Existing inventory when starting a business

[chuckie365]

Hi All,
So i have decided to change my hobby to a business. I have a few tradeshows and portarait sessions booked and am looking to get into weddings. I have a question regarding expenses for tax purposes. I know this isnt a tax website but maybe someone can provide some insight anyway. I purchased some canvases (prior to the start of the business) earlier this year and am wondering how do they work in the scheme of things if i do not sell them. Are items like this even considered in a PNL? Or is this something that since it was acquired when i started the business that can only be depreciated. Again any help on this would help a lot! I am trying to keep this as clean as possible since the IRS sometimes has issues with the hobby/business aspect of photography. Thanks.

[FlyingPhotog]

Seriously, go find a qualified accountant...

The IRS doesn't like the words: "I read on the internet..." ;)

[chuckie365]

I know that...going to take the advice i get with a grain of salt...lol..anyone?

[Andie Rae]

Expenses can technically only be deducted if you're "actively carrying on a trade or business". So if you weren't technically in business at the time of purchase they cannot be deducted.

You also made mention that you were planning on selling them? If you plan on selling them, they're considered inventory and cannot be depreciated. If you do decide to put them on the books as inventory and they end up not selling there are some avenues for expensing them. The explanation might be a little long winded here so just Google "expense recognition for Obsolete Inventory".

The IRS doesn't really have issues with the hobby aspect of photography. The only time you start to run into problems is if you have a loss in 3 out of 5 years. Once that happens you can no longer deduct the loss on your return (assuming this was a Sch C. business and not some sort of partnership or Corp, in which case would open up a whole different can of worms on deducting the losses).

Sorry to be the bearer of bad news, but hopefully it helped!

[J Michael]

The business entity you form after consulting your attorney and accountant can purchase the assets from you or you can make their value part of your start up capitalization. You'll probably have your accountant set up your Quickbooks file and that can be part of that setup process. If you don't form a business entity then you might make a payment to your personal account from your business account. Don't mix up your personal and business activities. Don't take accounting or legal advice from people on the internets. Good luck with your new venture.

[Andie Rae]

Don't take accounting or legal advice from people on the internets.

Disregard everything myself and J Michael said because we're people on the internet. ;)
Be careful when choosing anyone who gives financial, tax, or legal advice whether on the internet or in person. Just because they're sitting across the desk from you doesn't mean the advice is sound.

Check out:
http://www.taxalmanac.org/index.php/Discussion_Forum_Index
There is a wealth of information on those forums from people who really know what they're talking about but like everyone here has said, take it with a grain of salt. When in doubt do a little research yourself on the IRS website.

[windpig]

Don't f@#k with the IRS. But don't listen to me 'cause I'm on the internet. BTW, don't expect an accountant to know jack either, but at least it's a start.

[FlyingPhotog]

Don't f@#k with the IRS. But don't listen to me 'cause I'm on the internet. BTW, don't expect an accountant to know jack either, but at least it's a start.

WTF are you talking about..?

They're paid to "know jack" and more importantly, they're paid to represent you if there's an issue with the IRS.

Who the hell is he supposed call, a freakin' plumber? :rolleyes:

[Frugal]

The backdrops are equipment not inventory. Having equipment when you start any business commonplace. - your camera for example! When you file your return your accountant will decide whether it's more advantageous to expense or depreciate the camera, lenses, backdrops etc. Do get an accountant.

[chuckie365]

Thanks all for the info. I plan on getting an accountant but was just curious as to what you guys thought given the situation. I'll let you know what he says when i consult with him ;-)

[Fernando]

I know I'm late to the party but here's my advice anyway.

CPA or IRS. Pick one.

[sfaust]

The only time you start to run into problems is if you have a loss in 3 out of 5 years. Once that happens you can no longer deduct the loss on your return (assuming this was a Sch C. business and not some sort of partnership or Corp, in which case would open up a whole different can of worms on deducting the losses).

Where did you get this info? All the accounts I've used over the years gave advice that was contrary to this, as well as what I've read in various business books. Just curious of your source since it is counter to theirs.

[windpig]

WTF are you talking about..?

They're paid to "know jack" and more importantly, they're paid to represent you if there's an issue with the IRS.

Who the hell is he supposed call, a freakin' plumber? :rolleyes:

Maybe a plumber that's been through the tax/accounting mill, especially if it's esoteric, may know more. I've owned a small business for 35 years, I've had both accountants and tax attorneys that were not as up on what I was dealing with as I was, it was a learning experience for them with the info I provided. The freaking tax code is huge. If in doubt, don't take the deduction, what are you going to save, 25% of the deduction? Errors and omissions insurance is fine for them, but I don't want to get to that point.

[Rubi Jane]

I'll only speak of my own experience setting up a sole proprietorship in Ontario, Canada. All equipment i previously owned was rolled into the company as an owner's contribution at fair market value. All supplies such as mats, frames, presentation materials was rolled in at what I paid for it since it was new and therefore still had full value.

This was on the advise & direction of my accountant.

Find yourself a solid accountant who you get along with. They all seem a little dry to me but mine seems to have a realistic view of things. He keeps very up to date on current precedent setting cases, knows the tax laws and advises me knowing he's my voice if the taxman doesn't like how i accounted for my business.

[Andie Rae]

Where did you get this info? All the accounts I've used over the years gave advice that was contrary to this, as well as what I've read in various business books. Just curious of your source since it is counter to theirs.

http://www.irs.gov/newsroom/article/0,,id=169490,00.html

"The IRS presumes that an activity is carried on for profit if it makes a profit during at least three of the last five tax years, including the current year — at least two of the last seven years for activities that consist primarily of breeding, showing, training or racing horses.

If an activity is not for profit, losses from that activity may not be used to offset other income. An activity produces a loss when related expenses exceed income. The limit on not-for-profit losses applies to individuals, partnerships, estates, trusts, and S corporations. It does not apply to corporations other than S corporations."

[sfaust]

I am aware of those guidelines, the presumption of for profit basis. However, both the accountants I've talked to in the past on this said while it was a guideline for taxpayers for the presumption of 'for profit' basis, even if a business posted consecutive losses they can still deduct all normal deductions if they can prove they are in fact a business to make a profit, and the taxpayer is not using the business to hide hobby deductions.

The guidelines and presumption are just an automatic 'litmus test' in lieu of actual proof. If you fail the litmus test, then you shoulder the burden of proof in order to still get the deductions and 'for profit' status. The act of consecutive losses is not the nail in the coffin, just the loss of the automatic presumption.

I need to meet again with my accountant in the next month for year end stuff anyway, I'll bring it back up and see if I can get a more clear reference. This is only my understanding from previous conversations early on in my startup phase.

[Andie Rae]

I guess I should have been more clear in my response. You are correct in your thinking. You can take the loss if you continiously show a loss (even after three years), but the problem is that you really start to go under the microscope with the IRS. If you lose money year after year you'll have to be able to show that you're legitmately in business to make a profit, which in some cases the IRS has requested to see business plans, future contracts, etc. It is legal, although not really advised because you can potentially be opening up a door for the IRS to put everything under scrutiny. Sometimes it's just not worth the hassle.

Unfortunately, photographers are usually under the most scrutiny because there are so many "hobbyist" out there doing it. A Sch C business showing "Photographer" as the type of business is usually a red flag to begin with, especially if you have some sort of W-2 income on your return.

[sfaust]

I agree, its obviously best to show a profit for the presumption since its the easiest route to take. I just wanted to clarify since things could have changed since my understanding of it, which was several years ago, nor leave anyone thinking there is no other option.

And yes, anything to avoid the microscope is worth pursuing! :)

[Andie Rae]

[QUOTE=sfaust;10873564] I just wanted to clarify since things could have changed since my understanding of it, which was several years ago, nor leave anyone thinking there is no other option. QUOTE]

I totally agree. Especially since most people think that just because they read it on the internet it has to be true ;)