Employed Person Side Business Tax Questions

[FLlaw111]

I'm employed in Illinois, though I am technically still a resident of Florida.

I do not want to be self-employed as I will lose benefits. However, I am starting up a small business to produce and sell 3d extrusion printers (like the makerbot). It's almost more of a hobby with revenue in that the expenses are quite large but right now there is little revenue.

Is there some sort of structure that will allow me to avoid being self-employed while somehow writing off business expense? Could a relative own my business and I invest and deduct the investment losses? Or could I own the business as an LLC or incorporated business and deduct the expenses?

Thank you for your time.

 

[LdiJ]

I'm employed in Illinois, though I am technically still a resident of Florida.

I do not want to be self-employed as I will lose benefits. However, I am starting up a small business to produce and sell 3d extrusion printers (like the makerbot). It's almost more of a hobby with revenue in that the expenses are quite large but right now there is little revenue.

Is there some sort of structure that will allow me to avoid being self-employed while somehow writing off business expense? Could a relative own my business and I invest and deduct the investment losses? Or could I own the business as an LLC or incorporated business and deduct the expenses?

Thank you for your time.

A person can be self employed with a small side business and still be a regular employee for someone else. (unless of course there is a conflict of interest). A hobby with revenue is not a business. A hobby with revenue only allows expenses to be deducted to the extent of the revenue.

If you don't have a profit, you don't have any self employment tax. Therefore before you decide what kind of long term structure you need, you need to see if you are actually going to make any profits.

 

[FLlaw111]

A person can be self employed with a small side business and still be a regular employee for someone else. (unless of course there is a conflict of interest). A hobby with revenue is not a business. A hobby with revenue only allows expenses to be deducted to the extent of the revenue.

If you don't have a profit, you don't have any self employment tax. Therefore before you decide what kind of long term structure you need, you need to see if you are actually going to make any profits.

Let's say I earn profits in the 3rd, 4th, and 5th years, but losses the first two.

 

[BigMouthWino]

Let's say I earn profits in the 3rd, 4th, and 5th years, but losses the first two.

If you have a need for a liability shield an entity with pass-through taxation like an LLC or an S-Corp will allow you to deduct your business losses from the personal income that you earn in wages and pay less tax over the next couple of years. You can also do this with a sole-proprietorship, but then you will not be shielded from personal liability if somebody decides to sue you over one of your printers someday.

 

[FlyingRon]

If you have a need for a liability shield an entity with pass-through taxation like an LLC or an S-Corp will allow you to deduct your business losses from the personal income that you earn in wages and pay less tax over the next couple of years. You can also do this with a sole-proprietorship, but then you will not be shielded from personal liability if somebody decides to sue you over one of your printers someday.

You can still be sued personally with a corporation. You can even be found responsible for your own acts. Whether your business losses can be used to offset other income depends on the type of activity. If the activity is passive or the IRS determines it not to be a business motive, then they will severely limit it.

 

[LdiJ]

If you have a need for a liability shield an entity with pass-through taxation like an LLC or an S-Corp will allow you to deduct your business losses from the personal income that you earn in wages and pay less tax over the next couple of years. You can also do this with a sole-proprietorship, but then you will not be shielded from personal liability if somebody decides to sue you over one of your printers someday.

And on top of what Ron said, a good liability insurance policy shields someone just as well as a corporate entity...in fact, it probably does a better job of shielding them.

 

[LdiJ]

Let's say I earn profits in the 3rd, 4th, and 5th years, but losses the first two.

Then you would pass the test for NOT being a hobby...assuming that your intent from the beginning was to eventually make a real profit. However, you are calling it a hobby now, which puts you in a bit of a precarious position.

 

[BigMouthWino]

You can still be sued personally with a corporation. You can even be found responsible for your own acts. Whether your business losses can be used to offset other income depends on the type of activity. If the activity is passive or the IRS determines it not to be a business motive, then they will severely limit it.

It is not an easy thing to pierce the corporate veil and hold owners and officers responsible for acts of the corporation or especially products of the corporation as long as the paperwork is in order.

Regarding the tax issue had you bothered to read the OP you would have seen he is doing this with a clear profit-motive of turning it into a viable business.

 

[BigMouthWino]

And on top of what Ron said, a good liability insurance policy shields someone just as well as a corporate entity...in fact, it probably does a better job of shielding them.

While insurance is important it is not a complete shield. It is a shield to a limit. For example, let's say there is an electrical problem with these printers he produces and one of them catches fire and burns down an office building. The building's insurers are able to determine the cause of the fire. That $1-2 million insurance policy isn't looking so hot to trot now. At least with the corporate structure all you have to lose is your business. You can still start another one with whatever personal assets you have left in the event of some tragedy occurring.

 

[tranquility]

It is not an easy thing to pierce the corporate veil and hold owners and officers responsible for acts of the corporation or especially products of the corporation as long as the paperwork is in order.

FlyingRon was not thinking about a piercing argument, but direct liability for what the OP does. It is a problem for single-member entities where the member does all the work.

Risk is managed by choice of entity, insurance and business practices. Each needs to be addressed by intelligent business owners.

 

[FlyingRon]

It is not an easy thing to pierce the corporate veil and hold owners and officers responsible for acts of the corporation or especially products of the corporation as long as the paperwork is in order.

That's not what I said. I said a corporate entity will not shield him from personal negligence. A single person corporation or LLC is going to get very little liability protection against assertion that they were personally negligent. Contrary to your misguided advice, it's quite easy to pierce. He's not just a shareholder or employee here. He's of unity of interest, he's going to have commited the wrongful conduct, and he will be the proximate cause, and He's at substantial risk.

Regarding the tax issue had you bothered to read the OP you would have seen he is doing this with a clear profit-motive of turning it into a viable business.

I read his post and what I said is true. Your assertion is not consistent with what he says he wants to do. In fact, he specifically called it a hobby. It's not me he has to convince of his motives, it's the IRS. Further, I doubt that a single person would be manufacturing extrusion printers single handedly, which makes me wonder what the nature of his participation is, which entails what the extent of what deductions he can take for his losses against other income.

 

[BigMouthWino]

Further, I doubt that a single person would be manufacturing extrusion printers single handedly

Thank you for making my point.

 

[davew128]

It is not an easy thing to pierce the corporate veil and hold owners and officers responsible for acts of the corporation or especially products of the corporation as long as the paperwork is in order.

It is when its the officer's bad act.

Regarding the tax issue had you bothered to read the OP you would have seen he is doing this with a clear profit-motive of turning it into a viable business.

Which doesn't mean squat. I know a lot of horse and race car owners who say the same thing.

 

[tranquility]

No race car owners, but a few horse owners for me as well. Times are tough on the horse circuit. No matter how hard they try, they just can't seem to make a profit.

 

[FLlaw111]

Ok, to clear up a few things.
1. A small business is an investment with tax benefits for me. That is the purpose, to maximize revenues and minimize wasted expenses ( taxes, permits, transaction costs). Disregard the word hobby, it was said when I was under the impression that a hobby had superior benefits to the small business owner. I am still currently learning small business laws and regulations.

2. I thank you for your concerns, but please do not spend much time on liability issues. It's beyond the scope of the thread and worrying about future lawsuits and fires seems a bit odd considering that a type of form I must fill out to start the business hasn't even been decided.

I want to invest in something with a higher return than an IRA or 10 yr treasury, and I want that investment to be tax deductable.

3. After doing even more research I am now curious about locating my business. Can I locate it in a state I do not reside or work in?