# Claiming machinery on taxes?



## benwinch07 (Nov 12, 2015)

Hello guys, I have searched a little bit for answers on this topic but would like a little more clarity.

Tax time will be coming soon and I spent a LOT of money this year getting my shop stocked up with machines. This is all a part time venture but I'd like to be able to claim the cost of my equipment on my taxes.

I do make some money with my woodworking, so I think I qualify to be my own business. I have a full time job and this is on the side, so will I need to file a separate tax form under a business name? If so, how to I go about becoming a business entity? I know there is a section on the 1040 form where you can claim deductions such as work uniforms or tools, but does that section also apply to someone who is self employed?

I have my receipts for my machines. Do I need to be able to show invoices on the pieces that I made this year if I were to get audited?

Finally, if this is all feasible, what can I expect if my income from woodworking is less than the cost of my machine expenses (and it is. very much so.)

Thanks for any help you can give!


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## Finn (May 26, 2010)

I am in the same situation as you are except I am retired. I just put down my "business" income and expenses as "other income" on my federal form. I have run this small enterprise at a loss most every year , so far. (nine years and counting) I have a sales tax number from the state and as soon as I did that the local tax man started taxing me on my equipment every year. Not much though. Less than $100/year. I suggest you talk to an accountant about all this. One advantage is, that anything I buy for my business/hobby I do not have to pay sales tax.


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## Wildwood (Jul 22, 2012)

Simplest thing you can do is enter on 1040 line 20 hobby income. You can itemize small hand tools & consumbles on schedule A but there are limits. Deducting cost of machines tricky! Sometimes you can and sometimes have to claim depreciation each year.

Like Jim said better to consult a accountant or tax attorney. This link just general info that changes a little each year.

https://www.irs.gov/uac/newsroom/five-basic-tax-tips-about-hobbies

States have different requirements, most important is collecting and paying sales taxes. Your state department of revenue normally has a web page with all the info.


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## dhazelton (Feb 11, 2012)

Deductions like tools and vehicles have a 'life' and get amortized over time. If you don't make much you may not want to bother with the hassle (or extra expense if you pay a tax preparer by the form).


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## benwinch07 (Nov 12, 2015)

Thanks guys, This has been pretty informative so far! I read the suggested forms, and it definitely doesnt seem to be beneficial for me at this point. Its not as easy to get tax breaks as I was hoping!


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## bbasiaga (Dec 8, 2012)

I believe you can only write off hobby expenses against hobby income. If you have enough hobby income that might make sense, especially if that hobby income pushes you in to another tax bracket. These expenses don't help you get a bigger refund from your regular job. Machinery is considered a durable good, so you can't just write it all off at once anyway. An accountant could tell you the depreciation schedule.

Brian


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## OggieOglethorpe (Aug 15, 2012)

Even if you've made a decision, I'll throw this out for lurkers…

Ask around self-employed people you know for names and book an hour with a local CPA.

I've had more than a few part-time, self-employed incomes over the years, and with a bit of guidance on the details, the bookkeeping can be really simple. During the hour, you can go over specifics that will clearly show you if a business entity or simple hobby income will be most beneficial to you.

Technically, all income is reportable, but most hobby shops really don't make a profit, so the income ends up not taxable. People who don't do their own taxes often confuse reportable with taxable.

There are simplified methods for depreciating tools and equipment in a single year, or "expensed" under Section 179. This will be explained to your specifics in your introductory meeting.

My early self-employment income was pre-home computer, all on paper, so I needed more accounting help at tax time. With all the fantastic software today, including Quickbooks, accounting and tax prep has gotten incredibly easy and far less expensive. Your local guy may suggest a software that can directly export to him at tax time, saving him time and you money. Most good credit unions offer fee-free small business accounts these days, to it's easy to keep things straight without paying unnecessary fees.

Have fun!


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## wichman3 (Sep 12, 2016)

Here is a website for your state:
Indiana business info
Warning, starting a business may trigger a visit (or letter ) from your county property tax entity (it did in my case, I started selling at a farmers market, since I had no building or other "taxable property", they left me alone)


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## rwe2156 (May 7, 2014)

Ben,

You are right, it is not as easy as you think. My wife is a CPA. I have discussed this her many times as I've had ideas for a couple years of making my shop a commercial business when I retire (whatever that it..).

Bottom line is the IRS is only concerned with whether you are actually a business trying to make a profit. The evidence they are looking for are things like a business license, insurance, advertising, etc. and, of course, some kind of income. BTW, having a full time job is not a deal breaker, but if the above isn't adding up, a full time job doesn't help you in the eyes of the IRS. You also have to check with your county and state re: licensing.

As for "hobby income" you can only offset expenses equal to income.

No matter what you do, you have to keep meticulous records in case of an audit.


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## clin (Sep 3, 2015)

Either spend some money to get professional tax advise from a tax expert, or spend time reading IRS and state tax publications addressing hobby and/or sole proprietor businesses.

But, here are a few general comments (I've had my own small business for 30+ years).

First off, if you are thinking (and I'm not saying you are) that there is some way to justify writing off thousands of $$$ of income from your day job, by deducting equipment costs from selling a token amount of woodworking projects, that cannot be done legally. Lot's of people try this crap all the time, thinking that because they made a few $$$ with their hobby, they can justify deducting the expense of EVERYTHING related to their hobby. You can try, and likely will not be caught, but it would be tax fraud.

Now, I'm not familiar with hobby deductions, but I believe others have it correct. If you earn some income from your hobby, you can deduct some expenses, but never to the point of creating a loss. I'm also sure there are restrictions. For example, I doubt you could deduct major equipment costs this way. But, I'm sure you could deduct the cost of materials. Honestly, unless the income from the hobby were significant (>$1,000), I'd just ignore both the income and expenses.

If this really is a part time woodworking business that earns you some significant money (>$1,000), then consider creating an actual business and filing form 1040 Schedule C as sole proprietor (vs corporation or partnership). Form C will have all the places to enter real business income and expenses. Generally you depreciate equipment over several years. Different types of equipment have different depreciation schedules (number of years and percentage per year you can deduct). WW equipment is probably 5 years.

As Oggie already mentioned, you can completely expense capital equipment, in the year purchased, under section 179. There are limitations on total dollar amount. And I'm pretty sure you cannot generate a business loss.

Keep in mind, that a fundamental aspect of running a real business is record keeping. You must do book keeping and save receipts. Computer software is a big help for this.

Another thing to consider, is that you can expense a portion of your housing costs (mortgage interest or rent, electric bill, internet maybe). Anything associated with the business AND in proportion to how much you use it for the business.

For home office space, like using a spare bedroom for an office. If that room represented 8% of the square footage of the home, you could deduct up to 8% of your mortgage interest (not principle) or rent. However, that is only if the room is ONLY used for business. If the room is also used for personal use, limitations apply.

I'm not sure how this might apply to shop space in a garage, since garage square footage is not commonly considered part of the home's square footage. You'd have to study IRS publications to find out.

The bottom line, there is almost always a way to deduct legitimate expenses for activities that produce income. But if a tool is only used partially for income generation, then it generally can only create a deduction in proportion to how much it is actually used. If the equipment is mostly used for personal use, it's probably not worth the hassle to deduct some small amount of it. But, consider deducting, in fair proportion, consumables like saw, planer, and jointer blades, or fees for sharpening those.

Don't forget, you can deduct car mileage. You make a trip to the BORG for supplies (used for the income generation) you can deduct this mileage (the IRS has a set $$/mile for this).

Finally, with a form 1040 Schedule C filing, the IRS has requirements for making a profit. I don't know the current rules, but it something like you must show a profit in 3 of every 5 years, else they'll call it a hobby which will reduce what you can deduct.

By all means take advantage of deductions in income. But keep in mind, the deductions have to be in proportion to generating that income. Just because you sold your neighbor a 1/4 cord of fire wood, doesn't mean you get to deduct the entire cost of your chainsaw, pickup truck, trailer, work boots, yadda yadda yadda. There's a name for that, tax fraud.


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## matthww (Mar 24, 2016)

On the contrary, you cannot deduct the cost of equipment, even AS a business, (which you are not until you file paperwork and pay the associated fees w your state. )

Any purchase of machinery, as a business enterprise, would go right to the ASSETS side of your balance sheet, not the EXPENSES column. A capital investment. Sure it can be depreciated over 17 years or something (following the Federal guidelines, not yours!)... But is it even worth it? No. Your Accountant fees will outweigh any tax savings until you're doing a lot more business.

Keep it a hobby, and play by the rules. Don't incorporate unless you're going to make a real go of it. I just view taxes as rent owed to America, whom I love. So I never sweat that check to my accountant, or the Uncle. I pay my cpa to keep me out of trouble. And for that I am thankful.

I learned all of the above the hard way, thinking I could deduct everything I bought.
Thank goodness I paid a professional that year!


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## clin (Sep 3, 2015)

> On the contrary, you cannot deduct the cost of equipment, even AS a business, (which you are not until you file paperwork and pay the associated fees w your state. )
> 
> Any purchase of machinery, as a business enterprise, would go right to the ASSETS side of your balance sheet, not the EXPENSES column. A capital investment. Sure it can be depreciated over 17 years or something (following the Federal guidelines, not yours!)... But is it even worth it? No. Your Accountant fees will outweigh any tax savings until you re doing a lot more business.
> 
> - Matt Hegedus


You can expense it in the year bought using section 179, though there are limitations. This is all part of business taxes. But, yes otherwise it is just changing one asset (cash) for another asset (capital equipment) and you have to depreciate it over time. The depreciation is the expense you can deduct and the basis (value) of the equipment goes down as it is depreciated.

Keep in mind, that if you later sell the used equipment you may either increase or decrease your income and your tax liability. If you sell it for more than its current basis (what it cost less depreciation), you have a capital gain and that will add to your taxable income. If, on the other hand, you sell it for less than it's current basis, the difference is a loss that is deductible.

It's pretty common to fully depreciate an asset, and therefore have zero basis, then sell it used. In this case, whatever you sell it for is taxable income, though likely at the lower, long-term capital gains tax rate.

All of this is certainly not something to get into for a few thousand a year. If you have an honest income for selling a little. Then, as mentioned earlier, just declare it as "other or misc income" line. But be fair to yourself. If you spent real money on materials and supplies, be sure to subtract that off of the selling price.


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## benwinch07 (Nov 12, 2015)

WOW this has been very informative and helpful!! The whole idea of deductions is misleading to someone who has never done it! I've heard people for years say "I bought this thing, its a tax deduction," or "dont worry about that, its a tax deduction," but I'm learning now its not that simple!

It makes sense that I cant deduct more than the sum of my income, just to fatten the refund at the end of the year. I can see where that ideology can be abused. I could just buy lots of stuff, claim it as an expense, report a loss, and get all my money back and then have free stuff that I can sell for profit. I wish it were that easy 

Boy, they sure dont mind taking a third of my check in a heartbeat, but they're not too keen on giving any of it back.

Ok, so the deductions arent practical right now. Do I need to keep invoices to show as proof when I report that income in the miscellaneous section?


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## realcowtown_eric (Feb 4, 2013)

Get a copy of the appropriate laws…Federal state/municipal and start reading.

And keep all receipts.

Get some accounting advice, but do be aware that in many lacales, ANYBODY or their DOG can hang out a shingle as an accountant, so you wanna be sure that yer dealing with a reputable firm/person

RecommenddDo your own book-keeping with something like quick books. If you employ a book-keeper, well you gotta pay them, and how do they know if purchasing a pulley from the borg is "cost of goods sold" or "equipment repair" So much easier to do it yourself!.

Rule#1 of running a business is don't mess with the tax man. Friend of mine was audited and what it cost him was spending 4 hrs a day for a month, plus the cost of his accountant for the same time.so go figure if you push the limits on tax law, the 10 bucks you might save can end up costing you thousands in lost income opportunity and other expenses. Not worth it.

Rule#@2 is don't violate rule#1

Even if I sell some surplus tools at a garage sale, I calculate and remit the GST on the sale. Call me stupid

In Canada, I have to file quarterly GST returns, and typically it takes a day to do it.

My wife does the income tax and way back when I was using a spreadsheet to do my accounting, a typing mistake could take hours to find, and come income tax filing time, there were many hours spent and some heated discussions, which thankfully disappeared when I started to use quickbooks. I am sure there are other equally good accounting programmes out there, but I ain't gonna change.

Eric


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## rustfever (May 3, 2009)

First, there are some SIGNIFICANT new tax laws that have been recently place into effect that effect small businesses.

Second, do not waste time asking for ideas, but instead, get a hold of a COMPETENT tax advisor. This individual will save your all sorts of problems, tax audits, etc. as well as significant money.
To do other wise, is just going to cost you in the future.

Been there, done that, have the T-shirt…................

My CPA saved me weeks of problems and a lot of money when he made his presentation to the Tax Man.

Ira


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## JAAune (Jan 22, 2012)

Budget $150-$250 for annual accountant expenses and track your income and expenses in Quickbooks. It's not worth spending a couple weeks studying forms every year to learn what new changes the IRS made. If you're running a real business, a couple hundred dollars to save you a few days work is a no-brainer.

When tax time rolls around, you'll just hand over the reports to the accountant and discuss everything in a half-hour meeting. Done.


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## MadMark (Jun 3, 2014)

Most time the IRS can be stalled, negotiated with, etc. Its the STATE TAXMAN that will show up with handcuffs to take you away for not sending the monthly paperwork! (Do *not* ask me how I know this . . .)

Remember: If there is anything you don't know how to do in your business, you'll have to *pay* someone to do it or it won't get done.

M


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## Tootles (Jul 21, 2011)

I'm not in the US, so I really cannot say anything constructive. But I stumbled across this video today. Even that is a little off track for a tax question, but it might still be useful to you.


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## fuigb (Apr 21, 2010)

> Boy, they sure dont mind taking a third of my check in a heartbeat, but they re not too keen on giving any of it back.


Oh the irony in this statement ( hobbyist, any hobbyist, aiming to game the system to get other taxpayers to foot the bill for their toys)...


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## Tim457 (Jan 11, 2013)

> On the contrary, you cannot deduct the cost of equipment, even AS a business, (which you are not until you file paperwork and pay the associated fees w your state. )
> - Matt Hegedus


People have already mentioned the section 179 deduction which does allow certain capital expenditures to be deducted in the year purchased up to the limits. And no you don't need to have a formal business established to file taxes as if you have a business. The IRS decides if you have a business basically by whether you are trying to make a profit or not. If you meet the definitions of a business you can file your business income and expenses on a Schedule C form with your 1040 even if you're not incorporated or formally filed as a business. Many people claim their hobby is a business in order to claim losses on their schedule C, but if you claim too many losses in a row the IRS will tell you it wasn't a real business trying to make money and you can be liable for paying back the taxes you saved by claiming the losses, plus owe penalties.

So Ben, I hope you've gotten some better general understanding, but as others have said, it would really be worth your time to sit down with a competent CPA and figure out the specifics that apply to you. Reading the 1040 instructions form for the applicable lines for hobby income and the 1040 Schedule C instructions would be good background to help you get the most from your money if you sit down with the CPA. You may still want to capitalize and depreciate the price of the machines if you intend to make more money in the future a business, but as mentioned it may not be worth it if you never make any profit.


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