Turning my bedroom into a corporation

[demensia]

Hi,

I've been talking to a few people reguarding starting up a corporation... I dont actually intend to make any real income.. maybe 5 bucks here, 10 bucks there... But it would definatly be a plus to write off all my gear as a business expense.

.. Is this just really sketchy, or is that an acceptable business practice?

 

[scottboyher]

Huh? I don't know bout that but I did deem my house a church..

 

[mikeh]

Tax laws require that a business must show a profit in in 3 out of 5 years (if my memory serves) - if not they consider the activity a hobby (not subject to write offs).

There are certain ways around the law if you can show that the artistic works are "a continuous process" - as an example, a song has been published, with the potential to generate revenue.

It all depends on how aggressive you want to get as a tax payer (ie: how much income you want to hide or write-offs you want to take).

If you want to establish a business you should consider being a sole proprietor rather than a corporation. A corporation requires filling fees, a board, monthly meetings (with minutes) etc. etc. - which is a pain in the ass!!!

A couple of warnings - if you claim a business you must (in the event of an audit) prove intent of business (even with no revenue/profits) meaning a business plan, marketing activity, a seperate checking account (in the business name, etc, etc.)

Also, if you try to claim a part of your house for business use (a bedroom) you then have to realize a business profit in the event of a sale of the house - as an example - you sell the house for a $100,000 profit and the bedroom is 10% of the house - the business has a $10,000 profit to claim - subject to the higher tax rate.

Also keep in mind - a tax form C (Business activity) is a red flag for an audit - as is buness use of the home, etc.

If you buy thousands of dollars of gear - maybe it makes sense, but think very carefully - and talk to a tax accountant first.

 

[Jagular]

Tax laws require that a business must show a profit in in 3 out of 5 years (if my memory serves) - if not they consider the activity a hobby (not subject to write offs).

There are certain ways around the law if you can show that the artistic works are "a continuous process" - as an example, a song has been published, with the potential to generate revenue.

It all depends on how aggressive you want to get as a tax payer (ie: how much income you want to hide or write-offs you want to take).

If you want to establish a business you should consider being a sole proprietor rather than a corporation. A corporation requires filling fees, a board, monthly meetings (with minutes) etc. etc. - which is a pain in the ass!!!

A couple of warnings - if you claim a business you must (in the event of an audit) prove intent of business (even with no revenue/profits) meaning a business plan, marketing activity, a seperate checking account (in the business name, etc, etc.)

Also, if you try to claim a part of your house for business use (a bedroom) you then have to realize a business profit in the event of a sale of the house - as an example - you sell the house for a $100,000 profit and the bedroom is 10% of the house - the business has a $10,000 profit to claim - subject to the higher tax rate.

Also keep in mind - a tax form C (Business activity) is a red flag for an audit - as is buness use of the home, etc.

If you buy thousands of dollars of gear - maybe it makes sense, but think very carefully - and talk to a tax accountant first.

all good advice except the the 3 out of 5 rule above is not a must. It just creates a red flag if you don't meet that criteria. Then you must prove you are a legitimate business with other subjective standards (ex. what % of time do you spend, do you have capital at risk, do you run your business in business like manner...there are others I can't think of right off).

 

[demensia]

if you claim a business you must (in the event of an audit) prove intent of business (even with no revenue/profits)

This in itself would not be a problem as I could add a price quote page to my website www.demensiax.com/studio.html or something, plus in the future I would actually like to make a few bucks with my hobbie (not nessicarily... spell that right? carrer)... so in reality im not out to screw the IRS.. I just buy alot of gear.

As it stands I'm not good enough to really charge money.. Unless I was just doing a little 4 track recording of a punk band or something..

But anyway, I'll look into it a little more thoroughly and I'll let you all know what I come up with.

 

[Abelskeeper]

I believe in order to take a deduction on purchased gear, say a $2000 Preamp. You need to show a taxable income of $2000 or more. I don't think you can just incorporate and start writing off music gear, unless you've made enough profit that your going to have $2000 in taxes to pay.

Terry

 

[Jagular]

I believe in order to take a deduction on purchased gear, say a $2000 Preamp. You need to show a taxable income of $2000 or more. I don't think you can just incorporate and start writing off music gear, unless you've made enough profit that your going to have $2000 in taxes to pay.

Terry

That is true. You can write off via Section 179 of The Code up to $25,000 each year of new asset additions. However, you can't put yourself in a loss position while doing so. However, you can depreciate your assets using the proper method and period as a deduction even if you don't have income (as long as you can prove to the IRS that you are a legitimate business when they come a knockin'). Note...there are other restrictions on this too, but not germane to this example.

So for the above $2000 preamp (I wish I had one ) If you were showing $2,500 of income from your business before depreciation you could deduct the whole $2,000 via Section 179 to reduce your income to $500. If you had no income at all you would only get to deduct $286 (2,000 * .1429) assuming this is a 7 year asset - it might be 5 you would have to research that. Then you would show a taxable loss on your schedule C. You would then get to deduct the rest of the $2000 over the next 7 years in varying percentages (I know 7 years doesn't make sense, but it's true. I could explain it, but really it's probably not worth it here).

Well, it's been awhile since I did any tax work, so you might want to bounce the above off of someone who is currently doing it before you take my word for gospel.

 

[Smokepole]

I'm not too knowledgable in this area. I do want to add that a buddy of mine was denied unemployment from his main job because he had started a home based business.

Joe

 

[tanlith]

The only real advantage of setting up as a corporation would be in the event of having to file chapter 11 (Bankrupt) they have no claim to any of your personal assets. (At Least in Canada thay don't... I assume it's similar in the US?)

Had a friend who (although moraly questionable) legally maged to make a killing in the resterant business... he'd open one, incorporate it. Borrow as much money as he could ... keep giving himself raises and bonuses than file chapter 11 and start over. After about 6yrs he ended up with about $230k in his bank account (Not counting the money he'd been living on all that time)

You'd be surprised at how much government funding there is out there if you know where and how to look...

In fact. in Ontario there is an anual budget for aspiring artists... music ... film ... etc. You could get a grant of up to (approx) $8000.00 to be used in the recoding of your music. (Must be used in a studio or in an expendable way - ie: cannot be used to buy equipment). All you need do is get the right forms and fill em out.

- Tanlith -

 

[analog4]

Why Incorporate?????

The same rules apply as if you were running any out of home business......even things like multi-level operations.

In Canada, you would simply need to show some sort of sales/
revenue was being generated and you could use the write-offs
against your total income if you operated the enterprise as a
proprietorship. I would caution going down this road though as
writing off capital assets can lead to problems if you eventially
sell them at a profit..(Notional recapture rule)

Too much downside for me personally........

Graham.