HBB start question

[Ervin Farkas]

Planning to start a videography home based business (HBB), sole proprietor, at the very beginning of next year (this is what my tax guy recommended, instead of doing it right now).

Do I need to wait until I have the business license, business bank account, etc. to buy the equipment?

Or can I start buying now and deduct those expenses once I have the paperwork? Since I will use my own money either way, I would think I can buy now - but will the IRS allow me to deduct expenses incurred before the business has been officially started?

Thank you,

[Rick L. Allen]

You are less than a month away from the new year so waiting a few weeks to make your business purchases will make your IRS paperwork MUCH EASIER next year.

You can use that time to work on your licenses, advertising prep and figuring out the gear you need based on who your clients will be/are.

Also, your tax guy can give you much better advice than those of us who frequent the forum. He's the expert - listen to him.

[Sareesh Sudhakaran]

Won't buying these things in your company's name and letterhead be important? Only a certified professional can answer your question.

[Chris Davis]

Originally Posted by Ervin Farkas

Do I need to wait until I have the business license, business bank account, etc. to buy the equipment?

Or can I start buying now and deduct those expenses once I have the paperwork? Since I will use my own money either way, I would think I can buy now - but will the IRS allow me to deduct expenses incurred before the business has been officially started?

No, you don't have to wait for anything. Remember, we do not live under an oppressive communist regime, you can deduct anything you damn well please. You don't have to prove anything to the IRS at the time of filing. However, in the highly unlikely event that you are audited, then you have to demonstrate a legitimate business use for the stuff you bought. So if you're buying a 52" flat screen for demoing client videos, don't put it your living room.

However I agree you should wait until after the 1st of the year because you won't have to worry about it on this year's taxes.

BTW, one of the best pieces of advice I got from a CPA was this: Claim all income and deduct everything you even think is a legitimate business expense. If you're audited (and you probably won't be) the IRS agent can only disallow a bad deduction and you'll pay the taxes you would have paid anyway (with no penalty.) Nobody goes to jail for a bad deduction.

Originally Posted by Sareesh Sudhakaran

Won't buying these things in your company's name and letterhead be important?

No, you do not have to use your company name or letterhead, at least not in the USA.

[Garrett Low]

Ervin, You need to discuss this with an accountant, tax attorney and I would recommend talking to a business accountant. One of the advantages I have is that my father is an accountant who has a consulting company where he specifically focuses on business accounting. He's helped me setup and manage two start up companies now. The tax code is incredibly complex and there are many sections that a good accountant and tax attorney specializing in business accounting will know about and will help you get the most out of your planning.

As far as your main question, no, you do not need a business license for the IRS to recognize you as a business. In fact, the government considers you a business the second you start collecting income from a venture. For your state taxes you need to check with your state tax board, each state has it's own set of tax laws. The license could help to establish a start date for a business but the fact is you'll want to start your business before you apply for the license so you can directly write off the fees as a business expense. You could lump the fees associated with obtaining a license with your initial start up investment but I can't remember all the details about how those costs get accounted for and show up on your balance sheet. I just remember that there is an advantage to declaring your start date as the day before you start incurring costs.

I'm not sure why your tax guy recommended you waiting. Generally, most businesses will actually make purchases at the end of the year if they will be showing a profit. That way their tax liability for that year is reduced. Here is the basic theory as it has been explained to me by numerous accountants (my brother is also an accountant so I get hit constantly with advice on running a business from a financial standpoint), If you wait until next year, say January 1, to purchase your equipment, you will not realize the tax write off until next April. That means that you have lost 1 year in opportunity cost for the tax savings. If you purchase it before January 1, come this April, you will reduce your tax liability for 2010 and have that savings in taxes at your use for the entire year. If you could simply put that money into an investment, you would make say 3%. So by waiting 4 weeks you'll realized an opportunity cost of 3% on the money you could have saved in taxes.

Since you will be running it as a sole proprietor, any losses your business shows will reduce your income from whatever other sources of income you have. If you do start your business this year, you could reduce your taxable income so your taxes for this year will be reduced.

In any case even if you wait until next year to start your company, you will have a contribution amount that you should calculate to start up your company. This will include any equipment you contribute, desks, chairs, paper, etc. So if you purchased equipment now, that would be included in that start up investment. Which then gets written off as an expense to your company. I believe you usually have to depreciate this amount though and I don't know if you can claim it as a Section 179 expense (look up Section 179 of the tax code for an explanation of what that is).

Again, you need to discuss this with an accountant that specializes in business accounting. The advise you seem to be getting is all geared toward making your tax filing "easier". That should not be your goal here. You need to determine the greatest financial advantage you can gain by doing things at specific times.

Sorry for the long post but I just wanted to give you some of what I've experienced starting up a Sole Proprietor business.

Good luck,
Garrett

[Garrett Low]

Originally Posted by Ervin Farkas

Since I will use my own money either way, I would think I can buy now - but will the IRS allow me to deduct expenses incurred before the business has been officially started?

You'll want to start thinking in terms of your money and your business' money. Get separate financial instruments for each. In other words, don't use personal accounts to pay for business expenses or visa versa. This makes things a lot easier accounting wise and much clearer in the event that you are audited.

-Garrett

[Chris Davis]

Before you start paying accountants, lawyers, et al you should check with your state's small business development center (just google that.) They will have a myriad of free services available to you, including training, counseling, and even business advice from accountants and lawyers.

[Garrett Low]

Chris has a good point. Most States and now many local governments have programs to help small business. You could also check with your local business associates and your Chamber of Commerce. Also, by connecting with your local business owners you will be making important connections with local business owners. You may even be able to work out a service trade of some sort that will give you the services and advise you need while having no out of pocket expenses.

I have to remember that I have free tax and financial management consulting services available to me. ;-)

-Garrett

[Don Parrish]

Simple solution, play it safe, wait until January, get the license and account first. Use the time to plan the business and learn all you can. Double check the camera that you want, will it do what you need, then read the online manual until it runs out your ears. Read about copyright, find the right price for your work. Make sure you diversify, You will need more than one type of video work to stay alive. Don't overspend, make sure every dollar you spend hits your need right on target. You have a fun adventure ahead but a lot of footwork and learning. Watch videos of the kind of work you plan to do and see others techniques. Your eye and style will be 80% of your success. Be aggressive at getting off the couch every morning.

P.S. I like for my purchases to be under my business name as the large purchases may help someday. Say you have a problem with an order and B & H looks at your account and sees 12 grand worth of purchases. It may help business wise that your major purchases were under your business name. I too am about to make the leap back into business.

[Garrett Low]

Originally Posted by Don Parrish

Simple solution, play it safe, wait until January, get the license and account first. Use the time to plan the business and learn all you can.

With taxes there is never a simple solution. And simply waiting is not playing it safe. The decision of when to "declare" the start of your business is a business decision. Again, getting your business license and opening a bank account does not necessarily determine the start of your business. I do agree that you should not jump in and buy equipment without adequate research first. But, it sounds like Ervin has already done his equipment research and knows what he wants to get to start.

Another good resource could be an accountant or CFO of a company you might have a friend working at. You could ask them what the advantages and disadvantages to purchasing now would be. Before you do purchase though check on your state's sales tax laws. In California there is a special exemption for Teleproduction and Post Production equipment. The normal state sales tax here is 9.75%. For equipment I purchase that fall under this category I only pay 4.75%. You should check to see if your state has any such regulations set up.

Also note that I'm not trying to convince you to purchase now or to wait. I'm just trying to point out that there are advantages either way. In any case definitely do your homework. There are some good books out there on starting a small business. Check with your local Small Business Administration office too. They're in the business of promoting small businesses.

-Garrett

[Don Parrish]

Garrett said

"With taxes there is never a simple solution. And simply waiting is not playing it safe. The decision of when to "declare" the start of your business is a business decision. Again, getting your business license and opening a bank account does not necessarily determine the start of your business"

Why would I tell him to wait ;

1. His accountant told him it would be best.

2. We are talking 28 days, he is not in a hurry.

3. His reciepts will say 2010 if he buys now.

4. The IRS requires a tax return when your business begins existence.

IRS notice -- Not in Existence Entire Year

"Even if you (a taxable entity) were not in existence for the entire year, a tax return is required for the time you were in existence. Requirements for filing the return and figuring the tax are generally the same as the requirements for a return for a full tax year (12 months) ending on the last day of the short tax year."
Tax Years

All I meant was to play it safe for 28 days, then create the business and then buy the equipment under the business name. What I said does in fact make his life easier. It is simple to just wait and buy the gear in 2011.

[Garrett Low]

Originally Posted by Don Parrish

G
Why would I tell him to wait ;

1. His accountant told him it would be best.

2. We are talking 28 days, he is not in a hurry.

3. His reciepts will say 2010 if he buys now.

4. The IRS requires a tax return when your business begins existence.

IRS notice -- Not in Existence Entire Year

"Even if you (a taxable entity) were not in existence for the entire year, a tax return is required for the time you were in existence. Requirements for filing the return and figuring the tax are generally the same as the requirements for a return for a full tax year (12 months) ending on the last day of the short tax year."
Tax Years

All I meant was to play it safe for 28 days, then create the business and then buy the equipment under the business name. What I said does in fact make his life easier. It is simple to just wait and buy the gear in 2011.

First let me say that I'm not trying to get into an argument so please don't misunderstand what I'm saying. To address some of your points, as I said, it appears his "tax guy" is thinking in terms of just tax filing and not financial advantages for a person operating a business. If his tax guy is a CPA who does personal taxes and does not specialize in business accounting and business tax filings he will, in my experience, most likely not have the full knowledge and expertise to advise someone about the best business decisions.

If you talk to any accountant, at the end of the year, 28 days can make a significant difference if it means posting in one year or another. In addition to owning my own sole proprietor businesses for the past 15 years, I also am a Project Manager for a Civil Engineering company. One of the standard practices is to look at our balance sheets and assess when to make expenditures and when to book income. At the end of the year our accountants and CFO always go nuts on our cash flow management because it can make a lot of difference on your tax liabilities for that year.

If he does purchase in 2010 of course his receipts would show 2010. But there are advantage that could be realized if he needs to reduce his tax liability for 2010 and if he decides not to start his company until next year he would still be able to write this equipment off to his company as an initial investment amount.

As for the IRS requiring a "tax return" for any entity in existence even for part of a year, I don't think I've suggested anything to the contrary. Since he is planning on a Sole Proprietor status this simply means he has to file a Schedule C along with his personal income tax return. It's not a lot of added work if you have a well set up accounting system. All the line items from your business accounting recorders transfer very easily to the line items on the required forms. Whether he starts a business now or January 1st, the tax reporting requirements will be the same. It is just that he has to do starting with his 2010 return as well as future returns.

I believe that you're statement about safety and equating it to waiting until the new year is not valid. Waiting 28 days just because the calendar changes and the tax year changes does not provide any safety. The real safety would be if he does not fully understand the procedures and requirements to starting a business and performing proper accounting and reporting practices. Then waiting has it's definite benefits, but the change of the tax year will not be the determining factor. It would be dependent on how long it takes to become knowledgeable about these subjects. It could take 2 weeks or it could take 2 months. However, if he does understand what is required, I believe all accountants and financial consultants who understand business, will tell your there is an advantage to starting the business this year.

That has been my experience and what I've been advised and have followed that through two business ventures. I believe the best thing anyone planing on starting a business can do is to make sure the business is set up correctly to start with. Establish solid accounting procedures which may take consulting a person who specializes in business accounting.

Again, I'm not attempting to persuade Ervin into jumping in if not ready now. I'm only trying to point out that there are certain complexities that could provide an advantage to making purchases this year.

And, I still stand by my statement that with taxes and the IRS nothing is simple. As an engineer I'm trained to be obsessed with details and have learned that it is necessary to read the actual letter of the law. Yes that means I've read several sections of the tax code and if you ever want to become confused in an instant, just pull up a section and read through it. :-)

-Garrett

[Don Parrish]

No argument here either Garrett, I suspect your knowledge is way up there after 15 years. It sounded as if he is just starting out and starting the first of the year with something simple like a "dome" book is what I envisioned. He could already have complicated taxes and the purchase would work or he could be retired and not be filing, it would all depend upon him. I was just thinking on the less complicated side of things for him and the savings of not filing "C" for 2010.

Ervin, it would be interesting to hear what camera you are choosing and what line of work your after. Good luck with what you do.

[Don Bloom]

And this is why I don't ask my barber for medical advice at least not most of the time but you then should see my barber. She's quite pretty.

Anyway, while we all have experience and some have had "dealings" with the IRS and most with attorneys and accountants, it is my very humble opinion that Ervin should 1) continue his talk with his accountant, 2) check with his local municpality to find out what he needs to do to start a legal business there (IE license, listing whatever) and 3) find an attorney locally that has expereince setting up a sole prop ownership. Unless the accountant is also a JD and has done before most accountant can only tell you the numbers side while the lawyer can tell you the legal side. Put them together and you should have the answers you need.
We should all keep in mind there are ramifications not only Federal level but state and local and that's why Ervin needs to talk to people in his area and get information specific to his area and the type of business he's setting up, be it sole prop or whatever.
I've been running Home based for 39 years (yes before it was the "norm") and yes I've had conversations with the IRS over the years especially in the beginning, and luckily I had both an accountant and a lawyer who were willing to step up to the plate and help me out back then. Trust me over the years things have gotten a whole lot better for those of us the run HBB.

[Garrett Low]

Don B, I completely agree with your recommended steps. And, speaking of State/Local specific laws, I'd be interested to know if any other states have provisions like California to reduce Sales Tax for Teleproduction and Post Production equipment purchases? I think I'll set up a separate thread to pose this question.

Ervin, like Don P. I'd be interested to hear your equipment choices and what type projects your planning on focusing on for your business.

Happy Holidays to all,
Garrett