Drunkard, you should talk to an accountant, but here’s some general guidance.
You cannot write off anything unless your “business” is legitimately intended to be profitable, and is not just a personal enjoyment hobby.
Provided that you can reasonably satisfy that criteria, you can generally write off all expenses that were required in order to earn income to the extent they were incurred for business purposes. In other words, if you buy something (like a car) that you are using both for business purposes and personal use outside of your business, you can only write off the expense to the extent you use it for business purposes (based upon percentage of use over time).
So in your camera example you gave, if you ever use that camera for personal use as well, you could not legitimately write it off entirely as a business expense, even though you need the camera in order to run your ebay business. A lot of people who do home businesses don’t fairly allocate “personal use”, and end up getting hit when audited. Frankly, game writers who write off every game and item of hardware they purchase for “research” would have a difficult time proving they didn’t get any personal use out of the item.
larger items, such as office furniture and computer hardware, cannot be simply written off as a “business expense” in most cases – it is a “capital expense”. It is also deductible to the extent it is used for business, but only over time (a percentage, based upon the type of asset) as the asset “depreciates” in value, to reflect the fact that it’s the type of purchase that the business will use for several years, and accordingly the write-off period is several years.
Re: your guitar question - if that’s what you’re selling, you can categorize it as inventory or supplies, and can write off the cost as well as any loss (after including in income any revenue from the sale).
Hopefully that’s some useful general advice, but it’s worth the time to speak to an accountant first prior to setting up shop.
That’s for the advice Desslock. I do plan to see a tax accountant one of these days. This is just something that’s been knocking around in my head for awhile now. I just need to get off my ass and find out about some of the details.
What Desslock said is the absolute correct truth, at least as I understand it. There is an important exception to the quoted point above though. There’s also a category for hobby expenses. You can deduct hobby expenses up to the point of equaling hobby income. For example, say that you oil paint as a hobby. You sell some of your works every once in a while. The selling price of any painting sold must be declared as income but you’re allowed to deduct your painting expenses up to the amount of the income that you made off of the pictures. The point being that this can be done even if you never intended your hobby to be profitable. I also note that this is not handled as a business expense which is what Desslock was talking about.
Another good reason to talk to an accountant, you can deduct up to $24,000 annually immediately under section 179. So if you’re a small business you don’t necessarily have to worry about doing depreciation on your capital equipment. Again, talk to an accountant!
HAs anyone added that before doing anything, you should probably talk to an accountant?
Our accountant told us that writing off a few things for small amounts (reasonably priced computer, office supplies, etc.) in the effort to start a business is basically safe. If you do not show a profit in a couple of years, that’s when the audit risk increases.
Hope that helps, but I would talk to an accountant first.
Yep, the IRS hauls you in and makes you take deductions, sometimes even requiring you to take home and cash a refund check that very day. Don’t let this happen to you! Make your write offs.
It’d be great if you couldn’t be audited, though–I’d be happy to stop writing anything off and I’d even give up the standard deduction if the IRS would guarantee me I’d never get audited.
Since you’re Canadian, Tom, it’s even less likely, but there is a very small random number of audits that could hit anyone. But if you just have a regular job, pay a decent amount of tax as reflected on your T-4, don’t have capital income or business income, you essentially have no chance of being audited in Canada.
