First Year Business Shows Loss

[lef206]

I want to start doing my own taxes. I have never done them before but feel I want to be more hands on, and saving the money is not a bad idea. However, I have an irrational fear of messing up and getting audited. I have nothing to hide, it just seems like a major headache. I'm sorry if my terminology is off. I have been researching taxes like crazy and am now getting confused and losing confidence that I can do them. So here it is:

My wife started selling LuLaRoe this year. So far we have nearly made more purchases for resale (the clothing) than we have taken in sales. For the sake of this topic, lets say we bought $18,000 in clothing and have net sales of $20,000.

That leaves us with a gross sale of $2,000.

LuLaRoe removes sales tax and processing from our net sales, so lets say from our gross sales they take $500. Now our profit is $1,500.

Now we have our expenses (postage, supplies, clothing racks, ect). For this example I will say $3,000.

So the way I see it, our business is -$1,500.

We did use a credit card to start the business, and we still owe money back on that. I don't feel we have done poorly with our business, as we have taken some of the profit here and there to pay a bill. But most the money has been reinvested in the business. I just feel like we have lived better from the business than the numbers show. And that's where I feel like I have a problem. I feel like if the business has improved our family income, why do our numbers look so bad? Is it a first year business thing? Do I have red flags? I've kept the best records I can using excel spreadsheets.

Thank in advance for help, and apologies for my ignorance.

[TaxGuyBill]

I understand wanting to do your own taxes.  However, the first year of business is a bad time to start doing it youself.  I highly recommend going to a tax professional for at least the first year of business, and once you get an idea for how things work for the business, THEN you may want to try them on your own.
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[Carl]

Nothing to be scared of here. In fact, the IRS *expects* you to not make a dime of profit for your first 3 years of business. So don't worry. I've been self-employed for going on 13 years now, and working out of my home as I assume you are, doing my own taxes was actually easier than I expected. I've been using TurboTax since 2003, started my business in 2005 and because I kept detailed business records, it was a piece of cake. I see you're keeping detailed records from day one, and that makes all the difference in the world. So I don't really see a problem for you. The fact you're showing a loss your first year is common and expected. But I do have some advice I'd like to offer that may make future years even easier and simpler for you. Especially since you'll be going into your 2nd year of business in a few days.

1) If using credit, obtain a credit card for BUSINESS USE ONLY! Nothing else.....EVER!

2) All money received by the business needs to go into ONE BANK ACCOUNT that is for the business only.

3) All bills paid by the business needs to come out of that same ONE BANK ACCOUNT that is for the business only.
Items #2 and #3 give you easy one-stop reference for the movement of all business related funds on one single bank statement that way.

4) Do NOT EVER UNDER ANY CIRCUMSTANCES give a vendor or customer your social security number. EVER! Instead, obtain an EIN (Employer Identification Number) for use with any and all business transactions where a tax ID number may be required. You'll also use that EIN on the SCH C when filing your tax returns. If your business has an EIN, then nobody has any legal need for any SSN. If they need a tax identification number, you give them the EIN instead. If they don't like it, then you don't do business with them. Period. You can obtain an EIN for your business absolutely free at https://www.irs.gov/businesses/small-businesses-self-employed/apply-for-an-employer-identification-n... and it only takes about 10 minutes if you type slow.

5) Understand how inventory works as it relates to taxes. DOING THIS WRONG WILL COST YOU $$$MONEY$$$.
When it comes to inventory, you can only deduct what you paid for that inventory, in the tax year you sell that inventory. It does not matter in what tax year you purchased the inventory. So if you purchased 1000 widgets in 2016 for $1 each, and you only sold 500 widgets in 2016 at a price of $5 each, then when the program asks you for your COST OF GOODS SOLD, it's asking what *you* paid for the 500 widgets you *actually sold* in 2016. At $1 each, your COGS would be $500. You can not deduct what you paid for the unsold widgets, until the tax year you actually sell them.

Please ensure you understand how inventory and COGS works.

6) I assume the business does not have employees, so I won't go into that part. Just understand that the business owner CAN NOT be an employee of the business they own. Your sole-proprietor or single member LLC business is considered a disregarded entity by the IRS. That means money earned by the business is treated no differently than money earned at a W-2 job by the business owner - with one exception of course.
If the business has more than $400 of taxable income, then in addition to regular income tax, the business will pay an additional self-employment tax (around 15.6%) on the business income only. The SE tax is basically the employer side of Medicare and Social Security.

7) Make sure you list only ONE PERSON as the business owner. It makes taxes a whole lot easier and simple. If you report the business as owned by more than one person, then you don't have a sole proprietorship or single member LLC. That would be a partnership, even if both owners are married to each other and filing a joint tax return. It can complicate tax filing quite a bit, depending on what state you are in.

😎 Since 2016 will be your first year dealing with the business, I highly recommend that you DO NOT use the online version of TurboTax for your 2016 tax return. I recommend you purchase the CD/download version of TurboTax Home & Business, physically install the program on your computer, and use that this year. The version you physically install on your computer is MUCH easier to deal with when you make mistakes and need to jump around to correct data. Remember, this will be a learning process for you since it's your first time dealing with SCH C. You know the first rule right? When you find yourself fin a hole and are ready to get out of it, the first thing you do is STOP DIGGING!

Hopefully, you find the above helpful. Of course, if you have questions as you are working things through, please feel free to post back and I'll be happy to help.

[lef206]

I sincerely appreciate that answer. I thank you for taking the time to answer me in detail.

Yes, we have just that business card
We are switching everything  to a business only account.
My wife has the EIN
As far as the COGS, that was the clarification I needed, and now I think my business actually looks like it should on paper.
No employees 🙂
My wife is the Captain of the boat, I just help keep this kind of stuff straight.
Yes the disc version is the way I would go.

Again, your answer REALLY helped. Thank you so much.

[Carl]

I just thought of something else too. On Jan 1, 2017, either go to the store or go online and purchase QuickBooks 2017 to install on your computer. (Not the online quickbooks.) I started using that for my business in 2006, and it's made my tax time life so much easier. I use QuickBooks to enter and track all of my income, expenses, and inventory. What I like about it, is that you can set it up to assign specific transaction types to specific tax lines on the SCH C. Yes, that initial setup is a bear. But once done, I simply import my data from QuickBooks directly into TurboTax. Of course, since Congress can't leave tax laws alone from one year to the next, I do find myself having to confirm and "correct" a few things. But it's a heck of a lot easier than doing the SCH C from scratch each year. On top of that, by purchasing it on Jan 1 2017, you have your first tax deductible business expense for 2017 too!

As for the 2016 taxes, I know your deductible business expenses will exceed your taxable business income. that's okay. You still "claim" them on your 2016 return. So while you will "claim" them, once your deductions gets your taxable business income to zero, any more deductions won't be "allowed". But you claim them anyway.

This is because those claimed 2016 deductions that are not "allowed", will be carried over to your 2017 taxes and deducted next year, provided you have the business income to deduct them from of course. But if you don't "claim" them in 2016, then you can't carry them over and claim/deduct them in 2017.

[jesdv]

This is very helpful. Thanks for this post. I was just 'roaming around' for information when I bumped into your comment/reply sir. Thanks! I'm still planning to do Uber and got into some comment by someone that it might be better to open an LLC just for my Uber drives. My thing is, currently, I am a teacher. And, as I had tried before, when I filed my taxes (W2) I got a way bigger refund just because my Uber 'business' was a loss. (Of course, I can't really drive much because of my teaching job - special ed!) So, when considered the LLC format, I wondered if I'd lose that 'advantage' of having a bigger refund (I don't actually know how it worked or, how it will work the next time around.)
So, I wondered, if do Uber as an LLC, what's the advantage or, disadvantage?
I wonder if you could advise me where to get information related to my concern. If you got any...
But, thanks all the same for your very detailed  feedback. I got some ideas I never heard of before.
Also, I'll switch to TurboTax the next time I'll do my taxes. (I do them myself, too...using another software...).

[TaxGuyBill]

A Single Member LLC will not change your tax return at all (unless you live in a State that charges for LLC, such as the $800 California fee), so that is only for legal liability issues.

If you are continually reporting a loss, you may reconsider doing that type of work, as you spending time to lose money is not a good idea.  I realize that the Standard Mileage Rate may be a larger deduction than 'actual' cash flow costs, but it would still mean you are likely spending time for very little money.

[Glossy WIndows]

It seems like you are a very knowledgable person so i really hope you cant help me out with this.
I am in the exact same boat as the person above but unlike him, i have been doing a terrible job of keeping my expenses and income in check.

 
I have no idea what my starting balance was when I first opened my business

I used 5 different cards when buying things for my business

Sometimes, the money I made from my business would go into my personal checking account because My bills are automatically deducted from there.

The only thing I am aware of is how much I have made this year because I have receipt book with all of the income I've gained up until today. I know roughly how much in taxes I will owe at the end of the year.

What do I do now that I'm in this position? Do i go to a tax specialist and state the problems I have? Can you please point me in the right direction?

thank you in advance if you answer my miserably long question.

[Carl]

@Glossy WIndows don't feel bad or anything about your situation. Believe me, you are not the first one to start their own business without realizing they've got the head in the sand, and I can guarantee you that you won't be the last either. 

For your situation, I would highly encourage you seek professional help, as you will need one-on-one face-to-face help to cover your basis if you should be audited.Now I'm going to address some of your specifics below. But understand this does *not* negate my very *strong* recommendation that you get professional help.

I have no idea what my starting balance was

If you can't prove your opening balance, then as far as the IRS is concerned, its $0.00

when I first opened my business

What kind of business? This matters big time for tax purposes. A sole proprietorship? A single member LLC? A partnership? A multi-member LLC? An S-Corp? A C-Corp? Something else.

I used 5 different cards when buying things for my business

If you can't provide documentation to not only prove your purchase, but to prove it was for the business, then don't claim it as a business expense.

Sometimes, the money I made from my business would go into my personal checking account because My bills are automatically deducted from there.

If audited, and the amount of all deposites to all accounts with your name on them exceed the total income you report on your tax return, then you'll have a legal problem with the IRS for what they will see as unreported income.

The only thing I am aware of is how much I have made this year because I have receipt book with all of the income I've gained up until today.

Then without question, that will be the minimum amount you will enter on the "gross business income" line of whatever form you will report your business income on. (What form you use, depends on the type of business you have, as mentioned above.)

I know roughly how much in taxes I will owe at the end of the year.

Your rough estimate is probably way to low. Add at least 15.3% to that. When you are self-employed, in additional to "regular" income tax, the business will also pay an additional 15.3% self-employment tax. That's basically the employer side of your social security and Medicare taxes and it gets credited directly to your SS and Medicare account. So it's sort of like you're paying into your SS account for your future self.

What do I do now that I'm in this position?

First, admit to yourself (you don't have to admit to anyone else, as you don't answer to anyone but yourself) that you started this business with good intentions, but with no clue because you didn't do your homework first.  (most likely because you had no clue of just exactly what that homework was... but it's okay.)

Second, seek professional help "NOW". Don't wait until tax time when it will be darn near impossible to get a one-on-one face-to-face appointment with a CPA or tax professional of any type. Come January, they're all gonna be booked up with 15 minute to 1 hour appointments, and that just flat out will not be enough time for you to learn anything.

Also, keep this in mind. I myself did not learn about taxes by doing everything "perfect" the first time. 99% of what I know is what *not* to do..... and I didn't learn it by not doing it. 🙂

[TRAVELGAL369]

Hello,

This may or may not be related...I purchased a business late 2019. The previous owner will receive all income for trips that she planned this year.  My trips start in January.  However, income has started coming in for the year 2020, but it has to sit in the bank until the time comes to pay for tickets, meals, etc. How in the world do I show that I have received this amount of money (mostly to be paid to multiple venues), but it isn't income? I won't even know if income is made on a trip until all expenses have been paid. I keep a separate bank account and credit card for business only so the ins and outs are very easy to track. Any advice?

[Critter]

I would seek local professional assistance to get educated on your responsibilities based on what kind of business entity you bought...an incorporated would be treated different from a sole proprietor.   

[TRAVELGAL369]

It is a sole proprietorship.

[Carl]

@TRAVELGAL369 please start a completely new thread. There are 5 different users all with their own situations in this thread as of now. I can guarantee you that readers responding to your posts will get confused and you won't realize it. (Neither will the reader). This will result in you being provided wrong information. So please start your own thread that addresses your own, specific and explicit situation.

[3Nutcasegls]

I have CV always filed the exact way and the price kept going up and up. Redickuless 

[SueK1]

I have a similar problem...same year. I think I did something wrong on my 2016 when it came to reporting inventory. I do not want to carry inventory. Somehow,in answering the questions regarding inventory and cost of goods, I ended up with an inventory figure at the end. Which us transferring to my 2017. 

I had a CPA look at it and say it looked correct. I just cant get the $22, 000 woth of inventory back to 0. CpA says it looks correct on the tax form.