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Of course an accountant would give a condescending non-answer like that. The clients who give her the most money for the least trouble are the ones for whom tha

Of course an accountant would give a condescending non-answer like that. The clients who give her the most money for the least trouble are the ones for whom that's true. We shouldn't let them or her speak for new businesses, though. People trying to get into business have the clearest view of the problems they face. For an organically grown start-at-the-bottom business, $1000/year to declare a company is bad (it's much less outside of California, but still). The constant threat of the IRS deciding you aren't serious-business enough and sending you a bill for 30% of your revenue in the last 5 years is bad. Not profit, revenue. The fact that "serious business" is defined about as well as my memetic language would imply is doubly bad. We should fix this.

URSpider94 6y ago
If you want to run your business as as start-at-the-bottom business, then run it as a sole proprietorship. Then the incremental annual costs outside of some initial start-up costs are near zero. You'll probably still have to apply for a business license in the place where your office resides, which might very well be your house.
- jjoonathan 6y ago
  That's probably fine for a software business where capex and COGS are peanuts. Unfortunately for me, that's not how my sector works. I repair and resell lab equipment while I do R&D towards making my own. I have five-figure revenue, capex, and COGS. I also have a day job because the side business doesn't support me yet. Here's the rub: because of my capex and COGS, paying tax on profits is very different from paying tax on revenue. I get to pay tax on profits if I'm a business, but I have to pay tax on revenue if I'm a hobby (to put it crudely). If the IRS decides I am retroactively a hobby, my entire business goes from "growing steadily, maybe my day job soon" to "life lesson wipeout." So how do I make sure I'm a business not a hobby? The rules aren't much better than "I'll know one when I see one." They're a joke. A bad joke that keeps me up at night and stunts my business growth because I want to make sure my liquid assets could absorb the IRS dropping a bomb on the whole thing. Tax ambiguity shouldn't be this kind of threat. My accountant isn't concerned, but he's also not on the hook, so I don't take much comfort in that.
  - URSpider94 6y ago
    Welcome to the world of administrative law, nothing is black and white. This is true for a ton of government domains, but tax is the one people interact with most. Do not be terrified of the hobby vs. business designation. If you take some reasonable, intentional steps, you'll be safe. To be specific: do you segregate the materials for your business separate from your personal property? Do you maintain books for your business? Do you have a separate bank account for your business? Do you regularly operate your business to attempt to make a profit, e.g. selling things for more than you pay for them? If so, it's highly, highly unlikely that the IRS will retroactively characterize your business as a hobby. If you're really worried, get an accountant or tax lawyer to review your practices and give you an "opinion letter" stating that you're operating it as a business. If the IRS ever audits you, you can submit this to show that you were acting in good faith. Also, what you wrote implies that you might not be aware of this, but you can deduct all of the costs of operating your business vs. your profits, even if it's just a "hobby". The only difference tax-wise between a business and a hobby at this scale is that you can't deduct hobby expenses that exceed hobby revenue, e.g. a hobby can't generate tax losses, while a business can. If you think you'd be stuck paying taxes on the entire profits of your business without deducting your cost of goods sold and expenses, you've been poorly advised.
    - jjoonathan 6y ago
      Yes, I am taking those steps. > "Opinion Letter" Thanks, I didn't know to ask for that, and now I do. > The only difference tax-wise between a business and a hobby at this scale is that you can't deduct hobby expenses that exceed hobby revenue I used to file as a hobby under that framework, but my understanding (and my accountant's understanding) is that the TCJA nixed it right as its importance-to-me started to heel upwards, forcing me to formalize my intention of becoming a business. I've been putting all of the profit back into the business, but I haven't grown the stones to fully account for my costs and generate a tax loss against my day-job income. Anyway, thanks for taking the time to reply. Knowing what an Opinion Letter is changes things. The fact that I sort of asked after such a thing and my accountant didn't point me in the right direction makes me think I might want to shop around on that front too.
stu2b50 6y ago
OP's running a C Corp. Organically grown startups should start as a sole proprietorship or an LLC.
- jjoonathan 6y ago
  LLCs don't have to pay the California franchise tax? Are you sure about that? https://www.ftb.ca.gov/forms/2020/2020-3522.pdf https://www.ftb.ca.gov/forms/2020/2020-3522.pdf

URSpider94 6y ago

If you want to run your business as as start-at-the-bottom business, then run it as a sole proprietorship. Then the incremental annual costs outside of some initial start-up costs are near zero. You'll probably still have to apply for a business license in the place where your office resides, which might very well be your house.

jjoonathan 6y ago
That's probably fine for a software business where capex and COGS are peanuts. Unfortunately for me, that's not how my sector works. I repair and resell lab equipment while I do R&D towards making my own. I have five-figure revenue, capex, and COGS. I also have a day job because the side business doesn't support me yet. Here's the rub: because of my capex and COGS, paying tax on profits is very different from paying tax on revenue. I get to pay tax on profits if I'm a business, but I have to pay tax on revenue if I'm a hobby (to put it crudely). If the IRS decides I am retroactively a hobby, my entire business goes from "growing steadily, maybe my day job soon" to "life lesson wipeout." So how do I make sure I'm a business not a hobby? The rules aren't much better than "I'll know one when I see one." They're a joke. A bad joke that keeps me up at night and stunts my business growth because I want to make sure my liquid assets could absorb the IRS dropping a bomb on the whole thing. Tax ambiguity shouldn't be this kind of threat. My accountant isn't concerned, but he's also not on the hook, so I don't take much comfort in that.
- URSpider94 6y ago
  Welcome to the world of administrative law, nothing is black and white. This is true for a ton of government domains, but tax is the one people interact with most. Do not be terrified of the hobby vs. business designation. If you take some reasonable, intentional steps, you'll be safe. To be specific: do you segregate the materials for your business separate from your personal property? Do you maintain books for your business? Do you have a separate bank account for your business? Do you regularly operate your business to attempt to make a profit, e.g. selling things for more than you pay for them? If so, it's highly, highly unlikely that the IRS will retroactively characterize your business as a hobby. If you're really worried, get an accountant or tax lawyer to review your practices and give you an "opinion letter" stating that you're operating it as a business. If the IRS ever audits you, you can submit this to show that you were acting in good faith. Also, what you wrote implies that you might not be aware of this, but you can deduct all of the costs of operating your business vs. your profits, even if it's just a "hobby". The only difference tax-wise between a business and a hobby at this scale is that you can't deduct hobby expenses that exceed hobby revenue, e.g. a hobby can't generate tax losses, while a business can. If you think you'd be stuck paying taxes on the entire profits of your business without deducting your cost of goods sold and expenses, you've been poorly advised.
  - jjoonathan 6y ago
    Yes, I am taking those steps. > "Opinion Letter" Thanks, I didn't know to ask for that, and now I do. > The only difference tax-wise between a business and a hobby at this scale is that you can't deduct hobby expenses that exceed hobby revenue I used to file as a hobby under that framework, but my understanding (and my accountant's understanding) is that the TCJA nixed it right as its importance-to-me started to heel upwards, forcing me to formalize my intention of becoming a business. I've been putting all of the profit back into the business, but I haven't grown the stones to fully account for my costs and generate a tax loss against my day-job income. Anyway, thanks for taking the time to reply. Knowing what an Opinion Letter is changes things. The fact that I sort of asked after such a thing and my accountant didn't point me in the right direction makes me think I might want to shop around on that front too.

stu2b50 6y ago

OP's running a C Corp. Organically grown startups should start as a sole proprietorship or an LLC.

jjoonathan 6y ago
LLCs don't have to pay the California franchise tax? Are you sure about that? https://www.ftb.ca.gov/forms/2020/2020-3522.pdf https://www.ftb.ca.gov/forms/2020/2020-3522.pdf