garage expenses a tax write off?

[woodersen]

First, forgive me because i dont know much about how taxes/itemizing work.

I was talking to my friend tonight about our income tax refunds. We both owe. He asked if im claiming my shop expense as a write off. This year im spending 30k to build a personal shop. I do small stuff on the side, and advertise and conduct business online. I polish and restore aluminum and stainless trim. And i do other car related stuff more as a hobby. But people pay me. I have a name for the business. But i dont have a tax id. I do plan to push my little side hustle more now that i have space to work again. The money i make doesnt amount to a whole lot. I think in 2011 i might have made 2000 to 2500..i also buy parts and re sell.

What are my options?

 

[Charles (in GA)]

You need a good tax accountant. Get crazy with deductions and throw up a red flag to the IRS. Keep any deductions simple, a portion of the utilities, a few other simple items the accountant says are OK and don't get crazy and try to deduct way more than you take in to show a loss, it won't work, and isn't worth the hassles in the end.

Charles

 

[stingry]

Do you declare your earnings on your tax return? Do you really want the IRS poking around in your side business??

Cheers
Steve

 

[regguy1]

You need to claim the income and expenses (keep good records) if you don't make a profit for 3 out of 5 years the IRS will declare it a hobby and disallow deductions.
If it's just a hobby don't deduct/ if you're going run a business and file schedule C or Incorporate go for it. Then you'll need vendors license and collect and remit sales taxes to the state / employer ID for federal taxes and a host of other things.

 

[Falcon67]

You need to talk with a tax pro. The short answer is - yes, provided you document your business activities appropriately. I do the same with our racing and photo business. You could technically depreciate the building or a portion of it. But there are long term effects to that - like if you sell the home and building then a portion of the proceeds would have to be applied to the building and if it was depreciated below that number you have a taxable gain. It can get complicated. On the upside - if you run a legit business as described you can deduct any materials and machines needed to support your business. However, you best show some profits within 5 years or your business can be declared a hobby and you'll own back taxes on everything you took before.

So - another short answer: If you can't figure it out on your own, get a pro in the loop or you can put yourself in a big bind.

I sold a little over $2000 in product in 2012. We have a tax ID, business name on file, file a Schedule C and remit Texas state sales taxes. The sales tax bill this year was $7.42. Find the rules and play by them, it's not that hard.

Also - learn if your state/county requires that you declare business personal property. It's required in Texas and that's another spring ritual that must be delt with. And, a tax paid.

 

[bobscogin]

What are my options?

Keep your activities off the radar. You'll be far better off. Once you let the IRS in on it, you'll be sorry.

Bob

 

[ConCretin]

Not that you've got bad tax advice on here but don't look for tax advice on here. Consult a tax accountant before you take any deductions related to business activity. You have to know the rules before you circumvent the rules. Just sayin.

 

[woodersen]

i dont think my hobby will ever turn into full-time unless i can get some chrome dip tanks back there. then id love to quit work. but reality is, its just something i will do after work and on the weekends. so its sounding like im better off not opening up a can of worms if i dont plan on making a whole lot of money off it? i was just thinking maybe i can claim this large expense on my taxes and get some of it back.....wishful thinking it seems like

 

[Nighttrain]

Great advise above. Don't listen to Legalzoom and go that route. Talk to a CPA. Something I learned about claiming a home office on taxes is when you sell the house you will end up will a liability there. Still not sure about that but was told that. Even with all the advise I was given it does not add up to what a good CPA can do for you. I did buy a nice plasma cutter for my "business" which is in my garage.

 

[pmiranda]

I'd be very careful and only write off what you can prove is solely for business use. Keep good records for at least 5 years (some say 3 but it's not hard to keep them longer in case they audit you and dig deep).
If you write off vehicle expenses, keep logs of when and how far you drive (I do this for charity work I do). Keep gas receipts, service receipts, etc, although the mileage is the most important.

The tax ID is important if you pay employees (if you pay anybody enough in a year, it can count, even if it's just a babysitter or a cleaner) or want to buy things at wholesale. In my state they've stepped up enforcement of sales tax on services as well as products so if you start writing off business expenses they might start asking where their sales tax you should have been collecting is.

I'm all for getting your due, but these are not people you want to play games with.

 

[Higgins]

The other question is, are you allowed to run a business out of your house? Do you need a business permit from the county or your town? Are you a member of a HOA or PUD and how do they feel about Home Based Businesses?? Which brings up the topic of your home insurance. Are they aware of your "Business"?
So you may not want to raise a Red Flag on your business...........

 

[hockey88fan]

Keep your activities off the radar. You'll be far better off. Once you let the IRS in on it, you'll be sorry.

Bob

Good advice. First thing would be to show your income from this hobby on your return, you don't wanna do that.

 

[JakeKohl]

You can declare your business as a sole proprietorship pretty easily...filling as an LLC takes more effort but it gives you some legal separation from the business operation (if someone sues, they can only go after your business holdings if you are LLC or above- not your personal property). However, you definitely will need to report income/expenses in order to legitimize the deduction of the garage part of your property. Additionally, if you are doing local business, you should get a retail license as the local/state may come asking about their sales tax....and THAT is a real PIA to keep up with (trust me). Depending on how much business you are doing, this may cost you more than it will save.

You basically have two options when it comes to the property. You can claim it as "business use of your home" or declare that part of your property as business property (I forget the term). With "business use of your home" you basically can claim a business expense for an equal percentage of the property you use exclusively for business from your home expenses - electricity, water, phone, taxes, interest, etc. For instance, if your garage is 20% of your home square footage, you can claim 20% of your utilities, home repairs, and taxes as a business expenses. However, it may get a little fuzzy there because garages aren't typically considered "living space" unless they're climate controlled...but I may be splitting hairs.

If you claim that percentage of your home as business property (again, I forget the term), you can take a bigger expense against the business operation as you depreciate the property. However, should you sell the house in the future, your business will be responsible for paying capital gains tax on it's portion of the property.

Most local zoning allows you to run a business out of a residential area but it can't look like a business. In my case, I run a business out of my home and I can have employees (under the same reasoning that I can hire a guy to cut my lawn) but I can't have clients coming and going or have it "look" like a business. It works for me in my case. Home owner's associations could have a real problem with something like this, however.

 

[rlitman]

You need to claim the income and expenses (keep good records) if you don't make a profit for 3 out of 5 years the IRS will declare it a hobby and disallow deductions.
If it's just a hobby don't deduct

THIS!

For the most part, you cannot deduct more from a business than you declare as income. So if you are not declaring the income from your hobby, you certainly cannot deduct expenses for it. A deduction means that you are deducting something from your declared income, which reduces the taxes you owe. Again, for the most part, you cannot deduct from zero.

Also, if you do declare income from your "business", you must understand that deductions for "hobby" businesses are not allowed. Any business that takes a loss for 3 out of its first 5 years will be declared a hobby by the IRS, and your deductions may become invalid.

If you claim that percentage of your home as business property (again, I forget the term), you can take a bigger expense against the business operation as you depreciate the property. However, should you sell the house in the future, your business will be responsible for paying capital gains tax on it's portion of the property.

You depreciate business capitol (such as that percentage of your home, or equipment), and amortize business expenses (such as legal fees to set up a corporation, etc).

BUT unless you declare a profit 3 out of 5 years (and consequently PAY taxes on this business's income), you cannot deduct anything (there are exceptions to this hobby rule, such as for rental property that you do not occupy, but you do not fit one of these exceptions).

 

[CNGsaves]

Great advise above. Don't listen to Legalzoom and go that route. Talk to a CPA. Something I learned about claiming a home office on taxes is when you sell the house you will end up will a liability there. Still not sure about that but was told that. Even with all the advise I was given it does not add up to what a good CPA can do for you. I did buy a nice plasma cutter for my "business" which is in my garage.

Would NOT have any tax liability on sale of house/garage later UNLESS depreciation was claimed. So be smart and do NOT claim any depreciation unless this is a full blown business with full records, etc.

If your services aren't subject to sales tax, you could probably fly under the radar as you're a "small fry" or little fish for IRS. If your gross income climbs into the 25K to 100K level, then you'll get more scrutiny.

If this year is big expense year because you bought some equipment, you could file Sch C and report it as a loss. The Business Use of Home form could be filed with a reasonable % use for business. This BUH amount would flow to Sch C as an expense. Finally, your mileage for chasing parts, depositing payments, etc. could be deducted using Form 2106 that would flow to Sch C.

Up to you if want to report a loss, that's fine ; but hobby rule would kick in eventually if you had losses year after year. Also don't get greedy and go crazy with questionable deductions.

HOA or other entity will never find out from IRS that you filed Sch C ; it's just you and the IRS . . . . and your conscience! Good luck!

 

[theoldwizard1]

I'd be very careful and only write off what you can prove is solely for business use. Keep good records for at least 5 years (some say 3 but it's not hard to keep them longer in case they audit you and dig deep).
If you write off vehicle expenses, keep logs of when and how far you drive (I do this for charity work I do). Keep gas receipts, service receipts, etc, although the mileage is the most important. .

Excellent advice !

You are entering dangerous water ! If you are not comfortable with number and tax forms, hire a professional !

 

[theoldwizard1]

I do the same with our racing and photo business.

Years ago, I had a buddy who had a "racing" business. He kept excellent records and did show income some years (sold a few chassis, did some welding, didn't declare all of his expenses).

He did get audited one year. He showed up with his folio full of receipts and the IRS guys went trough all of them. He disallowed one gas and hotel receipt for a trip to an out of town track that was rained out, but in the end my friend found more tire receipts that he had not declared so it looked like the government might owe him more money ! That's when the audit ended !!

 

[pcmeiners]

"The money i make doesnt amount to a whole lot"

For the amount your presently making, opening a Chapter S or LLC, would only make a paper work headache and big expense. I use to do all may Chapter S tax forms myself, but now let an accountant do it, at a cost of $500/yr, plus a few hundred in minimum state taxes (NYC), and a few days each year prepping. You could do sole proprietor, but for the amount you state it is still not worth the headaches, especially a possible audit.
Never been fully audited in 20 years, but have had to explain/ provide info to avoid an audit a number of times. The last time, a mistake by a client issuing an incorrectly filled out 1099 cost me 4 trips to the IRS office (in Manhattan) and 3 of the trips were unproductive as the IRS could not tell me what the issue was about... basically I had to take off 4 days, and a few days to make sure all my tax materials were in complete order. Forget the write off !!!

 

[Falcon67]

http://www.irs.gov/uac/Business-or-Hobby?-Answer-Has-Implications-for-Deductions

"In general, taxpayers may deduct ordinary and necessary expenses for conducting a trade or business. An ordinary expense is an expense that is common and accepted in the taxpayer’s trade or business. A necessary expense is one that is appropriate for the business. Generally, an activity qualifies as a business if it is carried on with the reasonable expectation of earning a profit. In order to make this determination, taxpayers should consider the following factors:

• Does the time and effort put into the activity indicate an intention to make a profit?
• Does the taxpayer depend on income from the activity?
• If there are losses, are they due to circumstances beyond the taxpayer’s control or did they occur in the start-up phase of the business?
• Has the taxpayer changed methods of operation to improve profitability?
• Does the taxpayer or his/her advisors have the knowledge needed to carry on the activity as a successful business?
• Has the taxpayer made a profit in similar activities in the past?
• Does the activity make a profit in some years?
• Can the taxpayer expect to make a profit in the future from the appreciation of assets used in the activity?

The IRS presumes that an activity is carried on for profit if it makes a profit during at least three of the last five tax years, including the current year — at least two of the last seven years for activities that consist primarily of breeding, showing, training or racing horses."


Staple the bold part to your forehead. We race for money and sometimes do damn well at it.

 

[Dadstoy]

What the IRS doesn't know the better. My hobby and what I earn doing it is none of their business. They get enough from my regular job.

 

[regguy1]

What the IRS doesn't know the better. My hobby and what I earn doing it is none of their business. They get enough from my regular job.

That's what Al Capone said...worked out great for him, free room and board at Alcatraz

But seriously it's not the best idea to make posts in a public forum about evading taxes, deductions and tax avoidance are legal...non reporting of income and tax evasion are not.......

 

[joe_padavano]

I'll echo what's been said about getting professional tax advice on this, but I'll also add a few other things to think about. The issue brought up above about zoning and HOA requirements on a home-based business is a big one. Once you claim this as a legitimate business, you are going public in terms of telling the city and your neighbors what you're doing. The other thing you will have done is tell your insurance company what you're doing. Once they find out, expect questions at a minimum. More likely is that you'll be "encouraged" to pay for commercial liability insurance for your new business.

If you're simply trying to squeeze as much as possible out of the IRS for what is really a hobby expense, you're asking for trouble. If you legitimately are trying to run a business (and even a part-time business is legit) then do it right and get the maximum deductions.

 

[regguy1]

I'll echo what's been said about getting professional tax advice on this, but I'll also add a few other things to think about. The issue brought up above about zoning and HOA requirements on a home-based business is a big one. Once you claim this as a legitimate business, you are going public in terms of telling the city and your neighbors what you're doing. The other thing you will have done is tell your insurance company what you're doing. Once they find out, expect questions at a minimum. More likely is that you'll be "encouraged" to pay for commercial liability insurance for your new business.

If you're simply trying to squeeze as much as possible out of the IRS for what is really a hobby expense, you're asking for trouble. If you legitimately are trying to run a business (and even a part-time business is legit) then do it right and get the maximum deductions.

Good Advice......

 

[JakeKohl]

I'll echo what's been said about getting professional tax advice on this, but I'll also add a few other things to think about. The issue brought up above about zoning and HOA requirements on a home-based business is a big one. Once you claim this as a legitimate business, you are going public in terms of telling the city and your neighbors what you're doing. The other thing you will have done is tell your insurance company what you're doing. Once they find out, expect questions at a minimum. More likely is that you'll be "encouraged" to pay for commercial liability insurance for your new business.

If you're simply trying to squeeze as much as possible out of the IRS for what is really a hobby expense, you're asking for trouble. If you legitimately are trying to run a business (and even a part-time business is legit) then do it right and get the maximum deductions.

My homeowner's insurance company (major insurance company, starts with "S" ends with "m" ) wasn't really concerned that I run a business out of my home/garage. They just simply won't cover the business assets or any business related activity but would still cover the structure/home. I need to get a commercial policy to cover that other stuff ... and they were recently supposed to send me some referrals but never did....I need to get on that.

But, then again, I run a graphics business and am not talking about having chemical dip tanks in my garage either.

 

[Falcon67]

That's what Al Capone said...worked out great for him, free room and board at Alcatraz

But seriously it's not the best idea to make posts in a public forum about evading taxes, deductions and tax avoidance are legal...non reporting of income and tax evasion are not.......

LOL - The Internal Revenue Code states that "gross income means all income from whatever source derived... Even income from crimeshttp://en.wikipedia.org/wiki/Crime is taxable and must be reported, as failure to do so is a crime in itself." If you trade a wheel barrow for a lawn mower, the regs require that both of you report the proceeds of the trade as income. Those upgrades people get on Overhaulin' or the kitchen upgrades on HGTV - all taxable.

 

[911mike]

If your not making at least 10k a year don't do anything. Keep the cash and move on. Pigs get fat, hogs get slaughtered. Keep it simple.

 

[bop_pa]

Yes, you can, however the question is will you beat the standard deduction to make is worth while. Plus like other said you need to have your entire side business well documented. Just remember this tip, you may be able to slide something by the IRS once, twice, maybe three times, but once they find something they dig in and want to go back in time and look at other stuff. So getting a pro's help would be beneficial.

 

[woodersen]

If your not making at least 10k a year don't do anything. Keep the cash and move on. Pigs get fat, hogs get slaughtered. Keep it simple.

Out of all the response on this topic. This makes the most sense to me. Btw.... pigs get fat hogs get slaughtered is my phrase lol

 

[joe_padavano]

My homeowner's insurance company (major insurance company, starts with "S" ends with "m" ) wasn't really concerned that I run a business out of my home/garage. They just simply won't cover the business assets or any business related activity but would still cover the structure/home.

And if a business related activity starts a fire that destroys the home? Sorry, but my experience with insurance companies is that they will find any possible way to screw you. Kudos to you if your company isn't that way.

 

[JMartens]

A lot of good advice posted. I do general contracting on the side which includes building pool shells and cabinets/built ins in my woodworking shop. I run my business as a sole proprietorship and haven't had any problems to date. I keep all of my records and write them up for my CPA and let them review them and make the final call and submit my taxes. I haven't had any problems deducting a portion of the bills for the house based on how much time I spend working on projects.

I tried another small business that made retail sales and will never do that again. Dealing with the state on sales tax was a royal PIA. The first year I was in business, the state entered the wrong date on when my business was opened and threatened to put a lien on my house. I was guilty until proven innocent and it was their mistake as they entered the wrong year. I closed that business with the state in the middle of last year and received a sales tax reporting booklet for 2013. I guess the sales tax side of the house didn't get the memo

 

[o2bnkc]

I use part of my house as my office space, but the deductions aren't worth getting on the IRS radar for. Since it's my main source of income I do try to write as much off as I can, so that's why I put this as office space. I'm pretty sure you can write most of that garage off as "home improvement" expenses. Check into that. Good luck! Oh, I almost forgot! First time on here. What a great place! It was mentioned on the Corvette Forum, so I popped in over here and have been amazed by some of the things I've seen. Fantastic!

 

[50flathead]

I'll echo hiring a good tax pro. The internet in not a real good place for tax advice or medical advice.

 

[Falcon67]

X2 on the Home Office - not worth the potential hassle. Welcome o2bnkc!

> I'm pretty sure you can write most of that garage off as "home improvement"
> expenses.
No, they add to the basis of the house and you can only use them to offset proceeds of a sale. You can deduct the interest - maybe. Publication 530. Hell, I'd be all over that. We're getting $3000 in new vinyl EnergyStar rated windows in the next couple of weeks - zero decuctions or credit for the investment.

Which by the way is a good read for someone thinking of taking on expense deductions of any kind because it's a prime example of how f'n complicated the current tax system makes a fairly simple question: "This section explains what expenses you can deduct as a homeowner. It also points out expenses that you cannot deduct. There are four primary discussions: real estate taxes, sales taxes, home mortgage interest, and mortgage insurance premiums. "

http://www.irs.gov/publications/p530/ar02.html

 

[machine_punk]

I tell my tax accountant every year, "Get us as many deductions as possible, but make sure we pay whatever we need to pay--the mob bosses didn't go to jail for killing, they went to jail for evading taxes."

I like to be able to sleep well at night. Cheating on taxes just isn't worth the sleepless nights for me.

Kev

 

[rlitman]

I tell my tax accountant every year, "Get us as many deductions as possible, but make sure we pay whatever we need to pay--the mob bosses didn't go to jail for killing, they went to jail for evading taxes."

I like to be able to sleep well at night. Cheating on taxes just isn't worth the sleepless nights for me.

You're overthinking this. If you paid what you think was correct, in good faith, then the worst you could be liable for if you made a mistake is the difference, plus interest. For the most part, this is even true if your "interpretation" differs from the IRS's.

The mob bosses went to jail for fraud. Now if you set out to defraud the government, then you deserve restless nights. Otherwise, get some sleep.

 

[o2bnkc]

X2 on the Home Office - not worth the potential hassle. Welcome o2bnkc!

> I'm pretty sure you can write most of that garage off as "home improvement"
> expenses.
No, they add to the basis of the house and you can only use them to offset proceeds of a sale. You can deduct the interest - maybe. Publication 530. Hell, I'd be all over that. We're getting $3000 in new vinyl EnergyStar rated windows in the next couple of weeks - zero decuctions or credit for the investment.

Which by the way is a good read for someone thinking of taking on expense deductions of any kind because it's a prime example of how f'n complicated the current tax system makes a fairly simple question: "This section explains what expenses you can deduct as a homeowner. It also points out expenses that you cannot deduct. There are four primary discussions: real estate taxes, sales taxes, home mortgage interest, and mortgage insurance premiums. "

http://www.irs.gov/publications/p530/ar02.html

Thanks for the info!

 

[pcmeiners]

"then the worst you could be liable for if you made a mistake is the difference, plus interest."

Yep, the IRS generally gets around to notifying you just before the 3 years anniversary of the mistake, billing you at a compound interest rate of 22% on the principle and penalty from the date of filing, then your state might want some also.
Also note ,if the FEDs make a mistake in your favor, they still try to issue a penalty, and they will still charge you 22% interest. Meanwhile in my state, if I charged 22% on a loan, I would have Butch as a cellmate in jail.