Taxes And Cottage Food Law. . Help Please!

Business By forheavenscake Updated 1 Jun 2011 , 2:48am by jason_kraft

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forheavenscake Posted 31 May 2011 , 8:30pm
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Hi There. . . I live in FL and am one of the thousands anxiously awaiting the signature for the Cottage Food Law.

I am pretty clear on what I can and can't do once it is in effect next month but I have a question about taxes.

We will obviously have to start reporting our income at the end of the year to pay taxes on it, but out of curiosity, how does the IRS know how much we make? Is it just based on the honor system and they assume we're going to report the amount we actually made or is there something extra I will need to start doing once I'm baking and selling out of my home?

I really appreciate the advice, this is the one area I'm confused about and want to make sure I approach correctly.


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jsc2010 Posted 31 May 2011 , 9:08pm
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I am from Michigan and work under our cottage food law. Yes , taxes are reported under the honor system. My husband and I have another business so we already itemize. But I am able to right off a small portion of the home for business use, my van mileage because I deliver cakes and have to go buy supplies, % of electricity, gas, etc. besides all my inventory of ingredients and tools etc.
Just keep receipts and keep a mileage log. We turn in our figures to our CPA and he does our taxes for us. Hope that helps.

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jason_kraft Posted 31 May 2011 , 9:20pm
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You only pay income taxes on net income, meaning your gross revenue (what your customers pay you) minus your expenses (ingredients, insurance, business meals, etc.). If you are operating a business on your own, you are a sole proprietorship by default, and your net income is reported on Schedule C of your 1040. If you set up an LLC to protect your personal assets from business risk, you would need to file a separate return for the business, with the resulting net business income flowing through to your personal income tax, resulting in extra tax liability or an additional refund (depending on whether you had a profit or loss on paper).

If something seems off about your reported income, the IRS can audit you, which means they will look for things like deposits into your bank account that don't match reported income. Some audits also originate from customers reporting a business when they are told to pay in cash "under the table". If you are audited and are found to be deliberately hiding income, you can face severe financial penalties, and in the most egregious cases jail time for tax evasion.

If you don't have a CPA prepare your taxes, I strongly recommend buying accounting software like QuickBooks. Once it is set up, the software makes it easy to track income and expenses, and it ties in directly with Turbotax -- it took me about 20 minutes to complete the corporate tax return for my LLC and another 20 to finish my personal tax return.

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forheavenscake Posted 1 Jun 2011 , 1:36am
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Thank you so much for the advice. I will have to figure out how to get organized with all this stuff!!

As far as gas, electricty etc. . .how do you know how much to deduct from the business?

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jason_kraft Posted 1 Jun 2011 , 2:48am
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Originally Posted by slparker

As far as gas, electricty etc. . .how do you know how much to deduct from the business?

For utility expenses you can estimate how much energy you use for the business vs. how much is for personal use, then just deduct the business portion. For example, if your electric oven uses 4000W and you baked for the business for 50 hours last month, that's 200 kilowatt-hours (kWh) of energy. If your entire electric bill is $150 for 1000 kwH, and 200 kWh is business use, that means you can deduct 20% of the $150 bill, or $30.

Just be aware that home office deductions are a major red flag for the IRS and can lead to audits if calculated incorrectly.

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