Tax Deductions - Home Based Cake Decor - Sole Prop

Business By SplendoraCakeandTea Updated 17 Apr 2012 , 4:44am by scp1127

SplendoraCakeandTea Posted 16 Apr 2012 , 8:09pm
post #1 of 12

In the spirit of the 2011 tax deadline being tomorrow, April 17th and my extreme procrastination (which will result in me staying up all night attempting to complete my own tax return) I wanted to get some input from the fellow cake decorators out there running home-based businesses in regards to the tax deductions you take. What loop-holes have you found that help lower your taxes due every year?

This year is the first year that I am completing a tax return for my cake business since past years have only been orders for family and friends. I know about the standard deductions like mileage, health insurance, liability insurance, kitchen rental fees, sales tax, miscellaneous expenses, cellphone, etc. But I want to know if there is anything I am missing?

Can you deduct the cost of your ingredients/supplies/tools? Do they fall under general business expenses? What if your family members help you but aren't officially employees, can you deduct the expense of paying them?

Also, I still live at home with my parents (am waiting to move out with my boyfriend once I get that ring in a few months!!!!) and I don't know how that works as far as taking deductions for my home office, the storage space I use in the basement for my tools/supplies or even the utilities I use (internet/phone, electricity). I once had an accountant tell me that there is way to write off the money you pay your parents (even if you don't really pay them. . . haha). I'm also single and do not have any dependents and my business right now is a sole proprietorship.

I just really cannot afford to go somewhere and get them done professionally and I don't want to wind up owing a ton of money in taxes.

Any advice/tips anyone has would be greatly appreciated! I researched this topic on the internet and didn't find too much about taxes and home-based cake decorating so I would love to hear from you guys!

Thanks!

11 replies
jason_kraft Posted 16 Apr 2012 , 8:24pm
post #2 of 12

Be very careful about payroll, if you pay other employees you are on the hook for your share of SS/Medicare/unemployment taxes. Workers comp requirements might also kick in depending on your state.

Business meals are often overlooked as a deduction, you may be able to deduct 50%-100% of the cost of meals where you discuss business.

More info from the IRS:
http://www.irs.gov/publications/p535/ch11.html

And a more general discussion of business deductions:
http://www.irs.gov/businesses/small/article/0,,id=109807,00.html

If you don't pay your parents rent you can't take the home office deduction. I recommend against pretending that you pay rent in order to get a tax deduction, that's fraud.

Ingredients, tools, and supplies for your business should be deductible if they are used exclusively for your business. Ideally you would be tracking your income and expenses in a program like QuickBooks throughout the year, otherwise you'll have a lot of adding to do from your receipts.

Jenise Posted 16 Apr 2012 , 8:33pm
post #3 of 12

let me start off by saying that you DO NOT want to take deductions for ANYTHING that you did not actually pay for! This would include rent and utilities that your parents are actually paying. If you say that you are renting the space from them, better make sure that they show the income on their return, because if you get called in for an audit, they will want proof of the expense and then will go to your parents return to show the income.

Next, anything that you purchase for the business is deductible. ie ingred (for a specific product) would be considered materials and things like cooking spray would be supplies(things that are used to make various products...cake, cupcakes, decorations). If you put something in either supplies or materials that should be in the other, it is usually okay, as long as it has to do with your business only.

When it comes to the tools, they are handled a little different. You can either deduct them over time (amortize) or take a 179 and deduct all in same year. this will be up to you. if you purchased any items for the business before you actually started the business, you can deduct those as "start up" cost, but those MUST be amortorized over 5 years.

Any wages that were paid to family members are deductible, but here you have to be VERY VERY careful. If you did not withhold social security and medicare and the IRS determines that these were employees, then you will be liable for the fees. If you are able to pay them as subcontractors, they you have to issue them a 1099 if they were paid at least $600 during the year. The IRS is very funny about 1099 employees, so be very careful. Also, they will be looking at the corresponding tax returns to make sure that this income was declared also.

When it comes to the mileage, make sure that you have good documentation, this is something that they check. The best way to handle this is to get a pocket calendar and keep in the car and just jot a note, beginning/ending mileage on the date and the purpose ie delivery, shopping for supplies, etc. The IRS finds this acceptable.

I don't know if I've answered everything, but am happy to help any way that I can, And in case you are worried, I have been doing taxes for over 25 years 10 of those with H &R Block.

shanter Posted 16 Apr 2012 , 10:18pm
post #4 of 12

Personal taxes are due today, April 16th (not April 17th). I don't know about business taxes, but make sure you get them in on time.

CreativeCakesbyMichelle Posted 16 Apr 2012 , 10:37pm
post #5 of 12
Quote:
Originally Posted by shanter

Personal taxes are due today, April 16th (not April 17th). I don't know about business taxes, but make sure you get them in on time.




Nope, personal taxes are due tomorrow April 17th.

http://www.irs.gov/newsroom/article/0,,id=251825,00.html

jason_kraft Posted 16 Apr 2012 , 10:48pm
post #6 of 12

Tax returns for sole props, partnerships, and LLCs are also due on April 17th this year, corporate tax returns for S-corps and C-corps are due 2.5 months after the start of the fiscal year (March 15th if fiscal year = calendar year).

LLCs that elect to be taxed as an S-corp or C-corp follow the corporate tax deadline.

jason_kraft Posted 16 Apr 2012 , 10:55pm
post #7 of 12
Quote:
Originally Posted by Jenise

if you purchased any items for the business before you actually started the business, you can deduct those as "start up" cost, but those MUST be amortorized over 5 years.



As of 2004 you can deduct up to $5000 of business startup costs in the first year without amortizing as long as your startup costs did not exceed $50K.

http://www.irs.gov/publications/p535/ch07.html#en_US_2011_publink1000208919

KoryAK Posted 16 Apr 2012 , 11:13pm
post #8 of 12

FWIW I heard that a lot of returns chosen for audit are those filed right at the deadline. File for an extension and then really file in a week or a month. This will also give you time do any necessary research so that you don't miss anything. Any money owed IS due 4/17 though, so if you think you'll have to pay I would send that along. You can can always pay a little more (less late, less penalty) or get a refund when you really file.

I use TurboTax Home and Business every year, it will walk you through everything you need.

costumeczar Posted 16 Apr 2012 , 11:22pm
post #9 of 12
Quote:
Originally Posted by KoryAK


I use TurboTax Home and Business every year, it will walk you through everything you need.




Turbo Tax is your best investment if you do your taxes yourself. It makes it super simple. Do NOT go around looking for "loopholes," especially if you work from home. The rules for home offices are really strict, and it's one of the things that triggers aduits, as far as I know. As someone who's married to a commercial finance auditor I'd advise you to err on the side of caution with financial records and tax returns.

shanter Posted 16 Apr 2012 , 11:29pm
post #10 of 12
Quote:
Originally Posted by CreativeCakesbyMichelle



Nope, personal taxes are due tomorrow April 17th.

http://www.irs.gov/newsroom/article/0,,id=251825,00.html




Great! I got my aunt's tax return done a day early! (She died last May, peacefully in her sleep, with no debilitating health problems and taking no medication. She was 100 years old.)

costumeczar Posted 16 Apr 2012 , 11:43pm
post #11 of 12
Quote:
Originally Posted by shanter

Quote:
Originally Posted by CreativeCakesbyMichelle



Nope, personal taxes are due tomorrow April 17th.

http://www.irs.gov/newsroom/article/0,,id=251825,00.html



Great! I got my aunt's tax return done a day early! (She died last May, peacefully in her sleep, with no debilitating health problems and taking no medication. She was 100 years old.)




She was very lucky! My inlaws are 91 and 95, and pills are the only thing that keeps them alive. To get to that age with no major health problems is very unusual.

scp1127 Posted 17 Apr 2012 , 4:44am
post #12 of 12

Home office deductions are a red flag for an audit. In most cases, it's not worth the hassle.

My husband pays my car payment, commercial auto polocy, and my electric bill. Even though my vehicle has a wrap and is a billboard on four wheels, I can only add the wrap cost as an expense because I didn't pay for the other expenses.

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