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I've been financing my guitar building adventure with personal funds and have no business set-up to write-off expenses. I recently sold a guitar and was considering opening a business account/fictitious name etc. in order to write off the cost of tools materials etc. but am aware the IRS has certain standards when a business is a business or when it's just a hobby and different rules for each form.

I was wondering what you each do with your hobby/business and how you handle guitar building expenses.

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Thank You and Best To All

It's very complicated and I've done everything from a simple DBA filing to a full fledged LLC complete with $300 an hour accountant for tax time and an attorney on retainer....

My best advice for you Larry is to seek out a local CPA and spend a few bucks for 1/2 an hour of his or her time. Tell them exactly what you want to do, write off all associated hobby.... er I mean..... business expenses and see what they say.

You will learn about flow-through income and about 1,000 other things that may either bore the hell out of you or scare the hell out of you....

Anyway when I finally hung out my first of two now shingles it sure was nice to see some of the cash coming back at me for a change. Those first learning years were brutal on the budget...

The IRS is very savvy in respect to folks wishing to "play" brick and mortar, conventional business in an effort to actually fund a hobby so I would get professional advice and do it by the book.

Don't try any funny business with your business!
My accountant squared me away decades ago, and she was the best money I ever spent on something that wasn't in the shop.
Do it right, or not at all - from the Federal level right down to your local City (or you'll be sorry).

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"Act your age, not your shoe size" - Prince

You're supposed to report all income.
If you report income, you can write off expenses, all using your social security number.
There's a form "Profit or Loss from Business" that you can use to report the income.
To be a business you have to show a profit 2 out of 5 years, so basically you can lose money and deuct your business related expenses for2 years, but after that you are considered a hobby by the IRS and have to report your income on schedule A itemized deductions, and can only deduct up to your hobby income.
If you lose money as a business, the money from your regular taxable income that you used to start up and fund your business is deducted from your total taxable income.
So if you've decided to start selling your guitars, then you can transition to a business. All you have to do is start building for sale, and engage in the activity regularly for purposes of selling. So if you already have all your tools, then you can basically just build them and sell them, and have fun doing it.
If you sell a guitar this year, you can deduct all your expenses this year, provided you kept receipts.
If you transition to a business, you have lot more deductions than as a hobby.

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Old growth, shmold growth!

GREAT advice and thanks so much. I've created many businesses over the years and have a CPA that currently advises me and does my tax returns for my home design business so I will definitely consult her but mostly curious about your guitar building business/hobby experience. I have all receipts for all my tools and maybe even materials so I'm good to go with write off's again curious about your experience and thanks for sharing.

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Thank You and Best To All

If you want the write-offs of being a business you must be a business. Get a state sales tax license and get an federal EIN, your accountant may or may not help with those items. You also need to give thought to compliance with fish & game, customs, etc.with regards to CITES and such. You need to be able to track every piece of flora & fauna that goes through your shop if any one should come asking questions. Then of course there are local zoning laws. Is your location appropriate for this type of business activity?

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Brian

You never know what you are capable of until you actually try.

https://www.howardguitarsdelaware.com/

What Hesh said. I set up a business in 1978. Did everything by the books. Everybody made money except me. But if your going to go that route then you must comply.


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You don't need an EIN unless you plan on hiring employees.

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Old growth, shmold growth!

And once you do, your paperwork won't increase by three or four fold - try tenfold!
THAT'S why you need an accountant.

(been there, done that)

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"Act your age, not your shoe size" - Prince

In some states, Michigan is one of them, your EIN is also your state tax ID which of course requires one to get an EIN for both tax purposes and that tax ID number is going to be the first thing that you need to purchase stuff wholesale as well i.e. strings, humidifiers, that Bassman amp that I always wanted....etc.

Ann Arbor Guitars was the second business that I had a hand in setting up in 5 years time so one more bit of advice.

Get valium...... I'm not known to be a government hater like some but the experience of seting up a new business very nearly changed that for me....

And.... if you need insurance, and you most certainly do if you are going to have in your charge the personal property of others OR invite the public to your shop Heritage is the only way to go in my opinion.

I think that you have to be trying to start a business, even if you do not end up selling anything and stop the business. You can depreciate tools, etc. and deduct them from your personal income tax. HOWEVER, I think that you need to actually be trying to start a business. If it is really only a hobby and you pretend that it is a business to take deductions, I think that is tax fraud. So, when you refer to it as a "hobby business" I think you are not serious and should not deduct anything. If it is a hobby that you would like to grow into a business, then you can deduct.

Interesting thought. If you are building guitars with the intention of selling them, and you engage in the activity regularly, then you are a business. This is true even if you do it in your spare time after your regular job, an enjoy the activity so that for all otherintents and purposes it appears to be a hobby.

I don't have any state income tax here in Florida, though, so I can use just my social security number.

Other states may be more complicated...

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Old growth, shmold growth!

There may be other reasons you would want an EIN, like becoming incorporated. BTW, if you are running your business as a sole proprietor, you may want to re-think that. Liability is a major issue, no matter what your business is.

Valium now that is a great idea. A therapist would help also. When you start a business you'd think you get to be the boss. NOT!!! You become a flunky for everybody that comes along. God forbid if you have employees. They don't show up if they do they just got home from a party. Smell like booze and slurred speech. That's on a good day. Once a supplier was backing out on me and without the product there was no way we were going to make our deadline. My brother who was in business with me said what do we do. I said come on. We went for a walk in a park. After about 30 minutes of brainstorming we hit upon the idea that made everything work out. He said we were almost out of business. Yep I said. How often does these things come up? You mean how often do we almost get put out of business? He said yea. I told him oh no more then four maybe five times a day. He just shook his head and said ok handle it. I'll go back to work now. Sometimes being in business for yourself is not all it's put up to be.


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Valium now that is a great idea. A therapist would help also. When you start a business you'd think you get to be the boss. NOT!!! You become a flunky for everybody that comes along. God forbid if you have employees. They don't show up if they do they just got home from a party. Smell like booze and slurred speech. That's on a good day. Once a supplier was backing out on me and without the product there was no way we were going to make our deadline. My brother who was in business with me said what do we do. I said come on. We went for a walk in a park. After about 30 minutes of brainstorming we hit upon the idea that made everything work out. He said we were almost out of business. Yep I said. How often does these things come up? You mean how often do we almost get put out of business? He said yea. I told him oh no more then four maybe five times a day. He just shook his head and said ok handle it. I'll go back to work now. Sometimes being in business for yourself is not all it's put up to be.


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I have had many businesses with and without employees and understand the MANY pitfalls of running a business both physically and emotionally. NEVER will I have an EIN, incorporate or have employees again. Have done all that and we're STILL hearing from the EIN tax people many years later after shutting a couple businesses down (S and C corps as well as sole proprietorships and even an LLC.

Just not quite sure if I'm committed enough at this stage though I'd love to write off my to-date expenses.

What are each of you doing? Business? Hobby? In between?

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Thank You and Best To All

Oh I know took me forever to get everybody satisfied.


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Larry, mine is 100% hobby. Similar to growing tomatoes and selling them to family and friends for the cost of seeds.
And definitely hear you loud and clear about having employees. No do.

Thanks Glen. I wonder what the rest of you (us) are doing?

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Thank You and Best To All

Just for fun. Sometimes I'll take a repair for a little money. But would rather work on my own stuff.


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I don't see anything wrong with a hobby writing off expenses. If I understand correctly, if you sell a guitar you built, you need to report that as income. If those are the rules, then why not write off the expenses against it?

"I don't see anything wrong with a hobby writing off expenses. If I understand correctly, if you sell a guitar you built, you need to report that as income. If those are the rules, then why not write off the expenses against it?"

Whisperer mentioned that you can write off your hobby expenses up to the amount of your hobby income. It's right there with Slots and horse racing!

Yes, and that's a good thing. I build strictly as a hobby, one every year or two, and eventually I'll need to start selling what I build. I can only justify having so many guitars around the house! It's a shame that I'll have to research the tax situation and deal with the paperwork just to prove I'm not making money!

I wouldn't want anyone to reply with their personal situation, but I wonder how many hobby builders just sell the occasional guitar and don't mess with the tax situation at all,
Mike

"I wouldn't want anyone to reply with their personal situation, but I wonder how many hobby builders just sell the occasional guitar and don't mess with the tax situation at all,"

Until the IRS starts spying on us like the NSA (is it coming?), garage sales, nonprofessional flea marketers, and the occasional sale of personal property usually isn't scrutinized for profit/loss to determine tax liability. I think most of us could show a loss if it was.

I'm in the same boat Larry. It really wasn't a big deal. I have a bookkeeper and accountant for other interests. I set up set of simple books. Income (not so much), expenditures in a few different categories. The only really scary part is when my bookkeeper asked me to do an inventory of material on hand. I figured what could it be, 2 or 3K. Was I waaaaaaay low on that.

One stumbling block that I'm pondering though is my insurance. If you start to run a business they want to know. Guess why.