N200WN
Topic Author
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Tax Benefits Of A Sole Proprietorship?

Mon May 17, 2010 4:06 am

Does anyone here run a home based Sole Proprietorship? If so, have you found the tax benefits to be worth the time and effort and how successful have you been? What is your home based business all about? I'm tossing around the idea and would like to see what others have learned from their experiences.

Thanks
 
N1120A
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RE: Tax Benefits Of A Sole Proprietorship?

Mon May 17, 2010 4:14 am

Quoting N200WN (Thread starter):
Does anyone here run a home based Sole Proprietorship?

Yes. I have a virtual office but work primarily from home now, and it has been great.

Quoting N200WN (Thread starter):
If so, have you found the tax benefits to be worth the time and effort and how successful have you been?

Oh absolutely. Remember, you can write off a portion of your rent/home value as well as all the tax benefits of being a sole proprietor (basically, you can write off so many more expenses than you can as an regular salaried employee).

Quoting N200WN (Thread starter):
What is your home based business all about?

I'm a lawyer, but I would hardly call it a "home based business."
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LAXintl
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RE: Tax Benefits Of A Sole Proprietorship?

Mon May 17, 2010 5:23 am

If you are truly looking to run a home based business versus a hobby like venture, I'd strongly suggest you incorporate (at least become a LLC).

I'm not sure what your local tax laws and regulations are, however I personally don't see too much value being simply a sole proprietor versus incorporating. The tax and investment benefits along with legal shield afforded are much greater incorporating.
From the desert to the sea, to all of Southern California
 
N1120A
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RE: Tax Benefits Of A Sole Proprietorship?

Mon May 17, 2010 5:41 am

Quoting LAXintl (Reply 2):
If you are truly looking to run a home based business versus a hobby like venture, I'd strongly suggest you incorporate (at least become a LLC)

It really all depends. Full incorporation is really only something you want to do after really establishing your business, and after you have all your tax ducks in a row to avoid double taxation. An LLC is a good idea if you have significant assets and want to avoid both double taxation and maintain limited liability. The issue with any sort of corporate form is generally that you have to follow the rules, or you spent money pointlessly, because you will not be able to avoid liability under an alter ego theory.
Mangeons les French fries, mais surtout pratiquons avec fierte le French kiss
 
PPVRA
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RE: Tax Benefits Of A Sole Proprietorship?

Mon May 17, 2010 12:40 pm

Quoting N1120A (Reply 1):
Oh absolutely. Remember, you can write off a portion of your rent/home value as well as all the tax benefits of being a sole proprietor (basically, you can write off so many more expenses than you can as an regular salaried employee).

True, but I also hear the IRS is pretty picky about "home office" deductions (I have zero experience with that, just what I hear) because of the high chance for abuse. Not to dissuade anyone but make sure to do your homework to avoid nasty surprises.
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planespotting
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RE: Tax Benefits Of A Sole Proprietorship?

Mon May 17, 2010 2:44 pm

Quoting LAXintl (Reply 2):
however I personally don't see too much value being simply a sole proprietor versus incorporating.

As one of our resident lawyers put it, it's best to incorporate after setting up your business.But after you're established and successful, incorporating is a pretty good option.

Quoting PPVRA (Reply 4):
True, but I also hear the IRS is pretty picky about "home office" deductions (I have zero experience with that, just what I hear) because of the high chance for abuse.

Indeed - most likely, you will be audited at some point if you go a few years deducting a home office.
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N200WN
Topic Author
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RE: Tax Benefits Of A Sole Proprietorship?

Tue May 18, 2010 3:44 am

Thanks for your responses. I'm going the S/P route to get started and to avoid some of the extra complications in setting up an LLC. In TX a "Franchise Tax" needs to be paid for an LLC but not for a S/P. Seems fairly simple to get started in this state, not sure if others are so easy. Get a sales tax permit at the state comptroller's office, register a dba at the county courthouse, apply for a Dept of Agriculture permit (I'll be selling agriculture products), and open a business account at my local credit union. Just trying to get as much input as possible before hand so thanks again.
 
LAXintl
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RE: Tax Benefits Of A Sole Proprietorship?

Tue May 18, 2010 3:57 am

Well best wishes in your endeavour.

Just hope you don't ever run into any financial or legal issues as you will be personally held fully liable for any outcomes stemming from a sole proprietorship. Over the years I've heard one too many stories of folks and their families loosing everything due to the lack of legal and financial cover afforded by sole proprietorships.
From the desert to the sea, to all of Southern California
 
DucatiRacer
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RE: Tax Benefits Of A Sole Proprietorship?

Tue May 18, 2010 6:11 pm

Quoting N200WN (Reply 6):
In TX a "Franchise Tax" needs to be paid for an LLC but not for a S/P.

Unless you are going to be EXTREMELY successful, you probably should not let this scare you away from forming an LLC. The Texas Margins Tax (its not really called the Franchise Tax any longer) has a small business exception (I believe it is tax code section 171.002) that exempts entities that have $1,000,000 or less in gross revenue. Depending on what you plan to do, the liability protection could be well worth the effort to form an LLC.

That said, there are a couple of things forming an entity won't help a small business owner with. First, if you are a professional or otherwise providing a personal service, you are likely to suffer some personal liability should you screw up, whether you are operating under an entity or not (particularly true for doctors, lawyers, accountants, etc. as it regards malpractice claims). Whatever you do, talk to an insurance broker about liability/malpractice insurance. Furthermore, should you need financing for your business, don't expect anyone to give the entity non-recourse debt. You can expect to personally guaranty any loan made to your business. Accordingly, having the entity will not necessarily shield you from all of its debts.
 
N1120A
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RE: Tax Benefits Of A Sole Proprietorship?

Tue May 18, 2010 7:56 pm

Quoting PPVRA (Reply 4):
True, but I also hear the IRS is pretty picky about "home office" deductions (I have zero experience with that, just what I hear) because of the high chance for abuse. Not to dissuade anyone but make sure to do your homework to avoid nasty surprises.

TurboTax actually provides a really good tutorial on it when going through your taxes.

Quoting LAXintl (Reply 7):
Just hope you don't ever run into any financial or legal issues as you will be personally held fully liable for any outcomes stemming from a sole proprietorship.

That is what insurance is for. I agree that people should incorporate when they are making enough money to make it worth it and can actually follow a proper, corporate form. Property trusts are also a good idea.

Quoting DucatiRacer (Reply 8):
Depending on what you plan to do, the liability protection could be well worth the effort to form an LLC.

As you said later, there is likely not much liability protection in this case.
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RightRudder
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RE: Tax Benefits Of A Sole Proprietorship?

Sun May 23, 2010 3:16 pm

In a residential home, depreciation can be deducted on the section of the home that was used for the business. One setback however, is that the amount of depreciation deducted, or that could have been deducted, decreases the basis of your property. That means if you someday decide on selling your home, that depreciation expense (regardless of whether you used the expense) will be subtracted from the cost basis (purchase price) of the home.
"Time flies like an arrow. Fruit flies like a banana".

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