Taxes and the home-based shop

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Permalink Reply by Ralph W. Bagnall on July 11, 2009 at 12:17pm

My shop is in a detached garage on my personal residence property.

I do deduct the proper percentage of taxes and interest as well as electrical, but don't go much further than that. I try to write off as much as I can, but when it comes to the IRS, if I have ANY doubts I pay the taxes.

Should I be audited, I vastly prefer that they determine that I'm do more back than owe.

Ralph

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Permalink Reply by David Bray on July 20, 2009 at 1:50pm

I had a home based business for more than a decade. I was audited in some fashion most of those years. On three occasions, they sent me a letter and told me that I missed something and the refund check with the additional amount would be sent directly (my kind of audit).

These people, as a rule are not unreasonable, but they do want what is supposed to be paid to them. I have found that as long as you are honest, send copies of your documentation with your taxes and fill out all of those silly forms that they request, you should be in good shape. During those years, when I used an accountant, they never offered more deductions than I already knew about. I found most of the deductions and asked the question to them and everyone of them would tell me, "Oh, you can take that." And I am paying you for what???? One of them did inform me that I needed to fill out 4 more forms that I hadn't been - oh joy!

Be careful, be honest, and be thorough. In a business you have to wear every hat including accountant. Your accountant will not have the $30,000 penalty, you will - if (s)he makes an omission - unless its your other half.

If you are using production equipment in your home business, put a sub-meter to the panel for the shop. It may cost a little bit but the investment is deductable (if I remember correctly) and the electric consumption to the shop is then a given. In your tax documents, show where this work was done - the separation of personal and business is complete and apropriate. If the shop is in a different building, like a detached garage, the A/C and heat are easier to document as well. The only thing that I didn't do was depreciate the house or building - I thought it was stupid and if you sell your place, you'll see why I say that. Treat it like a real business and it will be.

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Permalink Reply by David Bray on July 21, 2009 at 7:59am

It wouldn't be so bad if the rules didn't change every year but they do - just enough to spend more time than what's equitable. The small shops get hit the hardest. One thing I noticed when I had the business, when the state's revenues started getting a little tight, the state sent someone out very quickly for a sales tax audit. In this economy, that could be a serious issue to many small businesses. It is not the loss of money so much, its the lost time spent with these folks to give them what they ask. That's where sound accounting proactices and job costing can be a serious asset.


Take care and good luck,

David

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Permalink Reply by Patrick Kartes on September 24, 2009 at 6:20pm

I have been self employed in a home based Custom Cabinet Shop for more than 30 yrs. I deduct 100% of the use of my detached garage (which hasn't had a car in it since 1974) and a % of my homes' basement space where I have a small machine shop. My office space on the second floor is also deducted.
Just to complicate things, my wife is also self employed ( Consultant, Facilitator, Trainer) and home based.
We are audited regularly. Lots of red flags.
We do our own accounting and taxes.
I agree with David Bray. Pay what is due, especially all state sales taxes.
The audits usually result in small amounts from transposing figures from one page to another, or we missed some credit we didn't know we were entitled to. If you cooperate and are respectful it all works out easily.
One bit of advice (In agreement with David) do not take depreciation on the business use of your home, only maintenance expenses, otherwise Capital Gains when you sell the house will get you.

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