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Professional as a CPA, Newbie as a Quilter


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This is in response to lots of posts I have seen about CPA services. I am new as a long arm quilter but experienced as a CPA and would not mind bartering my CPA services for long arm quilting advice and techniques.

I am a CPA in NC and just bought a Millennium. I am starting a night time business "specializing in long arm quilting" but I am also a CPA since 2002 and work at the University of North Carolina at Greensboro full time in the Accounting Services. I don't mind answering accounting questions one-on-one. I can also perform CPA services and tax services for your company. Since I am new at my quilting business and trying to make money, my CPA rates will be very reasonable for the new business owners especially during the start-up stage. As I get more customers in quilting and as a CPA for quilting businesses, my rates will go up. So take advantage on my quilting "newbie" status and my real experience as a CPA. Send me an email at joanne@yeoldeforest.com or call me at (336) 638-5076.:)

As a CPA, my understanding is that you do not charge tax on services. Long arm quilting "services" are not taxable but selling products are taxable. As a CPA, when I prepare personal taxes, I do not charge sales tax since this is considered a service.

However, this is where it gets a little trickier. If you sell batting to your customers in addition to your quilting services, then you would charge tax on the batting. But the "price per inch" or your hourly rate you charge for quilting the quilt top is not taxable.

Another example, if you do not allow your customers to bring their own batting and you provide the batting as part of your services and pricing structure for quilting, then you would not charge sale tax as this is part of the services you provide. See the difference?

Oh..Thanks Dawn C. for your wonderful help with my purchase from APQS a few weeks ago!! I love Milton!

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Originally posted by yeoldeforest

As a CPA, my understanding is that you do not charge tax on services. Long arm quilting "services" are not taxable but selling products are taxable.

I am not a CPA and I haven't balanced my checkbook in at least 10 years but I do know that what is taxable and what isn't taxable varies from state to state. When we were in KY, I argued til I was blue in the face with the taxing authorities that I should not have to charge sales tax on my services but they assured me I was wrong and for 9 years, I did charge sales tax on my services.

So, anyone not sure about sales tax in your own area, please check with the local taxing authority.

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Hi Joanne, welcome to the board and congrats on your Milton!

Thanks for your kind offer to help us with tax questions. I agree that there is a fine line (or many fine lines) with regards to working to keep your quilting business a legitimate business so you don't get smacked later with the hobby loss laws. I don't want to go there!

I live in Alaska and we do not have a sales tax or state income tax. I have a CPA in my home town (who is also a quilter) and she is working with me to keep me in good graces with Mr. IRS Man.

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Hi Joanne,

Being a CPA, can you explain the Hobby Loss Laws and how this can affect people like me who are just starting out with a quilting business? Hobby Loss Laws affect everyone, no matter where they live. I think this topic is important to be aware of when just starting out a quilting business. Thanks!

Shana

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In CA, per our SBE, if you are putting a new quilt together (putting a back, batting, and a top together), your labor is taxable. Therefore the entire cost, materials and labor, is taxed to the customer. It is the same ruling as a shop doing embroidery, screenprinting, etc: if the application is on a NEW item, it is taxable (if it on a USED item, it is not - but the shop owner must PROVE which items are new and which are used, and not just a notation on the work order).

Johnmach

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Hi Shana,

I got a little long winded in my answer so I put it in a word document as an attachment. If you can't read it, let me know.

Thanks and let me know if it helps!

Originally posted by quiltmonkey

Hi Joanne,

Being a CPA, can you explain the Hobby Loss Laws and how this can affect people like me who are just starting out with a quilting business? Hobby Loss Laws affect everyone, no matter where they live. I think this topic is important to be aware of when just starting out a quilting business. Thanks!

Shana

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Okay,

I didn't see the attachment...Newbie status, I guess:

Here is my response:

Hi Shana,

Great question?especially for quilters! Hobby laws are in place to prevent people from taking advantage of the tax laws and trying to write off their hobby expenses as business expenses. You can report quilting as a hobby but you are limited on how much you can expense. If you are legitimately trying to run a quilting business, then you will want to report your expenses and revenues as a business.

Here?s an example of why the hobby laws exist and the IRS?s view on identifying an activity as a hobby vs. a business. A CPA (of course), wanted to claim that his yacht and all associated expenses should be deducted as a business, not a hobby, for tax purposes. On his yacht, he had a flag with ?1040? on it. He tried to argue that he was advertising his business on his free time and that he used his yacht to get more customers and therefore the expenses associated with his yacht should be legitimate business expenses. Basically, he was trying to write off all of his expenses associated with his yacht (gas, cost, maintenance, etc.) Of course, the IRS didn?t allow it. They ruled his yacht and all associated expenses were a hobby and disallowed these expenses as a deduction to his income.

The IRS can audit your tax returns and determine if your expenses are classified as hobby vs. business. Of course, you have a greater deduction to your income, if your quilting activities are classified as a business. So if you were audited, what would you need to prove that you are in a legitimate quilting business to the IRS?

1. Did you apply for EIN number with the IRS? This can be done at www.irs.gov or over the phone. Do you have to have an EIN number? No?not if you are a sole proprietor but it can help prove you are a business.

2. Do you have a DBA license in your local area or state? A DBA license might be called ?Doing Business As? or registering a business name.

3. Do you make a regular profit or are you just trying to cover the expenses associated with your activity. For example, if you make a profit every month?.the IRS would see you as ?A going concern? and this proves that your business is legitimate and purpose is to generate profits. If you are only trying to create enough income to ?feed your need? as a quilter and cover your own personal quilting expenses then the IRS would probably consider this a hobby.

4. Did you go to any workshops or classes on ?How to open your own business? or entrepreneur classes at the local community college? The SBA and SCORE offices are a great resource as mentioned by another quilter earlier.

5. Do you pay sales tax or have a whole sale license?

6. Do you own an industrial long arm quilting machine ?i.e. an APQS machine. If you are just a hobbyist, you would probably own a ?home? model and not an APQS machine. The industrial machine would show that you are serious about quilting for a profit.

7. Do you have a business plan or a plan of action for growing your business?

8. Do you have a budget, projected cash flow, project income statement and balance sheet for the next several years?

9. Do you keep good accounting records? This does not have to be done with fancy software. You can even buy decent accounting ledgers at Office Depot. Do you keep track of the mileage associated with the business aspect only?

10. Is your business growing? Do you make more and more each month?

11. Do you have a separate, identifiable area in your house that is dedicated only to the business?

A hobbyist probably wouldn?t go through all of the steps above just to get a tax write-off. A serious business owner would take the time to file for licenses, learn about his/her business and want to grow the business.

Now the ironic thing is?it doesn?t matter whether you earn money as a hobbyist or quilting business, the IRS will still tax you on your income. The hobby rules just keep you from reporting an absurd deduction for expenses if you are just a hobbyist. However, as a legitimate business, legitimate business expenses should be reported as a deduction to income.

This is probably way more info than you wanted but hope it helps?

Joanne N. Jones

Originally posted by quiltmonkey

Hi Joanne,

Being a CPA, can you explain the Hobby Loss Laws and how this can affect people like me who are just starting out with a quilting business? Hobby Loss Laws affect everyone, no matter where they live. I think this topic is important to be aware of when just starting out a quilting business. Thanks!

Shana

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Joanne,

Thanks for such a detailed explanation. I do not have a LA yet (still saving) and I do not have a "business." I think I want to start a business when I am getting ready to buy a LA, so I can do this as a retirement job, perhaps in 4-5 years, when I am 62, although the more I think about retiring then, I'll probably need to work till I'm 66. (:. I don't plan to do lots of business, but do hope I can make some money to supplement my SS.

Anyway, I don't know if I should actually start a business, or sew as a hobby. To supplement my limited SS, I would like to earn some money. Can I get insurance to cover quilts that are in my house waiting for customer pick up if it's a hobby? And coverage if someone falls/gets hurt when they stop by? Can I legally charge people to do their quilting if I'm just a hobby? Right now I make baby quilts on my Bernina, for people - almost exclusively for (a large) family members. I get paid for the cost of the fabric, thread and batting, but I do it all for actual cost. I was afraid to "make a profit" and get on the bad side of Uncle Sam.

Do you have any suggestions or guidance for me? Anything would be appreciated. BTW, I live in PA, if that makes a difference.

Thank you,

Sandy

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Nice talking to you today Tina!

I must be crazy... I saw a really good response to Sandra's question earlier today and now I don't see it anymore.

Well, I am waiting on getting my compuquillter...waiting and waiting and waiting...sigh.

So I am playing with my website. Any feedback or comments about my website would greatly be appreciated. If you have really negative comments, email me so I don't get my feelings hurt publicly...I am a sensitive soul at times.

Thanks for all the comments so far! I really love all the information on this site.

Oh website is www.yeoldeforest.com

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Originally posted by sandradarlington

Can I get insurance to cover quilts that are in my house waiting for customer pick up if it's a hobby? And coverage if someone falls/gets hurt when they stop by? Can I legally charge people to do their quilting if I'm just a hobby?

Sandy: I'm packing to leave in the morning and don't have time to give you lengthy answers. You might try doing a search on here for "insurance" and you'll get some previous topics. The answer to all your questions is YES.

Insurance to cover quilts - some homeowners policies will cover property belonging to others, some will not. We've had State Farm and they offered an in home business policy. We've had Allstate and they wouldn't cover the property of others or the liability of an in home business. We currently have Liberty Mutual and they did cover the personal liability but would not cover the property. It seems to be different with all companies. Whatever your agent tells you, make sure it's the exact same thing as written in your policy. Yes, I read my policies cover to cover. You may find a topic where I posted previously about my Allstate agent telling me I had coverage when I did not.

If the insurer for your home will not cover the business aspect, Milne & Scali (may have a new name but that's what they were when I last wrote a check) will cover the property of others but I do not think they cover personal liability.

Another thing to be aware of -- if your homeowner's policy does not cover business, and you are using your longarm or your computer or whatever in the pursuit of that business and have a loss, they will (1) not cover any of it or (2) fight with you so long you give up. The Milne & Scali policy will cover your business property. You tell them the amount of coverage you want and your rate is based on that amount.

Another thing to be aware of is whether you live in a neighborhood with restrictions as to what type, if any, business you may have in your home. I have no sign, no customers coming to my home EVER and I still had to jump through hoops with the city inspector and "code enforcer" and we live in a teenie tiny town. I ended up being an "artist" in order to get my license approved.

Yes, you can charge even if you are running your business as a hobby. You will be limited as to the expenses you may deduct. I think they cannot exceed your income but I'll leave that to the accountants on here. Just didn't want your question to go unanswered.

Basically, you need to do the following:

(1) Make sure there are no city/county/neighborhood restrictions that will cause you not to be able to run the business from your home.

(2) Make sure your insurance is adequate and if you have to add a business endorsement to your homeowners or get a whole new policy with another company, it's something that is so necessary!

(3) Establish a relationship with a CPA in your area who will do your taxes as well as advise you of any local filings that are required. When we lived in Kentucky, I had to file a "Net Profits Certificate" based on my IRS return. Had I been using a CPA from somewhere else, chances of them knowing about that requirement would be small. My CPA has definitely earned her pay in helping me with deductions, requirements, etc.

Aren't y'all glad I didn't have time for a lengthy answer!;)

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Judy L.,

Thanks so much for your "short" answer:)

Actually, it is very helpful. I am trying to get all my ducks in a row, so to speak, so when I am ready for this new adventure, I do it the right way. There really is so much to think about, plus the expenses and the learning curve. Wow! This can get overwhelming. Well, while I save up for my machine, I will continue to investigate and collect information. Thanks again for your reply.

Sandy

PS- I love the quilts you post on here, and your feather "class" was so helpful to many of us.

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The other thing to consider is the form of business you want. There are many good books on starting your own business that go through this decision. I found the books by Nolo Publishing to be very clear and easy to understand.

The easiest is a Sole Proprietorship - where you are the only owner and you file a Schedule C with your 1040 for your business. However - you can be sued and lose everything.

More difficult and expensive (depending on the state) is Limited Liability Corporation (LLC). If you are a sole owner, you can still file Schedule C with your 1040, otherwise you file other forms that are more complicated. An LLC limits your liability if you are sued to the LLC assets. So - if quilting is a sideline and you have other income, an LLC may be the way to go to protect your assets. In Maryland, I have to pay $300/year for the "privilege" of having an LLC, whereas the Sole Proprietorship would have been free, but it was worth it to me from the liability perspective.

There are other options, but you are better off with a "Start your own business" book to get into the nitty gritty.

My other piece of advice is to go to your state small business department - they will have lots of good info for start up businesses and explain all the licenses and taxes you need to get/pay.

Good luck!

Julia

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Originally posted by Jushiar

.........The easiest is a Sole Proprietorship - where you are the only owner and you file a Schedule C with your 1040 for your business. However - you can be sued and lose everything...

Hi Julia,

Great post with good info. But just to be fair, subjective, and to help put things in perspective with the facts so most folks don't become concerned when they read or hear about filing as a sole proprietor and possibly getting sued and losing everything. I heard this somewhere, too and I had the same concern, so I spoke with several professionals on advice about this. For my specific business situation, I have been advised to start out as a sole proprietor and in a couple of years or so, change over to an S Corp. The reasons being are because the risk of me being sued by a customer and losing everything is extremely low, or won't happen, because I won't have customers dealing with me in my home (falling or getting hurt, needing medical care) nor will they be using my machine. My homeowners insurance covers all of my equipment and supplies and any customer quilts that may be temporarily stored in my home. I think that if you are going to be dealing with the public regularly in your home then absolutely you should have ample insurance or protect yourself and your company by filing as an LLC or as a corporation. Otherwise it's not really necessary, especially just starting out in the business (newbies like me). Before making a decision like this, consider all the risks and get all the facts. I think that sometimes the stories about possibility getting sued and losing everything gets misconstrued and may be misunderstood by folks who are just learning about starting a business. (I'm still learning!!) :)

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  • 2 weeks later...

Just found a great website with lots of information that is easy to understand for starting your own business. It also has information about the differences between a hobby and business, business structure (i.e. sole proprietor, LLC, etc.) and shows some simple book keeping examples and it has a discussion on the steps needed to start your own business:

Chapters with good information:Chapter 2 - Business Structure

Chapter 8 - Sample business - shows examples of accounting entries

Chapter 4 - Business start up

Here is the link to the index page which you can use to get to the chapters above.

http://craftandfabriclinks.com/busfocus/business_book_index.html

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Tax Accountant here in Hawaii...

Arrrrrgh - we are charged a general excise tax (4.5%) on EVERYTHING (Gross Sales) including services! :( The only way around it is to hire sub contractors (reduces gross income) or to be a "middle man" in a transaction and then you can get away with charging a wholesale tax rate.

Within the next month, will be completing my order for an APQS Freedom - am still not sure if I will set up shop as a small business here on the islands. Am thinking that getting paid for my "passion" may not be worth the stress and headaches that come with quilting for others????? But I am considering it, in order to justify spending that amount (to my DH). We shall see.

Interesting thread.... thank you for sharing info!

Hawaii Barbara

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Hi Barbara,

Where in the Islands are you? I'll be over there from the 18th to the 29th. Hubby is taking us on a little vacation. We'll be on Oahu and Maui, maybe a skip hop over to Molokaii or Kaui. He used to live there and we have friends to visit and places to take our little guy. He's six and it'll be his first trip to Hawaii.

And, just my opinion, Yes, you should consider quilting for others. It both justifies spending money and time on your machine and supplies, and gets you quilting more and in more ways than you ever would just quilting for yourself. You will be amazed at how appreciative others will be when you help them finish their quilts so they can justify spending more of their money on fabric for even more quilt tops! More quilt tops means more quilting for you to do. It's a natural cycle.

If you later decide you've had enough of other people's quilts, than by all means you can either cut back to make more time for yourself or close up shop all together.

PS: How 'bout a vacation trade? We have an awesome place on the lake not far from the Sisters Outdoor Quilt Show! If you've never been here for that you should definitely consider it. Second Saturday in July. It's coming up soon. And hey, you can write it off as a business expense! :)

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Hi Hawaii,

Of course you will want to start a business out of this...it's in your nature as an accountant!!

There's nothing funner than doing your own books...just be careful tho..it's almost too easy to see everything as a "business" expense...makes the spending seem justifiable.

I have a pretty detailed MS Excel document with a "guestimated" or projected balance sheet and income statement for what I "hope" to make in the next year...if/when you want to start your own business...just let me know and I will send you an electonic copy. It can help with a starting point of the numbers.

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