The end of Dot-Tone-Designs?

[Screened Gear]

Don't mean to cause any kind of controversy here, but just a point of clarification: tax brackets do not change how much you are taxed on any income below the bracket... 

If you make 50,000 taxed at 15%, making 50,001 does not mean ANY of that 50,000 is taxed at 25% (it is still entirely taxed at only 15%), only the $1 would be taxed at 25%.  You never lose money to taxes by making more money, you simply lose a larger percentage of the additional income that would put you over the threshold for the next bracket, and the exact same percentage is taxed of your original income.  Making money from DTD will not cause you to have your M&R income taxed any differently. 

edit: Obviously it's entirely up to you whether the higher rate taxed on whatever income is taxable at the higher bracket means your hourly wage drops below what you need to make it worth your while. a 10% decrease is certainly significant if you are near that bracket, but honestly y'all already charge very little for your seps, and I would bet you could increase your fee by 10% to absorb the difference and still get plenty of business.  That would be something like $5-10 total per job for most sim process stuff.

Just sad to see you stop completely!

Well said.

[Dottonedan]

I'm thinking I have to see what my breaking points are. As in "how much can I do" before it takes me over into being taxed higher. Then comparing (at what seps fee increase) would I need to add on for it to balance out or be more beneficial and have it make sense for the IRS for me to stay in business. In other words, to be able to show a true profit of some sort.

[zanegun08]

Why not just do it under the table?

[Frog]

As has been pointed out, much ado about virtually nothing. You have already jumped up a bracket to be at 15%.
Though it has already been explained here, here's an article, a couple of years old, but is still applicable.
http://www.investopedia.com/ask/answers/071114/can-moving-higher-tax-bracket-cause-me-have-lower-net-income.asp

 

[cbjamel]

Start a corp that needs office space in your house, phone, internet, plus wages to you.  All write offs, go in talk to them about this plus other avenues.

Sorry to see you do that.
Shane

[Frog]

Start a corp that needs office space in your house, phone, internet, plus wages to you.  All write offs, go in talk to them about this plus other avenues.

Sorry to see you do that.
Shane

This is how any home based business is already doing it. No need to be a corporation.

[cbjamel]

I was thinking write offs. You are right though.
Shane

[Dottonedan]

I did just a little digging on the web. It seems that if you claim standard deductions as a business (portion of the house, Internet, phone, etc. and yet aren't "profitable" based on their list of qualifications for 2 out of 5 years or even 2 out of 7 if they please, they can put your business into a "hobby" category. In that, you become more limited on what you can claim etc.  I don't know for sure yet, but the issue here could possibly fall somewhere in those details. We dug up a lot of work for deductions on our last tax bout. Maybe the accountant didn't appreciate the extra work. I donno.

[Frog]

Dan, (and everyone else with a home based business). You should be deducting the obvious expenses of computers, printers and any other equipment. Then there is phone, internet and any other direct expenses related to strictly your business.
The percentage of your home dedicated to the business establishes that same percentage of indirect expenses like rent, mortgage, property tax, utilities and insurance.
Yes, if you lose money for something like three out of five years, they don't believe that you are a real business, merely a hobby, and you will have a harder time continuing without showing a formal plan to turn it around (and hoping that they go for it). But, even if you just make a few thousand dollars after all of the deductions, you are legit, and you won't be paying the higher tax on very much.

[screenxpress]

Yea Dan, I wouldn't be too quick to turn out the lights

https://www.youtube.com/watch?v=QoQZ0qmf-mk 

Especially if it's something you enjoy doing, want to keep up your skills and still make a few bucks to enjoy a night out on the town every so often.

[nobrainsd]

The two out five years, 3 out of 7 or whatever is a lot like the % of change required for overcoming a copyright concept. It isn't a law nor a rule. Yes, If you show a profit for a few years it does pretty much automatically justify your business expenses (if they are legitimate). The IRS and tax accountants like to throw this out there to weed out stupid stuff, like horse owners who want their riding hobby to be deductible. The real test is whether you actively engage in the business and whether or not you are at risk for a loss. If it was as simple as a not showing a profit for a couple of years GM and almost every major automobile manufacturer would have been declared a "hobby" a few years ago. If you are actively engaged in your business and can show that you have worked at it in a real way then almost everything you spend in support of that endeavor is deductible. Don't let some arbitrary or random "rule" make you think otherwise.  Lot's of big start ups don't show a profit for years or maybe ever. It doesn't seem to phase them or their accountants. Amazon has never shown a profit. Now whether or not a business that doesn't show a profit is worth ones time, that is a good question!

Dan's situation is one where he has to decide if the time and effort are worthwhile. My wife makes a lot more than I do. I am in a much higher tax bracket than my business alone would account for. I choose to screen print because I want to. I would never hesitate to write off expenses legitimately associated with that business. I am also working to establish myself in another field. I have manufactured a number of prototypes. I have lost money the last few years as a business due to this activity. I am not concerned by this as I can demonstrate and back up all of my legitimate business expenses. If being stupid and losing money was a crime we would see a lot more people get in trouble. The IRS isn't going to say you shouldn't have spent that money (on stupid stuff). They just want to know that you have been working to create profit, no matter how long term you may be looking at a problem.

I am sure that many of Dan's customers would hope that he stays in the separation business. I am equally sure that the government would be happy with him keeping track of his expenses to properly deduct them and minimize his taxes as much as legally possible.

 Here is a link regarding hobby vs business. Anyone who says I manually print for fun or make carbon fiber hydrofoil boards as a hobby is clearly crazy and with proper records and investment of time the IRS will not disallow my deductions regardless of profit. http://www.bizfilings.com/toolkit/sbg/tax-info/fed-taxes/profit-motive-required-to-claim-business-deduction.aspx

[Dottonedan]

So a little more.

It seems that once you get bumped to the next tax bracet (even though let's say another 20-50k puts me there and I'm only taxed at 25% for the amount over the 15% cap, it's the tax (deductions) that are getting me.  You have a different or higher tax deduction amount to reach (overall) once you are now in that 25% bracet.

So yea, I'm only taxed at 25% for just my side work, but the allowable deductions is much greater on the total) and I have your standard for the M&R and very few already for the DTD.  I dont have enough deductions to take advantage of it. You have to have X amount before you can.

[Frog]

So a little more.



So yea, I'm only taxed at 25% for just my side work, but the allowable deductions is much greater on the total) and I have your standard for the M&R and very few already for the DTD.  I dont have enough deductions to take advantage of it. You have to have X amount before you can.

This I don't quite understand. First off, even with no deductions, like you said, only the amount in the next bracket is taxed at the higher rate.
Then, of course, any deductions you may have (including the percentage of home-related expenses) reduces that taxable amount.
Curious as to whether your accountant alsom suggests that you scrap this additional income rather than helping coach you on how to maximize deductions and minimize the taxable amount.

Or, are you saying that by doing this you show a loss and that is not good for you?

[Prosperi-Tees]

I would either get a second opinion or do it yourself to really see what's going on.

[screenxpress]

You have to have X amount before you can ??

I'm lost on this too.  Over the years, I've held several proprietorships and have even had my own corporation for a number of years.  Deductions are deductions and I'm unaware of any threshold or higher tax deduction to reach that limits claims.

Expenses (deductions) offset income, and when expenses are greater than income, you have a net operating loss in one and in the case of multiple incomes, they all end up in the same pot where a loss in one offsets gains in another.  I don't see where you would ever lose an expense and as others have said, I don't think they are going to look too hard as a business that loses money year after year as long as you're not really running a sham business, as in one that could "never" turn a profit. 

I think you need to find a "real" Tax Accountant.  One who knows the in and outs of Tax Law.  Yes, it's going to cost more than Turbotax or H.R. Block, but you will benefit from it in the long run.