Starting a home frag business

[BradR]

For 500 a lawyer will contract me a LLC. If I have a profit motive, all costs should be deductible. Does this mean the costs of buying starter frags and lighting can be deducted so that any money I make can be sunk directly into those costs?
Thanks for any answers or suggestions.

[magnum420]

ok... I have to ask... What is a Needle Jockey?

Now I am no lawyer, and not a CPA, but I believe that any costs associated with the startup or operation of a business are deductable. That should include stuff like tanks, lights, starter frags. I believe it also includes stuff like the electricity to run the equipment, and I think that you can even write off the portion of your house that you are using for your business and stuff like that.

Again, I am no lawyer or CPA so you might want to talk to someone that knows 100% what is going on before you deduct these things.

[AnnArborBuck]

Do you really need to spend 500 to get a LLC. My wife started up a small business and her license was like $25 and a LLC was around $75 if I remember correctly. And yes, you can deduct all of your expenses. If you are based out of your home you can deduct part of your electical costs, water, heat, etc. I would double check with your insurance agent about being covered.

Get a small business money manager application like Microsoft Money or Quicken and it will help you with deductions, taxes, etc.

[holeinone1972]

Well the $500 is deductable. I would steer clear of trying to write off a portion of your home though. That can be very tricky.

Corals bought thru a wholesaler with a license are deductable, but not from hobbiests. Unless they want to give you a receipt and pay taxes on them.

Unless you are gonna run a real business I would not bother with this, especially if this is gonna be a hobby and not your livelihood.

Trouble is brewing here trust me, more trouble than it is worth, been there done that.

Rob

[nic_u812]

uh... is a needle jockey a DJ???

[jg013c]

The IRS is very suspicious of people trying to write off hobbies as business losses. Before you attempt this, you should contact a qualified tax attorney. There are complicated rules in play.

People who turn a profit and pay correct taxes may not have a problem with writing off the buying of coral as a legitimate business expense. However, people who loose money year after year may be seen as hobbyists by the IRS.

[SunDragon]

make sure to check you county laws. My county clearly states on the business license app that you cannot sell anything other than hand made crafts out of your house, and you cannot modify any part of your house to accomodate the business.

Also be aware of your LFS's. We have a bad one here that sicks the law on anyone they get word of selling frags out of there house.

[marinelife]

Around here all you need is a business license and you can do anything out of your house

[AnnArborBuck]

Originally posted by jg013c
The IRS is very suspicious of people trying to write off hobbies as business losses. Before you attempt this, you should contact a qualified tax attorney. There are complicated rules in play.

People who turn a profit and pay correct taxes may not have a problem with writing off the buying of coral as a legitimate business expense. However, people who loose money year after year may be seen as hobbyists by the IRS.

You have 3 years to turn a profit, after that you can't deduct anything else. I would contact an attorney for exact details though. You could go into the breeding forum as there are several individuals in there that are doing this, as well as the coral propogation forum.

[shanekennedy]

donno if you'd need a LLC selling frags mail order. i don't see anyone getting killed injured from a frag. however, if you're selling out of your home, someone could trip & fall. you can fill out the LLC papers yourself, w/o the $500 lawyer fee. http://www.llcweb.com/

[Nabber86]

I just set up a home based business last year (nothing to do with frags tho). I have learned a couple of things:

If you are a legitimate business you can deduct expenses including business purchases, vehicle, utilities, and house space. You also have to deal with depreciation on any equipment that you claim (big PITA). House space is really hard to claim unless you have “dedicated space� that is used for business purposes only. You may even have to have separate plumbing and power to your business space to claim this. Sometimes a separate entrance is required to your house. If you use a computer to track your orders and expenses you can deduct that too (after depreciation), but you better have a dedicated machine located in your business space that is used for nothing else (NOT the one in the extra bedroom loaded with porn and illegal MP3 files).

Where people run into trouble is when they try to deduct the $5000 that they spent on equipment (tank, stand, lights, skimmer, Ca reactor, computer controlled 3-stage dosing system) then report a loss because they didn’t make more than $5000 in gross sales. You can only report a loss for a limited amount of time (three years at best). Maybe even less if the authorities decide to audit and determine that your business aint really a business.

The "hobby versus business" question is a biggy. Businesses run at a profit. Even in the first year you cant claim $100,000 worth of expense and report $100 in gross sales. Your business must also “look� legitimate (on paper and to someone visiting the premises).

If you are a “hobby� you loose most all deductions, but what people tend to forget is that you can still offset any profit you make by the cost of the actual materials that you purchase and later sell, which isn’t that bad of a deal. In other words if you buy $500 dollars worth of frags, raise them and then sell them for $1200, you only have to report $700 as profit. Then it is just a matter of keeping receipts and paying taxes – much easier.

[TheMcs]

LLC fees vary by state. Something has to turn a profit 2 out of 5 years to remain a business and not be classified as a hobby.
If you have a room in your house dedicated to the business (not an office/home gym, etc.), figure the % that room takes up of your house by sq footage and you can deduct that % of all utility bills.
You can deduct start up expenses including equipment and livestock. You can also deduct losses (dead corals) if you can provide documentation of it's value. Keep track of mileage on your vehicle for business purposes. For 2005 you get over 40 cents per mile to deduct.
Just don't get stupid on what you write off. The IRS isn't stupid and has been playing the game longer than anyone else.
The above is from my own experience and is by no means bonafide legal or financial advice. Good luck with your endeavor!

[zanemoseley]

So at what point do you have to start claiming coral sales on your taxes. So if you're just a hobbiest with no business license that sells say $1000 in frags a year on the RC selling forum you don't pay taxes but as soon as you get a business license you have to start paying taxes? Or is it after you sell over a certain amount of $ in corals a year that you pay taxes regardless if you have a license or not.

[shanekennedy]

if you plan to make money, you may end up ahead by not claiming any deductions & not reporting profilts either. that may not be the most legal route though.

[fd235158]

One thing I can tell you about deducting space from your house is you will get killed in taxes when you sell your house. I'm no CPA or lawyer but if you write off part of your house as a business expense and sell it eventually you pay big capital gains. The IRS will treat the equity as profit of the business. Trying to turn your hobby into a business is a lot more complex than you may think. Rather than pay $500 for an LLC I would spend that to consult with an attorney.

[eastshores]

I don't think the three years to turn a profit is correct, rather you have to show revenue. You cannot continually write off expenses and not show revenue from the corp. Otherwise, the corp would be an even bigger loop hole for those that use it as an S-Corp to combine their individual income taxes with the corps taxes.

Case in point Amazon.com they didn't show a profit for longer than 4 years, yet they had substantial revenue.

[Nabber86]

Originally posted by zanemoseley
So at what point do you have to start claiming coral sales on your taxes. So if you're just a hobbiest with no business license that sells say $1000 in frags a year on the RC selling forum you don't pay taxes but as soon as you get a business license you have to start paying taxes? Or is it after you sell over a certain amount of $ in corals a year that you pay taxes regardless if you have a license or not.

As far as taxes are concerned, if you make any money at all (whether hobby or business) it must be reported as income. Now realistically, should you be worried about a few hundred dollars? That risk is up to you, but I asked my tax guy if there was a some kind of minimum cut-off and he told me, "Yeah there is a cut-off, it ocurrs as soon as you start excepting checks for payments" --- Take that for what it's worth

Originally posted by shanekennedy
if you plan to make money, you may end up ahead by not claiming any deductions & not reporting profilts either. that may not be the most legal route though.

Now that is a sure fire way to get into trouble.

[TheMcs]

Originally posted by eastshores
I don't think the three years to turn a profit is correct, rather you have to show revenue. You cannot continually write off expenses and not show revenue from the corp. Otherwise, the corp would be an even bigger loop hole for those that use it as an S-Corp to combine their individual income taxes with the corps taxes.

Case in point Amazon.com they didn't show a profit for longer than 4 years, yet they had substantial revenue.

I think the difference is that Amazon (and other similar businesses) can't be considered hobbies. What the IRS definition of hobby is, I don't know. But I do know that when making a distinction between hobby and business when it comes to deductions you have to show profit for three (or two, now that I'm arguing it I can't remember) years out of five. That is in place so that I can't write off my 58 as a business investment and deduct a new Remora skimmer and then show a loss for the year because no one bought my frags. If that was the case I'd have a helluva tank.

As far as claiming part of the house affecting your taxes come selling time, that I don't know. Another good reason to consult an attorney/tax advisor.

[BradR]

Well, I was hoping to start this business: fill my existing 180 with frags, buy fresh bulbs and then start a webpage.
It would be nice to sell something as there is a small profit motive.
Not exactly sure how it works but wanted to spend 2K in frags, grow them, and sell them.
My understanding was that I wouldnt have to pay taxes on anything until sales exceeded setup costs. Is that right?
A needle jockey is a doc who does epidurals and nerve blocks etc, lol.
Thanks for the informative responses!

[redawg]

Brad i bet aptasia are terrified of you.