Tax ? before I make the leap into selling.

[cerelife]

I've been making cp soap for about 3 years now and have formulated my own recipes since my second batch. I've thought about selling in the past, but (thanks to the good advice on this forum) decided against it, as I work full-time and just didn't have enough free time to deal with all the aspects of a soapmaking business.
Several months ago I switched to a weekend shift at the hospital where I work three 12-hour shifts Fri-Sun, so I have weekdays off. I'm making more soap than ever, plus I've started making other products like body butter and solid perfume. I've also been making soy candles for a little over a year.
Now that I have more free time, I've decided to create a small business...not so much to make money (although a modest profit would be nice) but more of a way to write off the yearly cost of membership/insurance in the Soapmakers Guild, etc. and cover the cost to make my products. My decision is based on two things:

1) Not losing money by giving my products away
2) Possibly getting a few of our $$ back from the IRS when we file our taxes as we currently get screw*d by the IRS every year; making my addiction a business may actually help us out a bit.

BUT, I've been reading "Small Business Taxes Made Easy" by Eva Rosenberg to try to get an idea of what to expect tax-wise, and she mentions that the IRS can disallow your deductions per the "hobby-loss rule" if your business fails to achieve a profit for two or more years out of five consecutive years! This is bothering me for obvious reasons, but one of the people I asked for advice said not to worry about it...she's a master herbalist and says she's only claimed a profit in maybe 3 or 4 years of her 15 years in business and the IRS has never bothered her or disallowed any of her deductions. Does anyone have any experience with this rule?
I've done my research on how to apply for a business license/tax ID/trademark for my state. I've bought my company's domain name, although I don't plan to create a website until I've got everything else worked out, and I've talked to entreprenurial friends for advice. The personal advice has been great for pitfalls to avoid (like forgetting to send in a monthly tax statement on months you didn't make a profit), but everyone I know has had a business that was their sole income. And all the information I've read is geared toward the same.
It's frustrating that I've been unable to find any information or advice for someone running a very small business while also having a full-time job, so any advice would be welcome!!
Thanks!

 

[melstan775]

Being denied deductions or claiming a profit is there even for full time professional sole proprieters. If you fail to make revenue, the IRS can determine if it's worth it for you to stay in business. I wouldn't worry about it, as long as your ducks are in a row you're not likely to get audited anyway.

 

[Mune]

I had my business from Feb 2007-Mar 2010. At that point I was told that since I had not made a profit of $5000 or more in my 3 years of soaping, that I could not be a legitimate business. I lost my EIN and everything. I was just trying to be a good girl and pay my taxes, but they said no. Honestly, it really never made it worth it anyways.

 

[gratia]

I had my business from Feb 2007-Mar 2010. At that point I was told that since I had not made a profit of $5000 or more in my 3 years of soaping, that I could not be a legitimate business. I lost my EIN and everything. I was just trying to be a good girl and pay my taxes, but they said no. Honestly, it really never made it worth it anyways.

Not to hi-jack but Mune, are you still able to sell at Farmers Markets and online or do they put a stop to all that as well? This is what worries me.

 

[Marilyna]

I believe by the IRS saying you're a hobbyist, it just means that you cannot deduct your losses from your taxes. It doesn't have anything to do with whether you can conduct business, which of course you can!

 

[Lilahblossom]

I just filed my soap business taxes the other day. We will see what they say. Sate of Wi. stopped my EIN. I still have my sales permit though.

 

[gratia]

Okay good. I haven't got to that point of selling for 3 years (almost) so was just curious.
Thanks

 

[cerelife]

Just curious about terms. TIN is a business Tax ID #, while EIN (Employer ID #) is the generally used term when you employ others in your business, but I understand that they mean pretty much the same thing. So I'm curious if Mune and Lilah had employees in thier soapmaking business?
Thanks for all the input, and good to know I can continue to sell even if I can't deduct my business expenses after 3 or more years...not to sound greedy, but I think I'll just go ahead and buy the $$ stuff in the first few years and hope for a decent profit!

 

[VanessaP]

Not really. An EIN is a form of a TIN.

http://www.irs.gov/Individuals/International-Taxpayers/Taxpayer-Identification-Numbers-(TIN)

If you are going to be a sole proprietorship, then using your SSN is fine. However, if you are going to have employees, you will need the EIN. I'm not positive but I think LLCs, etc., have to have an EIN as well.

 

[Hazel]

I'm not positive but I think LLCs, etc., have to have an EIN as well.

That's what I heard from a SBA counselor that LLCs do require an EIN.

 

[Mune]

I can still sell at markets and shows and such, I just cannot use the business as a deduction on my taxes. I also, though, do not have an EIN so I cannot order from companies that want this. Some wholesale companies require an EIN, such as Azure Green, to purchase out of their wholesale catalogues and such. My only concern, and what I cannot seem to find out, is whether I will be penalized if I make a huge profit and am not collecting taxes.

 

[Hazel]

You still have to pay taxes on what you sell whether you have an EIN or don't have one and whether you make a profit or not. You sell, you pay taxes on what sold. There isn't any exemption to this issue.

Paying taxes to the state and using the business as a deduction on your taxes aren't the same.

 

[LandedGentress]

Newbie wading in here....
I've been setting up everything legally and went the LLC route. Yes, if you're an LLC you have to have an EIN, and register for state taxes and city taxes, (which in Philadelphia are higher than state sales taxes) and a city business license. Yes, it is quite a bit of money going out right now, but I was already on ETSY and I've started my own site on Weebly which allows me to use a cart sales function so I may come off of ETSY soon, but that will mean using a group that can help me with SEO to draw more people to my site. I guess what you do depends on what you want to achieve. I got burned out of 20 years in advertising so I need this to make up for the salary I was pulling before I left and that means taking full advantage of the SBA, their recommendations, their referrals, free software via Freshbooks and recommended SBA accountants.
And I didn't trademark because as an LLC if someone wanted to take my name I do have a level of protection and with all the current expenses, the trademark one was one I didn't want to incur, especially as it's not a blanket trademark and the info I got said I could
get the trademark for soap but then if I branched out to say, lipbalm, that's another $385 per additional product section. Hope the info helps.

 

[Soapsense]

I understand the whole thing about not profitting and if you get audited they can reduce your business to a hobby, therefore you are not
able to deduct home office and other business deductions. And of course you still have to pay state and federal taxes, but are you able to
deduct the cost of supplies? Things that actually went into the soap, like oils etc.?

 

[cerelife]

Thanks to everyone, and please keep the the suggestions/thoughts coming if anyone has any input on this topic!
The entreprenurial friends I asked for advice made me VERY aware that I would be required to submit a monthly sales tax statement to my state, whether or not I actually sold anything or made a profit each month.
Thanks for the trademark advice, Landed Gentress. All I really want to do is keep anyone from copying my company name and distinctive logo...any advice?
The tax book I referenced in my original post advises to apply for an EIN even if you plan to be a sole proprietor (with no intention of employing anyone) to guard against being considered a hobbyist by the IRS, as well as having a business plan in place for the same reason. This didn't seem to work for a couple of prior posters, so I'm curious as to the validity of this?
One of the things I've found frustrating is the lack of information I've found on small businesses owned by people who also have income from full-time jobs. Both my husband and I have careers which we enjoy and have no intention of leaving anytime soon. I make everything, but I work weekends; and my husband (who works M-F) is familar with all my products and is willing to set up shop at weekend events I would like to participate in...so it's a good fit for us.
But I can't find any tax info for our situation. Will being employed full-time help/hurt us by in starting a small business?

 

[SpiralTouch]

Reading through all of these replies has helped me a lot!

I've seen some mention deducting 'losses'. I'm curious, can you claim losses with your business such as

*a batch of soap turns out unusable - something went wrong in the batch. Can you claim the loss of the cost of those oils?

Another question - I need to buy a printer for labels. Can I write that off as a business expense if I have a business tax ID?

 

[SpiralTouch]

I can still sell at markets and shows and such, I just cannot use the business as a deduction on my taxes. I also, though, do not have an EIN so I cannot order from companies that want this. Some wholesale companies require an EIN, such as Azure Green, to purchase out of their wholesale catalogues and such. My only concern, and what I cannot seem to find out, is whether I will be penalized if I make a huge profit and am not collecting taxes.

Is it especially hard for you to sell though since you don't have the tax ID? I am trying to set up selling at a market here and you have to have a vendors license, and to get the license you have to have a EIN