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Thread: Woodworking and taxes

  1. #1
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    Woodworking and taxes

    For you guys that make enough money at this to file a Schedule C:

    How do you handle "consumables" like wood, sandpaper, glue, and finishing supplies? Do you just expense whatever you buy each year or do you have to treat it as inventory?
    Where are we going? And what am I doing in this handbasket?

  2. #2
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    Whether woodworking or any other service trade in which goods as well as services may be both consumed as well as sold, consumables can be a major part of the business expenses. Tracking them is essential as they can be "the percentage" which makes or breaks a profit. In my small engine shop I bought them as and recorded them on the income statement as a single line expense item (a debit). However, because they are sometimes such a major part of a job, we would also sometimes invoice the customer for "shop supplies" and without itemising the supplies used, we would add a fair dollar amount. Because of this, "shop supplies" could be purchased as sales tax exempt items, similar to inventory items, but without itemising/identifying each item. Sales tax would have been charged to the customer on those "shop supplies" and then remitted to the appropriate government department. Having sold some "shop supplies", the sale amounts would be recorded on the income statement as a single line item of revenue (a credit).

    If you don't charge for these things, then you have to be aware of them and make sure that either your labour rate, or your inventory markup is sufficient to recover the expense AND make some profit on it as well.

    The rules that allow this method of handling supplies in Canada may be different where you are and a tax accountant should have the correct answer.

    Hope this helps.

    cheers eh?

  3. #3
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    I've got this thread going on several forums, and I'm starting to realize that I'm confusing myself and others by lumping together two different kinds of "consumables":

    1. stuff that doesn't get delivered to the customer, at least not in recognizable form (e.g. sandpaper, glue, lacquer, etc)

    2. stuff that does become part of the finished product, albeit highly modified (e.g. wood).

    Clearly #1 is an expense item, but how to handle #2 is a bit trickier, especially if it is acquired in bulk rather than as input material dedicated to a specific sold item.

    Mind you, if I was actually selling enough pieces to generate enough income to cover the amount of wood I buy in a year, it would be relatively simple. I don't particularly want to turn a huge profit on this hobby (that's why they call it a "hobby"), but I'd at least like to get enough back to cover my bills at the lumberyard without having the IRS climb up my backside.

    Problem is, from the IRS's point of view, every penny I receive from selling a piece is "income", but it's not clear that every penny I spend on wood can be considered an "expense", at least not without a bunch of mumbo-jumbo involving "inventory", a term I am extremely loath to apply to the ever-growing pile of wood in my garage.
    Where are we going? And what am I doing in this handbasket?

  4. #4
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    I used to do this by not carrying "inventory". I'd just figure the cost/profit of a piece when I got paid for it and use that figure on that year's taxes. May not have been the textbook way of doing things, but it does avoid raising any red flags - like when you spend about 3 or 4 times more on materials than you make in profit and try to use the hobby as a deduction.

  5. #5
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    The wood etc. that you use to make the end product should be deducted from the income as a "cost of goods sold". This would also include your labor and an amortized potion of your shop expenses (i.e. electricity, etc,) if you do not deduct the total as a line item. It does require some diligence to do the paperwork, however, the taxman does love it when you overpay and do not correct the problem.

  6. #6
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    Quote Originally Posted by joe blankshain View Post
    .... This would also include your labor
    Hi Joe,

    Wouldn't labour only be deductible if you are paying yourself as employee of a corporation? In the case of a hobby, the structure is likely a proprietorship (or partnership with LOYL) and thus the labour is not deducted as an expense, but considered to be profit after all other eligible expenses have been taken?

    Just thinking out loud ....

    cheers eh?

  7. #7
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    Quote Originally Posted by John Bartley View Post
    Hi Joe,

    Wouldn't labour only be deductible if you are paying yourself as employee of a corporation? In the case of a hobby, the structure is likely a proprietorship (or partnership with LOYL) and thus the labour is not deducted as an expense, but considered to be profit after all other eligible expenses have been taken?

    Just thinking out loud ....

    cheers eh?
    Yes, I think that's the best way to handle it, especially if separate bank accounts are not maintained. If the business is incorporated - unlikely for a hobby - then its another matter.

  8. #8
    Had a similar discussion with my mother about a hobby of her's that eventually became a business. It was rug hooking and the wool/cloth used there would be similar to the wood in your hobby. What she did, and her tax advisors backed up, was to buy wool/cloth whenever the opportunity arose but kept it marked and segregated by purchase/cost. Since she often used it to make things for herself or family, that part was just consumed as personal property. However, when she made something for 'sale', she would compute what portion of the purchase was going into the saleable item and essentially record it as a resale to herself for tax purposes. No inventory carried. It was all personal property until she allocated it to a "commercial" project.

    From a wood perspective, it would work much the same but, considering there is much more waste in woodworking, I would think you would do the computation on the 'rough' lumber before doing finishing cutouts but after you cut that 8 footer to 3' and 5' where you were only going to use the 3 footer to make components of the project.

    <This information is supplied simply as anecdotal information and in no way represents a recommendation on how to manage your own finances>

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