Small Business Tax and Planning Question?

Question

I have a question about the following tax situation.
I run three home based businesses with my wife that were started in 2005. I also work full time. Through all of these businesses we have made about $1500.00.
We have expenses such as printing materials, Internet, Phone, Mileage, ebay fee's, advertising costs, website setup and maintanence. Thus far we have not gotten any kind of biz license, filed a ficticious name or anything else
My main questions are:
1. What are the pro's and con's of doing an LLC that operates them all versus simply filing a Schedule C with my Tax ID? If i do this now before the end of the year will it apply to this whole year. or do I start fresh with next year as an LLC.

2. I would like to buy a computer before years end and be able to amortize (?) it all this tax year using the "hummer clause" (section 117 ?) ?
3. What is the best accounting software for setting things up...
4. Are there small biz tax softwares that really work well.
Thanks

Answer 1

$1,500 is not enough profit to justify any kind of sophisticated business entity. More than 35 years ago, a used office furniture dealer in New York City named Harry Goode gave me some advice that has stood me in good stead ever since: pay for the fancy stuff of your business out of profits, not out of your savings and capital. Start on the cheap. Only swindlers, con men, have to show up in expensive cars, drip with gold, and rent impressive suites of offices from the get-go.

The purpose of an LLC taxed as a disregarded entity or partnership is solely to limit exposure to lawsuits, to protect your personal assets. Insurance can accomplish the same thing more cheaply for a small service business. Indeed, an aggrieved customer or member of the public will always sue the individual who (he thinks) has wronged him, as well as the entity.

If you are selling on eBay -- if that is your business -- it will take a long time to make real profits. Indeed, all but the biggest power sellers of expensive goods seem to wind up with rather low earnings per hour of labor and compensation for risk taken.

To answer your specific questions:

1. An LLC can be expensive in some states. In Calif. the annual franchise charge is $800 minimum. You would have to be doing substantial business before you consider that. And you would then want to consult with a tax adviser to see what form of entity (LLC disregarded entity, corporation taxed as Subch. S, etc.) would be most advantageous from the standpoint of personal taxation and pension allowances. Indeed, if you're selling internationally you might want to set up a Canadian corporation (LLCs are rare, and not the same as in the USA there) which are fairly cheap to run. Or an English company of Isle of Man LLC to sell in the EU. But those are for later, when you are making big bucks. As for attributing old sales to a new firm: while that is sometimes possible when a firm is a de facto one, operating somewhat illicitly during its founding days, it is not allowed to attribute to it income (vice assets, etc.) that pre-date its foundation.

2. Write-offs of computers are closely watched by the tax authorities. If you buy a computer for the business, DON'T use it for ANY personal work or you risk falling foul of various arcane rules. Same goes for a car. Instead, charge the business for (in the USA) allowed mileage on the car, and for actual use (per hour) of your personal computer. Others may advise you differently; that's my take on how to stay out of audit.

3. Quicken. But I live in Europe and have never used either the US or UK version. So what do I know.

4. Yes, but it is probably more expensive than you can afford. You probably can work directly from Quicken, and perhaps TurboTax will download from that onto Sched. C. Have a look at their Web site.

You could do worse than ask your tax questions on the newsgroup misc.taxes.moderated http://groups.google.com/group/misc.taxes.moderated?lnk=lr&hl=en

But sign up to Google via a temporary email address, not your regular one, or you'll be spammed forever: http://10minutemail.com/10MinuteMail/index.html

Answer 2

Having read your question it would appear that you have no idea what you are doing when it comes to taxes. The warning "don't try this at home leave it to a professional" surely applies. Every year there are thousands of changes to the 35,000 or so pages of the federal tax code. you should spend you time making money not reading the tax code.
As for the LLC you need to learn to crawl before you think about running. It is very unlikely that an LLC would help anytime in the near future for your size and type of organization. It would cost you at least $3 to $4 thousand to set one up.
Quicken will do all that you need to do until you get much larger. Give some thought to what you might be using for deductions before you set up the categories. Look at a Schedule C and read those instructions regarding a hint or two for the categories.

All of that said, Welcome to the world of business!

Answer 3

The previous answers certainly provide you with some good advice. Here are a few additional items to consider:

1. Don't apply for an LLC unless you find it absolutely necessary. It will complicate your life if your business is really in the beginning stages. You only need to incorporate or form an LLC when you need to start worrying about your liability, for example, if you want to protect yourself against an employee or a customer getting hurt on your property. If you're working out of your home, that liability protection may not be necessary, especially if you are covered by your homeowner's insurance. Generally, I would advise against an LLC or a corporation.

2. I'm not sure of what you mean by the "hummer clause". Section 117 of the IRC refers to education credits, so I can only assume you are a little mixed up in your understanding of what you can and can't do with your computer purchase.

First of all, if you buy a computer for business use, I would follow the advise of the previous poster and not use it for any purpose other than business. Even reading personal email could jeopardize your ability to take the full deduction.

Second, you have the option of depreciating your expense for the computer. That means that you can take a portion of the expense each year for five years until you fully recover the cost. This is handy if you think you will need deductions for the next five years.

You can also choose to expense the computer under IRC Section 179, which means that you take the full expense in the year you purchased the computer (or started using it for business.) This is beneficial if you have a lot of income you want to offset by your expense.

The rules governing depreciation are very complicated and tricky. You mention that you want to purchase a computer before the end of the year. If this is the case, you may fall into a set of rules called the mid-quarter convention that dictates how much depreciation deduction you can take this year.

When it comes to depreciation, I would seek ou the help of a qualified tax professional. In fact, since you are in business, I would recommend that you find a good bookkeeper to help you. If that person does books and taxes, then you are one step ahead.

Despite the previous answer that "Quicken" is a good software tool, I would urge you to not use it for your business expenses. The industry standard is "QuickBooks" - made by the same company, but a much better program.

It's a bit more expensive, but it is much more suited to what you are doing. You can even set it up to run each business as a separate account. I don't think that's a possibility for you in Quicken. Quicken is really nothing more than a checkbook program, but Quickbooks will set up your business correctly using a chart of accounts that will help you print profit and loss statements and balance sheets - something you will need if you ever apply for a business loan or other source of financing.

Better than pay the extra expense for Quickbooks, though, is to find a bookkeeper to do this for you. It's really the best answer. It's possible to be penny smart and pound foolish. You may save some money using software, but you may go out of business because you don't have expert help in your corner.

In terms of the tax software, there are a number of program out there that can be used and some I would even recommend in terms of ease of use. Still, I would not advise you to use a software program to do any tax preparation - especially for your business. Go talk to a tax professional. A program may be good at doing the math, but it's no substitute for knowledge of taxes. A professional will tell you what deductions you are allowed to take, how to properly report income, how to depreciate purchases like your computer, and - even more important - they will be able to show you about tax savings you may not know about yourself. A tax professional may cost you more in the long run, but even finding a few overlooked deductions could help pay the bill.

Just my advice.

Answer 4

see an accountant and don't be so cheap it will save you money in the end