TromboneChat

I have a pretty good shop set-up, and I generally order my parts retail from Votaw or Ferree, or if they don't have it, I order from an established tech and have the parts re-shipped at my cost. I'm the only tech for 60 miles around--100 miles if you don't count other folks like me working unregistered out of their homes, so I'm not impinging on anyone else's business.

Recently, I've been wondering whether it might be worthwhile to get an account with Allied to get parts at wholesale. I do around $10-$15K gross in brass repair and resale each year, and I may even be making a profit. I don't know, since I've never done the math and I don't keep solid records of what I buy and sell.

Getting an Allied account means I have to get a tax-exempt business number, which also means I have to officially register the business in WA, and start paying federal taxes. I'm not sure whether that's worth it. Has anyone made this shift from hobbyist to pro? Things I anticipate changing:

1) Having to keep records of what I buy and sell.
2) Reporting federal income.
3) Perhaps finding out that I make (or don't make) much more than I thought.

Is the hassle associated with incorporating worth it if I'm able to get parts at wholesale, delivered directly to me?

Do you really want to open a business and do repairs for fees? Or do you just want to be regarded as a professional for various purposes? I've "registered" two businesses in NC in the past (one as an LLC) and one as a sole proprietorship. In each case, since I never made any money in each of these, there were no taxes to be paid. There was a bit of minor pain in having to "file" online forms for 0 sales tax each quarter (though I usually waited and did that at the end of the year). All totally aboveboard, informed by my accountant, and perfectly okay with the State. In the case of the LLC I did get a federal tax number, but paying federal taxes meant only filling out the correct form on the tax return for 0 income. Although I closed both businesses over a period of about 10 years, I still retain my "commercial accounts" at a number of suppliers.

By the way, if you're thinking of going in this direction ... AND KEEPING IN MIND THAT I AM NOT AN ATTORNEY OR TAX ADVISOR ... The easiest approach is typically to create a single proprietor company. If I were concerned about shielding my personal assets from potential business liability, I would (and may do this in the future) create a standard S corporation. My accountant told me it was dumb to create the LLC since the S corp was simpler and cheaper. Actually, I think her words were long the lines of "Everybody got to the point of thinking that LLCs were really sexy, but for a lot of purposes they're just unnecessarily complicated." But your situation may differ. My wife had a Chapter S corp for a number of years, and it worked very simply and straightforwardly.

In any event, nowadays, (at least in my experience) all this is (at least legally and administratively) very simple to do and takes a few minutes online at no expense. Again, this is not legal or tax advice, but only a report of my own experience.

That was a nice corporation consideration post.

I was thinking of your first point about record keeping. There are certainly ways to make that easier like separate business checking account, business credit card, quick books to invoice and record payments.

It it seems the question is do you want to learn to keep records? Do you mind spending part of your day dotting the Is and crossing Ts to keep accounts?

Would the economics of a legal registered business work? One might start with estimating the income and expenses last year from credit card statements, bank account activity. Estimate What saving on supplies, etc. then could you write off shop space. Then are you expecting to advertise or call schools or something to generate business?

Interesting problem space.

1) Having to keep records of what I buy and sell.
2) Reporting federal income.
3) Perhaps finding out that I make (or don't make) much more than I thought.

Well, you should be doing the first two either way. Though your chances of getting audited and owing much are probably pretty negligible. Fortunately, filing for an LLC is super easy in most states. And if you are the only member of the business, you can treat it as a passthrough which basically means that you can subsidize your losses and expenses by deducting them from the amount you owe from your normal job. What you can write off would be tax advice which I can't give but its worth investigating because I suspect that if you're flipping stuff that your margns would be low enough that it would take a nice chunk off your personal income tax.

I would emphasize that if you in fact intend to run this as a genuine business (like with genuine customers, expenses, taxes on goods and services, etc.) you should take great care in separating your personal assets (bank accounts, inventory, home ownership, etc.) from the business assets. If there is ANY "co-mingling of funds" then a court may find it easy to "pierce the corporate veil" and open up your personal assets to any creditors who demand payment, file a suit, or file a lien. Again, not an attorney or tax advisor here -- but you definitely should consult one if you aren't totally confident about how to proceed. An ounce of prevention could save your butt from any unforeseen problems involving the business.

I'd also like to point out that having a side business that doesn't make money is a quick path to an IRS audit. The IRS is pretty strict about "hobby businesses" and your little repair shop will fit their model. I think the rule is you have to be cash positive for 3 years out of 5 before they call your business a hobby.

True -- if you take any deductions for things like capital spending or expenses. But if you don't have any revenue or expenses, then no one seems to care. And if there were an audit, it would be easy to demonstrate that you didn't claim any deductions or fail to pay any taxes. Even the IRS wouldn't audit in such a situation (if it even knew about it), since there isn't any cause or benefit to auditing. It's not a hobby. It's just a business with no income, no expenses, and no taxes (since nothing to tax). Nothing about the business would appear on any returns (no revenue, no taxes, etc.) because there's nothing to enter. Again: not an attorney or accountant, etc.

If you're tempted to ask what the purpose would be of such a business, re-read the original posting and the goals listed there and why the OP believes he needs to get a federal tax number in order to achieve those goals. If it's not obvious at that point, I'm not going to make it any more explicit, except perhaps to point you to the requirements for getting a federal tax number -- which are basically that you ask for one and they send you one. And I'm going to shut up about it now.

I think it will be fairly easy to keep track of the input and output. I do very little repair, since I don't want to carry insurance and I'm concerned that if I were to damage someone's horn, I'd end up being liable. I generally do refurbishment of used horns. If I document my own purchase prices, parts purchases, and my resale prices, I should have a good record of what kind of profit I'm making and the taxes I would have to pay.

I'm in the process of doing the same process right now with a '71 VW bug that I bought cheap. I quit keeping track when the cost of parts hopelessly exceeded the value of the restored vehicle.

Gary, thanks for your very thoughtful responses. I applied for an EIN as sole proprietor, and have sent my application in to Allied. WA doesn't make it easy, since one can't apply for a tax-exempt ID number without forming an LLC, but we'll see if Allied is willing to accept my documentation. If not, I may have to form an LLC.

If you're going to be doing repair professionally, even as a side business, you'll want insurance of some sort. A good friend of mine carries insurance for his side car repair and modification business, even though he doesn't really do it for the money.

Since I'm working out of my home, I think getting insurance and taking in repairs might get me in trouble with the Home Owners' Association. One of those things we're not supposed to do---along with keeping decrepit VW Bugs in the driveway...

Running a business without business insurance is an invitation to personal bankruptcy. Even if you're never sued by a dissatisfied customer or supplier, your homeowner's insurance won't cover any equipment or space used for business purposes; and, depending on the terms and conditions of your homeowner's policy, claims for loss or damage to personal property may be denied for failure to disclose material facts related to the insured property (non uberrima fides).

doctortrombone wrote: ↑Wed Sep 05, 2018 10:47 am Gary, thanks for your very thoughtful responses. I applied for an EIN as sole proprietor, and have sent my application in to Allied.

You will likely discover that having the EIN is not sufficient for Allied, and that they will want other evidence that you are a practicing tech. Often evidence of accounts with other suppliers (Votaw, Ferree's, etc.) or copies of old invoices will do the trick.

WA doesn't make it easy, since one can't apply for a tax-exempt ID number without forming an LLC, but we'll see if Allied is willing to accept my documentation. If not, I may have to form an LLC.

This doesn't make sense to me -- but then so much business law doesn't make sense. Not sure why you want to be tax-exempt. That's a real pain since you have to continually ensure that you satisfy federal requirements (unless you're just talking about state taxes, but even then I'm confused). And why require an LLC (rather than a Chapter S)? Sounds kind of weird. But since I'm sitting in Seattle at the moment, I can speculate.

The HOA is probably your bigger worry. Much worse than any state or the federal government -- and the busybodies in it are aggressive and ever vigilent. Every attorney I've ever talked to has sworn that he would NEVER be an HOA member (including -- or especially -- the ones who represented HOAs).

ghmerrill wrote: ↑Fri Sep 07, 2018 4:19 pmThis doesn't make sense to me -- but then so much business law doesn't make sense. Not sure why you want to be tax-exempt. That's a real pain since you have to continually ensure that you satisfy federal requirements (unless you're just talking about state taxes, but even then I'm confused).

I think maybe he's talking about a state reseller permit so he doesn't have to pay sales tax on parts?

Makes sense. The "tax exempt" jargon threw me off about that.

JohnL wrote: ↑Fri Sep 07, 2018 6:06 pm

ghmerrill wrote: ↑Fri Sep 07, 2018 4:19 pmThis doesn't make sense to me -- but then so much business law doesn't make sense. Not sure why you want to be tax-exempt. That's a real pain since you have to continually ensure that you satisfy federal requirements (unless you're just talking about state taxes, but even then I'm confused).

I think maybe he's talking about a state reseller permit so he doesn't have to pay sales tax on parts?

Correct. WA has no state income tax, so they're sticklers for State sales tax. The permit allows Allied to send me parts without having to assess sales tax--something that they aren't equipped to do.

I do find the idea of a tax-exempt facility for the rehabilitation of wayward trombones to be quite funny. And I find the concept that I may very well be "non-profit" quite sad.

You're threading your way through a bureaucracy that is tax-oriented and a supply industry that is in part "guild oriented". Expect some frustration.