Taxes/IRS
In states where a home-based cookie business is legal individuals often establish their business as a sole proprietorship (unless you plan to have partners) or an LLC . You can usually file your business taxes under your personal 1040 using your Social Security number as the business tax ID.
There are many potential tax benefits to running your business from your home. For specific details, you should contact a professional tax advisor. In many circumstances, a percentage of your home expenses are deductible when you use a percentage of your home exclusively for the business. If you are allowed to use your kitchen both for your business and for your personal use, you will break down this percentage even further. Your tax advisor will help you calculate this figure.
Your deductions may also include all ingredients, equipment, and utilities [electricity, water, gas] as well as any renovation costs for your work space.
Don’t forget about services such as garbage removal, maintenance, and repairs. Travel and auto expenses are deductible when the travel is specifically business-related. Internet expenses, office supplies, advertising, business meals, baking books, equipment repair, and many other items are deductions you may be able to take. If you rent, the same deductions apply. The most important thing is to keep excellent records and receipts of ALL your spending.
If you try to remember expenses months after the fact, you will spend far more time tracking down receipts and probably will make errors. Even if you can’t get to the bookkeeping right away, you can simply keep all receipts in a box. Consider a business credit card such as an American Express Corporate card. In addition to keeping your expenses separate, American Express will break down your purchases in a year-end summary.
It is very important to the IRS that your business in not a hobby. Even if you have another job, your cookie business is likely entitled to tax breaks if you are running it as a business. The IRS considers a hobby an activity “carried on for personal pleasure or recreation.”
The considerations for being identified as a business include: the activity being carried on in a “business-like” manner; enough time invested into your efforts to demonstrate that you intend to make a profit; you depend on the income for your living; your losses are beyond your control (start-up losses are normal); you make changes to make the business profitable; you or your advisors know what you’re doing to make the business successful; you’ve made a profit in similar activities in the past; you start making a profit eventually; you can expect to make a future profit from the appreciation of the assets used in the activity. Note that not all of these qualifications need to be met to qualify as a business.
If you are making a profit, another important consideration is the self-employment tax you will owe in addition to your regular income tax. The self-employment taxes pay for Social Security coverage. If you have a salaried job covered by Social Security, the self-employment tax only applies to the amount of your home-business income that, when applied to your salary, reaches the current ceiling. State taxes and, potentially, sales taxes apply as well. Again, talk to a professional tax advisor. The website www.irs.gov has a wealth of information regarding home-based businesses.