Remember when you made something and your friends all said, “oooh!! Sooo amazing! You should sell these!”, then you thought, “Sure. Why not?”. So you decided to start your business.
If you’ve been following along, you know that you are a business and not a hobby when you start selling. You also have decided which entity style you want. You’re super excited to get things going and then….oh, um, what about all this…stuff I already have?
Inventory
Let’s start with inventory; that is, everything that will end up going to the final consumer (fabric, yarn, beads, interfacing, cords, etc.). Anything that you already had is of $0 value unless you still have the receipts (or online order invoice/receipt). Because of how inventory is used and tracked, we can add inventory whenever we want, regardless of when it was purchased. So, don’t add your inventory until you are ready to actually use it in your business. Why? Because if you add it now (and it has a $ value since you have the receipt), then you will count it every year that it stays hanging out on your shelves. Counting is no fun, so don’t make more work for yourself. Put it on a separate shelf in perhaps as a “maybe business” pile.
Note: After you register with your state’s Department of Revenue/Taxation/Comptroller, you can purchase these items tax exempt.
Supplies
Now, supplies. These are things like needles, rotary blades, knot grippers, bead trays, etc. These are the things that don’t go to the final consumer, they stay with you. Unfortunately, these are the things that you cannot take deductions on in later years. You can only take a deduction of the amount you spent in the year that is on the receipt (yes, again, you need to keep receipts). This is why most businesses will go shopping in December, buying up as many supplies as they’ll need for the next year. By doing this, you’ll be able to not only get the resources you need before you run out and need them yesterday, but also take that deduction immediately on that year’s federal income taxes (yay!).
Note: Supplies are not tax exempt, so if you happen to not pay tax on a supply purchase, you will owe the tax as “Use” tax to your state.
Equipment
I know, this is what you were *really* wondering about, right? So this one is a bit…interesting. Previously used equipment (sewing machines, CNC & laser machines, etc.) *can* be added to business. If you plan to continue to use them for personal projects just as much as business, then, it might be worthwhile just not including it on the federal income taxes. A lot will depend on your situation, the fair market value at the time you put the equipment into place, and the depreciation schedule of that type of equipment. If you purchased a machine in the year prior to opening your business, specifically for business, there are options too. WARNING: DIFFICULT WORDS AHEAD
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You might be able to take “start up expenses”, but they are capped at around $5k total. Anything intangible (non-physical) total beyond is a 15 year amortization schedule. These non-tangible assets may include computer software, SVGs, intellectual property, domain names etc.
Amortization: A method of recovering costs over the life of the non-tangible asset.
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You might be able to take the cost of physical assets on a depreciation schedule from the date it is put into business. The time varies based on what the asset is.
Depreciation: A method of recovering costs over the life of the tangible asset.
- You might be eligible for a straight-line deduction under Section 179, BUT there are limits. If you use this for pre-used items, you can only use this deduction if the equipment is mostly business purpose (50%+) and only the business portion is calculated.
Now, I don’t want to overwhelm you too much, plus, this is an area that can take a lot of putting puzzle pieces together, so I generally will recommend talking to a tax professional. They’ll be able to walk through what each is, what the ‘basis’ (original cost) is for that item, what “recapture” is, and figure out the best (and safest) way to take your allowable expense here.