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Question: Small business tax deductions?
(Posted by: on 2011-05-23 23:07:38)
So i’m looking to start a small business. The plan is simple, basically I’ll be looking for relatively inexpensive vehicles that need some TLC. With my resources and personal know how i can bring most projects to a more respectable condition for an already existing client base. My question is this…i know what business expenses are and i know what capital expenses are but what do purchases directly attributed to the “product ” classify as? If I spend money, not on garage equipment but on new components that actually increase the value and quality of the car i’m working on thus increasing the selling price (new brake technology, new safety technology, new aesthetics…) How does all this fall into tax deductions?
Posted by: Bubble on 2011-05-24, 00:24:59
I think that falls under the Cost of Goods Sold, which you deduct from your total sales. This lowers your net income which of course can lower your taxes. But to be sure, ask an accountant = )
Posted by: Bobbie on 2011-05-24, 03:26:46
Your ordinary and necessary business expenses for this purpose that have your good detailed records for would be added to you cost basis of the inexpensive vehicle that you have improved to sell to offer for sale to the public. Would be your adjusted cost basis of the item improved vehicle that you will be selling. You may want to seek some professional face to face assistance CPA with this matter for your first year or two to make sure that you are keeping the good detailed records that you will need for this purpose and how you will account for your cost basis adjustment and have to recover your expenses for this purpose of improving this capital item vehicle for sale in the future. Hope that you find the above enclosed information useful. 05/ 24/ 2011
Posted by: Herrmann on 2011-05-24, 06:54:26
These are still expenses. You are right that there are 2 types of expenses – direct and indirect. As you guessed, the above example is direct. These expenses are listed on the Schedule C right under the gross revenues. Indirect costs are listed further down in the detail section. Net income/ loss is: Gross Revenue – Direct Costs – Indirect Costs. Both Direct and Indirect costs reduce your net income the same, it’s just proper bookkeeping protocol. Be sure to consult with a lawyer regarding liability because the industry you are entering has a lot of liability if something goes wrong. A Schedule C does NOT protect any of your personal assets (home, vehicle, savings, etc). You should consider forming a corporation or LLC (Limited Liability Company). Both will help protect you in case of liability, though neither will protect against negligence.
Posted by: mrreliable3599 on 2011-05-24, 07:42:10
Cost of Goods Sold. Same thing as Inventory Costs. Seek professional assistance to set things up for taxation. People who wait til they’re already in business to figure out the tax situation always end up with a big mess on their hands. Get your tax situation under control before you start, keep it that way, and avoid big messes and headaches. Call around to a few places to get an idea of price and experience. A CPA could certainly help, if they’re a tax specialist, but you could also get good help from an Enrolled Agent, usually at a much lower cost.
Posted by: tro on 2011-05-24, 10:47:35
Call 1 800 829 3676 and request publication 334 it will help you the amount you pay for the preowned vehicle, the parts you replace to get it in good running condition are all entered into the cost of goods anything that you incur that is a business expense is claimed on your Sch C some might be included in your cost of goods, and some may be administrative costs
Posted by: Michael Plaks on 2011-05-27, 21:02:36
Byron, I will simplify things with an example, to avoid long-winded technical discussion. Basically, purchasing the cars themselves and parts to fix them will be a third category: COGS which stands for Cost Of Goods Sold. When you prepare your tax return, it will be reported on the second page of Schedule C. Example. You bought a car for $3,000 and parts for $1,000. After fixing it, you sold the car for $6,000. You made $2,000 on this deal. Schedule C will have these lines, listed in order of how the form is completed: Line 36 (purchases) $3,000 Line 38 (materials) $1,000 Lines 40 and 42 (COGS) $4,000 Line 1 (gross receipts) $6,000 Line 4 (COGS from line 42) $4,000 Lines 5 and 7 (gross income) $2,000 – as it should be. Then, you list all other business expenses such as advertising, tools, and utilities. Whatever is left of your $2,000 profit will be taxable net profit on line 31. By the way, you cannot deduct the cost of your own labor. Where it gets a little complicated is when you buy the car in December and sell it in January. Even though you bought the car and the parts in December, you do not get to deduct them until next year when the car is sold. This makes sense, right? You deduct these costs against the sales price of the car whenever it is sold. But to record it correctly, you will have to record it as inventory. Explaining details of how inventory works would be impractical here, sorry. Please either consult an accountant or try to plow your way thru the IRS publications that I linked below. Good luck with your business! Michael Plaks, EA, Houston TX MichaelPlaks.com
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