little sketch of how a three year spread might look.

  1. First year: secure location, facilities and equipment; setup bookkeeping and managerial systems
  2. Second year: design product/service line and production procedures; acquire inventory (raw materials and/or finished goods); hire and train staff; initiate market research and development strategy
  3. Third year: roll out product (direct market, shows, websites, consignments, wholesale, etc)
Ha, sounds easy, ya?!

Good luck, Phil
 
Phil has it right.
If you want to deduct things, you have to make it a business. That means a business license, business property taxes,and state and federal income taxes if you make a profit. The plus side is you get to deduct all legitimate expenses related to the business. If you are not selling a lot of knives, you will see that your schedule C shows a big loss. This loss can be applied to your personal income when you do your taxes ( 1040 long form). If you do it yourself, keep every receipt and record. Keep them for at least five years. If you are not familiar with schedule C forms, it may be smarter to get an accountant to do it, as they know what goes where on the forms.

On deducting equipment-
It is amortized over its expected life ( usually 10 years). You get to deduct the amortized portion each year. Consumables ( steel, belts, small tools,wood, handle material, supplies, etc.) are deducted in the year they are purchased.
If you are claiming $10,000 in tools ,and taking $1000 a year off your schedule C, remember that you also owe your city or county the business property tax on the $10,000 every year. In our city the rate is figured on 40% of the purchase price, regardless of age, and taxed at $1.50 per $100. So, that $10,000 in equipment will cost you $60 a year in property taxes. The tax savings on the $1000 a year write off for amortization will depend on your tax bracket, but it will probably fall somewhere around $200-$250. So, don't get your shorts in a wad about having to pay taxes on your equipment, because you get to deduct much more than that....and the tax you paid also is a deduction on your schedule C.

If you are doing this as a small time hobby, keep it that way. The hassle and record keeping are not worth it. If you plan on making and selling a couple thousand dollars a year in knives,and will buy $5000 or more in equipment and supplies, then it will work out to your advantage.

My take on being an honest businessman:
If you do this as a business, keep it honest. Pay your taxes, get all licenses and permits, and keep your records. I know there are plenty of folks on this forum who say, "Hell, I ain't paying" squat to them folks.". I can tell you that beyond being dishonest ( call a spade a spade, it is being dishonest) you are setting yourself up for a possible nightmare if/when you get checked into. It is far better to sleep better and not worry about the knock at the door.

If you do this as a hobby, and are selling the knives to support your hobby, then the local authorities don't really care. The determining factor is usually how much money is coming in from sales.They don't care about your P and L, just the gross sales. If it is too small an amount for the authorities to be worth the paperwork, they are fine leaving it as a hobby. If you start selling 100 knives a year ( approx $10,000) , and are making an income from the sales, then you should become a business. The annual business license is where the cities/counties get their part from your sales, and it is usually based on a rate per $100 of gross income. Here it is $0.20 per $100, so if you do $10,000 they get $20 ( plus a few other fees). The minimum is $50 ( varies by location).
Also, remember that you will have to collect and pay state/local sales tax. This is filed monthly ,or quarterly in some cases. You will need to register and get a tax number from the state.

If all this sounds like a lot of work and trouble - it is.
That is why keeping it as a hobby until it really becomes a business is the simplest way to go. Either way, keep your records and receipts.

Stacy
 
AND, don't forget about getting product liability insurance.:grumpy:
 
I'd venture to say most businesses operate that way. I work for a large manufacturer and I remember them saying for the first 4-5 years they were in the negative. I would think the success of businesses is the reason for having the deductions. The idea is the gov lets you take the loss for a few years, then they will get greater rewards when they tax you after your successful. FYI, this is all just my thoughts...I'm no accountant or lawyer.
 
i was thinking of starting a business at some point. I had an accountant ( friend) tell me that he wouldnt advise it at this point because i may average2 -3 knives a month and for what im seeling them for it just wasnt a good idea. he also told me that if things change to make sure i have ALL my reciepts and at that point i could sell everything i bought to the "business". I need to talk with him abit more because i do want to get a web site up and sell a knife or 2 and other stuff i do with wood,- so i wonder if i need a business license to set up a web page and sell a small amount of stuff. I also wonder who is watching places like paypal to see whos making what.-thanks marekz
 
I took a loss the last two years and it allowed me to recover part of the cost of setting up my shop, I sold a few knives the first year and did better last year but the cost of tools, web site, and other deductions gave me a nice lose and tax credit. I keep a seperate checking account, credit card, and accounting spreadsheet with reciepts. I also have a business license, due to other family issues I will not sell as many knives but will show a profit since I dont have many expences. Now what to buy next year??? I do have to pay state sales tax every year on knives sold locally.

Its a good way to use your knife profits to buy equipment to build business rather than taking it as income and paying income tax. But now they have me.
 
Hi Friends,

I hate paper work. It is the bane of my existence. Even now as a teacher, I have to keep records for my students to back up the grades I give them (which I also dislike) and do a fairly funky job of it. I loose receipts. And, you need to do more than just save the damn things. You have to make notes on them as to what the expense was for and for which account it needs to get recorded to. So that means you have to have a bloody pen on you at all times too. I almost never can find my checkbook and/or register or my calendar or my notebook. I often don't know my bank balances. (I opened a separate account just for paying rent and other monthly overhead bills so nothing would ever bounce. So far so good. :rolleyes:) I can't remember where I ordered things and what makes, models, versions, grits, etc were the ones to reorder. I always have to look up recipes, temperatures and times. I almost always forget to reorder prescriptions before they run out. I have physically lost cash money and checks paid to me more than once. :yawn: I have even been known to run out of gas for lack of remembering to monitor the gauge. The only reason I remembered when my son was going to be born was I forgot about absolutely everything else on the planet!

That is why I usually hired a bookkeeper administrative helper type person for my small business enterprises over the years. I learned early in the game a good double entry accounting system is a godsend. Intuit's Quickbooks is reasonably good and priced. Before Intuit came along you had to spend thousands for a decent accounting program and have a rocket scientist to run the damn thing.

Keeping track of time is another humbug to manage. Phone consulting time, on site time, depot time, admin/office/shopping/errands time, production time, repair time, individual customers' time, etc... Depending on your business, what type of time you need to track and for what reasons (usually billing and management decision making) it needs to be recorded at the point of usage, tallied regularly, assessed and evaluated, billed and payments collected.

I tell ya, hobbies sound a lot more fun to me!

If you make a biz out of it, get ready to get so annal things just will never smell right again. Well, just kidding about that one, but do design a record keeping system that really works for you: saving ALL source documents, recording and filing them, responsible account balance management, timely delivery of orders and restocking of supplies and materials, etc. Oh ya, make sure it's FUN...and always safe for you and yours!

All the best, Phil
 
bladsmth said:
I ran my knife making hobby/business as a secondary business for five years. The equipment and material costs made for a net loss each year. I was able to deduct travel to shows, lodging,all material and other knife related purchases, etc. ( even bulding my smithy). After five years, the IRS declares any business that does not make a profit a hobby ( actually you have to make a profit one out of three years). I was able to buy a lot of equipment and deduct it for those years. Talk to your accountant and see what he/she says.

The important thing is to keep all records and receipts so if there is ever a question, you can show the proof of how expensive this hobby is. Using your credit card ( or better, get a card for the knife business only) makes it easy to show how much you spend on knifemaking.

Stacy
Click to expand...
love that quote u have under there.
 
Given that you're new to knife making, will you have developed the skills and knowledge in three years to a level that will make you competitive and able to turn a profit?

LonePine
AKA Paul Meske, Wisconsin
 
The first thing I will say is I do not envy the good folks who make a living making knives. There is no other way to put it other than it's a tough way to make a living and A LOT more work than most people would think.

The second thing I would say which lonepine touched on is... Don't get too worked up about the logistics just yet. It takes a fair amount of time to make a knife. Then it takes a whole lotta skill to make something that justifies someone paying several hundred, let alone several thousand dollars for.

Your first several are all going to be learning experiences anyway. After that see see how things are working out for you. If your skill is progressing fast and people show an interest in buying a few knives from you then you can consider how far you want to take it. At that point you'll likely be in the hole far enough that you're going to need to sell quite a few knives just to make up what your tools and materials are......if you're lucky. Then you can likely better determine if you want to keep it as a hobby or go into a full blown business.

**EDIT: ARRRGH I just noticed the date on this thread. Someone went and necroposted it. :mad:
 
Heck I'm just tickled to death my knife making hobby so far has stayed in the black.It bought me a bunch of tools and a couple of bottles of good booze.As much as I like it trying to make a living out of it would be tough.
This ones a good read to remind me of it.
Stan
 
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