Tax Advice?

Discussion in 'After Hours Lounge (Off Topic)' started by JohnE, Apr 20, 2003.

  1. JohnE

    JohnE Supporting Actor

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    Could one of you guys who know's what you're talking about, answer me this? How does a write off work? I've been kicking around the idea of doing an on the side business from home for awhile now.

    As a guitar player for the last 18 years I know my way around the instrument pretty well, and was thinking about doing a restoration type of thing on the side. Nothing serious, but just pursuing something I love and maybe making a few bucks off from it. I've bought a handfull of guitars through Ebay over the years and and after a bit of spit and polish I've managed to sell all of them for small profits.

    How do business expense write off's work? If I need to buy a digital camera so I can post pics of the guitars I'm selling, can I consider that a business expense? What if I buy a couple of guitars and end up not being able to move them or at best only able to sell them for a loss, is that considered a write off?

    I do plan to eventually see a tax accountant, but I would like to find out if it would even be a financialy feasable idea before I spend any money.

    Any advice would help, thanks.
     
  2. Carl Miller

    Carl Miller Screenwriter

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    I'm sure others will offer their ideas here. The term write off is overused and misused for the most part.

    In small business, you'll hear a lot of people say stuff like "oh, I'll buy that computer printer and write it off as a business expense". It just means they're going to include that printer as a business expense, which will lower their profit or increase their business loss, and in turn lower their tax liability stemming from the business...Then, of course, they might go ahead and use the printer for business and personal use.

    In your case, you'd buy the digital camera, report it as a business expense (if that's legal, I don't know), which would in turn lower your profit, reduce your tax liability and then you'd have a digital camera you might end up using for business and personal use.

    Lots of people do this stuff, but the IRS has code and regualtions to consider as to what can be legally characterized as a business expense and what can't. Much of this code revolves around how the item is used and whether it is used primarily for business, only for business or whether it has mixed use between personal and business and if so, what percentage is it used for business.

    It's wise to do some research and/or consult a professional as the IRS does scrutinize business expenses to some degree, particularly sole propiertors (which is how I assume you'd run your business) which perennially report business losses on their 1040 returns...These losses reduce the adjusted gross income and thus the tax liability on the individual return.

    The term write off has legitimate uses as well, but most of the time you hear it used in the manner described above by small business people.
     
  3. Doug R

    Doug R Supporting Actor

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    Briefly:

    If you plan to have your own business, you'll file Schedule C, which is "profit and loss from business". Here you'll put all income made and list all of the expenses, which are placed in set categories like supplies, office expenses, etc.

    For instance, the digital camera would be a write off in your business, but you can legally only take the entire cost of the digital camera if you use it 100% for business. Legally you must determine what percentage you use for business and write off that total amount.

    As noted, the expenses come off your total income for the business. It's been reported that Schedule C can be an audit flag. For instance, if you're reporting a loss every year of your business or a high percentage of expenses, then you might expect the IRS to become curious.
     
  4. Scott Merryfield

    Scott Merryfield Executive Producer

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  5. Steve Tannehill

    Steve Tannehill Ambassador

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    Definitely see a CPA. The money you spend for an hour initial consultation (surely less than $100) could save you thousands of dollars in tax liability.

    - Steve
     
  6. JohnE

    JohnE Supporting Actor

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    Thanks for the advice guys. I will most certaily be seeing an accountant before I do anything.

    The thing is I don't mean for this to be my main source of income. I'd like to think I could make a couple extra dollars doing it on the side though. After a couple initial start-up costs, there really are no other expenses.

    Anyway I'm still trying to decide if it's something I really want to do or not. But thanks again.
     
  7. Scott Merryfield

    Scott Merryfield Executive Producer

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