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The Business of Knife Making A forum dedicated to all aspects of running, managing and legal operational issues relating to the custom knife making and custom knife selling industry.

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  #1  
Old 02-16-2007, 12:09 AM
Dwane Oliver's Avatar
Dwane Oliver Dwane Oliver is offline
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OK , I have a silly Question

Is there any knifemakers out there that ever SHOW a profit on their taxes ?

I'm just a hobbiest knifemaker , made 28 knives last year , and I dont see how you could be completely honest on your taxes and not show profit. I'm not out to screw the government ( not completely anyway ). I pay my fair fair share of taxes every year , I'm at the bottom of the highest tax bracket , so it hurts. But if I were to go full time I would have to want to hide alot of those cash sales and not show them. I'll never make full time status , but I'm just wondering about it. I guess you can only show a loss for a few years , then have to show a gain. I probably dont know enough about taxes and the laws to help myself , but I'm going to make mine a buisness this year.
Mabey I'm lucky to be where I'm at,not many other makers in the area. I'm 12 knives behind right at the moment , I have about 5 big knives on the hook for when I get caught up , 2 outfitters going to use my knives as "thank you's " for their clients this year, and a slew of guys that are going to order for christmas this year. Even with those prospects , that aint enough to live on. I think I sell a nice knife at a reasonable price , cant see my prices going up , EVER. I'm looking for a place to pour some money into that I can write some off next year. I'm rambling
Thanks

Dwane


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  #2  
Old 02-16-2007, 08:51 AM
AcridSaint AcridSaint is offline
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You should be writing off tool and material expenses as well as recording miles for any trips you make for supplies, meetings, shows etc. You can write off your miles on your vehicle or your gas expenses, but not both. You can also write off some of your home expense and repair expenses if you drive for your business. If you can get a seperate electric hookup for your shop you can write that bill off too. The idea isn't to make no money, just to be able to write off enough that it doesn't sting.


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Old 02-16-2007, 09:47 AM
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NJStricker NJStricker is offline
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Dwayne,

For a while I worked seasonal jobs in between grad school stints, and at one of those they didn't pay my taxes/social security. They labeled me as a "contractor" and so that automatically made me "self employed." So, I ended up paying local, state, and federal taxes as normal, but then I also had to pay my FICA (Social Security and Medicare contribution). All together, that added up to nearly 40% of my salary from that job. If you are going to label yourself as a business, then make sure you pay all of the FICA for the past year. You will also have to declare and pay estimated FICA quarterly from here on out, and the first quarter will be due in April, I think.

If you are going to be a business, then you'll have to think like one. Anything that you pay money for to design, build, promote, and store, and power your knives and knifemaking equipment are all business expenses now. Not sure how the electricity bill will play into it, I think it's assumed to be part of the deduction for "business use of home" type stuff. The cost of your website maintenance, show fees, hotel stays, belts, adhesives, handle materials, steel, etc., are all in the mix now.

Hopefully you stocked up on supplies before Dec. 31!!!!!

Another thing to consider--check your state and local laws. Some states have laws where if you have a minimum $$ amount of merchandise for sale, or if you sell a minimum $$ amount in a year's time, you must file/register as a business and collect sales tax. If you start filing with the feds as a business, the state will want their share, not just in income tax, but in sales tax as well.
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Old 02-17-2007, 11:50 AM
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Brett Schaller Brett Schaller is offline
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A word of advice from my accountant:

Do NOT take the home office deduction. It's a giant red audit flag, and anything you gain from it will be lost if you sell your home.


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Old 02-17-2007, 01:31 PM
AcridSaint AcridSaint is offline
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Brett, can you elaborate on how you lose when you sell your home? Do you have to pay additional taxes on the money you make from it? Just curious, that's good info to have. I know a couple people that do take the deduction, but I also know that some people just can't, hadn't heard of anyone chosing not to so I'd definitely like to hear more.


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Old 02-18-2007, 07:24 PM
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Brett Schaller Brett Schaller is offline
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Hi Cap,

Sorry, I can't really elaborate more than that. I'm just repeating what my accountant told me several years ago when he helped me set up my knifemaking as a business. When he said "red audit flag", I immediately decided not to take the deduction, regardless of any benefit! But he defenitely did say that in my situation, at least, the benefit would be all but cancelled when selling my house.

He's not really my accounant; he's the accountant for the locksmithing business I work for. But he took an entire morning to help me set up my business, and never billed me for it. Nice man!


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Old 02-18-2007, 09:09 PM
AcridSaint AcridSaint is offline
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Yeah, well it's good to know anyways. If nothing else it's another question for any of use to pose to our accountants when the time comes.


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  #8  
Old 02-19-2007, 09:05 AM
RandyScott RandyScott is offline
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Dwayne,

There has been some good advice about your situation. The answer to the question about the home office deduction really would take a while ? the quick and dirty is to get ?competent? tax advice ? and that is beyond this forum. I did taxes for a couple of years for HR Block (and it has been a few years since then!). If I were to ever get to the point that I needed to consider the tax consequences of this ?hobby?, I would call a few folks I know and get the names of the ?old hands? in the HR Block Premier offices. Those folks have been doing taxes for years and may be an Enrolled IRS Agent (I think that is the correct term!) ? which means they have passed the IRS exam and are very knowledgeable regarding tax matters.

Back to the home office deduction for a moment ? if you own your home and, for grins and giggles, lets say you have taken over the two car garage of approx 400 square feet for your ?shop? and the total square foot area of your home is 2400 square feet and on your taxes ? in addition to depreciating all your tools and equipment - you decided to take on Schedule D (I think is Schedule D) depreciation on the ?shop?. Well that 400 sf / 2400 sf = 16.7% of the total sf. You might take the depreciation of that 400 sf. Well, I recall homes are depreciated at 27 to 30 years (it has been a few years now). So you work at this for several years and then decide to buy a new and larger home.

Upon the sale of the home, the nasty word ?recapture? enters into your vocabulary. You took the deduction which had the effect of increasing expenses which reduced income which reduced your tax liability. Now you must ?recapture? that depreciation which adds to your taxable income. Since you stated you were in the bottom edge of the highest tax bracket ? which I believe is the 25% bracket ? well.. I think you see where that would lead. And we will not even get into a discussion of the Alternative Minimum Tax.

The other real issue with the home office deduction is that the area is ?supposed? to be totally ? totally ? void of any and all items not related to the business. And that is a tough standard to meet. And there are other tests to meet as well.

And remember, the above is NOT competent tax advice. It is what I remember from a few years ago.

My advice ? get competent tax advice.

And keep very good records ?cause eventually the tax man cometh to check thou records and woe be unto those with insufficient records to sanctify thy deductions or justify thy income!. Here endeth the reading of the lesson.

PS: I still owe you a photo of a blade with the green micarta I bought from you. I haven?t forgotten.
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Old 02-19-2007, 09:44 AM
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Dwayne,

Another thing to consider. Depending on where you live, many municipalities do not allow you to operate a business out of your home.
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Old 02-19-2007, 10:11 PM
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Dwane Oliver Dwane Oliver is offline
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Great advice from all , I appreciate it. I still didnt see anybody answer my first question , aww well . I've decided NOT to do the buisness thing. It would probably hurt more than help. I know alot of people who own buisnesses and tell me of all of the things they do to hide money , but I cant find one tax person that upholds any of this information. So I guess I'll just keep bleeding to Uncle Sam.

Thanks again for all of the commentary on this subject.

Dwane


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  #11  
Old 02-20-2007, 08:55 AM
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Dwayne, forget it and get to work on your barlow.
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  #12  
Old 02-20-2007, 09:25 AM
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Ed Caffrey Ed Caffrey is offline
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My Mrs. carries an accounting degree, but she would not even touch the taxes for the knife business! She went out and found a good accountant who works exclusively with tax issues for small/home based businesses. I've learned a great deal talking with our accountant....shes very knowledgeable where tax issues are concerned, and although I know we'll be paying this year, she's managed to get us refunds the last several years.

On the up side, nearly everything we do can be deducted, as long as it involves the knife business. The down side is keeping good records and keeping EVERY receipt you get.

I recommend finding an accountant that deals with similar type businesses (home based) and consulting him/her.


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Old 02-20-2007, 09:08 PM
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Dwane Oliver Dwane Oliver is offline
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Thanks Ed.

Dwane


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  #14  
Old 04-02-2007, 04:47 PM
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Galloglas Galloglas is offline
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I incorporated my knife/sword crafting business a few years ago. It cost me $500 and change to incorporate and I have an accountant do my taxes, pay sales tax in Illinois and the whole 9 yards. I have stock, depreciate machines, and write off all my miles to shows and functions. All of my training fees and materials and legitimate business expenses are a write off. I started doing this kind of thing 20 years ago when working as a pro musician.

I had friends who just worked every weekend in the band and then put the money in their pockets and kept the IRS "out of the loop" and ran their $6000 per year business out of their pockets and they all had the same advice...keep it quiet, don't make it a "business" and do business in cash. 3 of them lost their houses to the IRS 15 years later. It is a crime to take money, not claim it, or pay tax on it. If they had kept receipts and taken all legitimate deductions their taxable income would have been paltry. As it was, the IRS went back to the first tax return they ever filed and calculated the tax, penalty, and interest on the tax and penalty for 15 years. A few thousand a year of extra income ended up $100K in fines, back taxes and penalties. If you ever "make it big" in the business the IRS will immediately wonder "where you came from" and if you have a papertrail for 20 years of losing money/making a little profit and all of your taxes were prepared to the tee by a tax accountant ($90 a year!!) they'll never look twice at 'cha.

My advice and mindset is this: Ya can't get caught cheatin' if you don't cheat. I kept track of every expense as a pro musician and paid maybe a couple hundred bucks a year in taxes. I run my knife craft Corporation by the book...I have an accountant do the paperwork and nobody has ever said "boo" to me. If it's worth doing you should do it all the way. Claim every penny of income, take every legitimate deduction, and make great knives with a clear path and conscience.

That's my experience....run it like a serious business and people will take you seriously. Incorporation is simple, cheap, and affords a layer of protection to a knife maker if some yahoo sues you 'cause he cuts his fingers off or hurts someone else with one of your creations. They can only go after Corporate assets. They don't get your car and your home and bank account.

Brian


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