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    11 Replies Latest reply on Jan 8, 2009 10:14 PM by colorgirl

    Tax Questions and Responsabilities

    colorgirl Newbie
      I am a Color and Design Consultant in the Charlotte area and started my "business" just a year and a half ago. It has been very slow getting off the ground as the economy has not been great, but I have also had to be home more than ever with my two year old son. The way I have seen the business over the past year or so has been more of an "awesome extra curricular activity", than a true business. My husband has concerns of how we will be affected tax wise as the business really has not brought in more than a few thousand dollors over the past year of so. Time and the Economy has been the real issue? I would love to work more, but the balance of family, kids, life makes it tough to keep up with it all. How will I be affected - should I start fresh with a new business name and model? Fortunetly we are in a situation where, my bringing in a regular paycheck has not been the issue and I know if I had the time I could be very succesful as both my husband and I have great sales and business skills? Would love any advice to keep us going and be sure I am not headed down the wrong path. My biggest question is how does this affect my/us tax wise and what should I do from here to avoid any major issues?
      Thanks for your time.
        • Re: Tax Questions and Responsabilities
          Lighthouse24 Ranger

          If you have been operating your business as a sole proprietorship, then you would complete a Schedule C (to figure/report your business income and expenses) and include it with your 1040 personal return (showing the "Net Profit" from your Schedule C in the appropriate box on the 1040).

          If you never registered the business and have been operating as a private individual (which is how it sounds), then you would probably be better off reporting the money you made on the "Other Income" line of your 1040 return. (You'd lose out on the ability to deduct your business expenses that way, but if you never registered the business, then you almost certainly didn't file or pay the state and local business fees and taxes that may apply, didn't collect and deposit sales tax on your sales, etc. So filing a federal return as a sole proprietor business -- when you were really operating locally as a private non-business individual -- could prompt those state and local taxing authorities to come looking for their overdue payments.)

          Your decision, from here forward, should be based on the question, "Am I truly engaged in this activity to make a profit, or is it just an 'awesome extra-curricular activity'?" If you're in it to make money, my advice would be to register as a sole proprietorship, most likely with your county clerk depending on where you live (in most locations, it's very inexpensive and everything involved can be done in a couple of hours). Then operate it like a business. Next year, you'd file a Schedule C to report the business' income and expenses.

          Hope that helps. Best wishes. (Note: I'm a business owner and consultant, not a tax attorney or accountant.)
            • Re: Tax Questions and Responsabilities
              CoachMike Wayfarer
              Happy New year Lighthouse24. May it be prosperous healthy!

              I agree with what you told colorgirl in general but we really need more info to effectively advise. Different states have different rules. For example, personal services are not subject to sales tax if she is in Fl. Also as you probably no there is no income tax for a sole proprietor in Florida.

              Never the less I agree with your points. They are all valid.

              Mike
                • Re: Tax Questions and Responsabilities
                  Lighthouse24 Ranger
                  I was thinking Charlotte NC, not FL -- but yes, different states have different rules. I operate in states where my services are not subject to sales tax, but even so, I'm still required to have a sales tax permit and file returns quarterly (they consistently show $X total sales and $0 taxable sales). Also, even when there is no state income tax, many local jurisdictions impose fees and taxes on businesses. My community requires a permit/annual fee for home-based businesses and charges property tax on home-based business equipment, for example. Some communities disallow home-based businesses entirely. The point I was really trying to make is that filing a tax return as a business entity, if this person didn't really have a business, might open a door she didn't want to open yet. Thanks for clarifying.

                  Happy New Year and best wishes to you, too, Coach Mike!
              • Re: Tax Questions and Responsabilities
                Adventurer
                Colorgirl,

                To be honest with you this is (potentially at least) a far more complicated matter than could be expressed through this forum. I would be happy to speak with you though if your interested in sharing more information. I will at the least give you my honest assessment of what your best options are.

                Let me know if you want my contact info. or feel free to send me yours.
                  • Re: Tax Questions and Responsabilities
                    Lighthouse24 Ranger
                    ". . . far more complicated" in what ways?
                      • Re: Tax Questions and Responsabilities
                        Adventurer

                        Lighthouse,

                        First off telling anyone that a Line 21 categorization is open simply to their interpretation is a fairly bold assessment. Second making broad strokes and assumptions like you have could be extremely misleading . Simply put you can't sum up the IRC code as it "may" relate to this scenario in a couple of paragraphs. You would always want to ask a lot of questions first before making a recommendation or implying something about a potential outcome. There is a lot more potential here to do the wrong thing than the most tax beneficial thing and no your not stuck with the same choice year after year.
                          • Re: Tax Questions and Responsabilities
                            Lighthouse24 Ranger
                            rjc2324,

                            First off, I'm not seeing where I wrote a Line 21 categorization is open simply to their interpretation (or anything like that).

                            Second, we only have the option of broad strokes and assumptions in this type of community -- unless the person posting the question opts to provides more detailed information. I think I was pretty clear about the generalizations and assumptions I was making, and the perspective from which I was offering a response (plus my background and credentials are readily viewable). It was a responsible answer in that regard, and the reader is free to take it or leave it.

                            Likewise you're free -- encouraged, in fact -- to present a different perspective or offer a different answer based on different assumptions. We all learn something that way.

                            You're absolutely right -- there are always a lot of questions that one would ask when we offer paid professional advice. Here, we're not. The purpose of this forum is to offer information and suggestions based on the information we have. The person posting the question (and anyone reading this thread) probably already knew she could contact a certified professional, provide the specifics of her situation, and get a conclusive answer. So I didn't think that telling her that would be particularly helpful. But neither did I imply that my suggestion was anything more than just that -- a suggestion (based on certain assumptions). Does that make sense?
                            • Re: Tax Questions and Responsabilities
                              colorgirl Newbie
                              Thank you all so much for your information. I am sorry I was not clear, but yes, I did register the business and received a business id- I had to file last year, and will need to file again. Someone recently mentioned, I should had filed quarterly? I am not sure if I was supposed to have done that or not? I don't think I made enough $ to report? (Ha Ha) So, my questions would be- 1) since I did not file "quarterly" will I be in "trouble"? I really hope not. I did keep all my reciepts and the expenses records. 2) The second question/ concern is since I have had two pretty non profitable years and I am not sure how this year is going to pan out... should I cut my losses now or try to pump it up this year? I was told also that if I did not make $ by my third year in business, I could have to pay back the "tax breaks" I got from being a business owner? Really, I so appreciate all of your advice. Thank you.

                              Should I just sign up for some small business classes somewhere? I just don't want to keep paying for training, onsite visits, Markets and more get so pricey.

                              Regards,
                              Colorgirl