Business launch planning: specifically, how long can I take a loss on taxes?

[Jorah]

Hi, all

I'm a newbie soap maker, but from my first batch I had an intuition that this will be my way of bringing in some cash when I retire. I've started the process of setting up the business, and I'm not in a hurry; I have a two-year plan, building to my launch date in June 2025. I have been through traditional training in three crafts in my life; foundryman, carpenter, and print shop, so I take the terms 'craft' and 'artisan' seriously. I say all this to be assure the reader that I'm not in the 'oh, I've made three batches so I'm going to start selling' camp. I'm taking the time to learn about soap making from as many angles as I can, to be sure when I do sell, the product is a good one.

What I don't know about is dealing with taxes. So far, I've bought some equipment, a bunch of raw materials, done a trademark search, started the LLC process, purchased insurance, bought a domain name, joined the HSCG, etc. I've spent some money, in other words.

If I am not selling, though, can I still take these costs as losses? I'm under the impression that I have to be actively trying to earn money in order to file as a business, and I don't plan to sell anything until early 2024 at the earliest and I'm wondering if the money I've spent so far can be used in my taxes for 2023.

I'm still looking for an accountant, so I can't ask them, or I would!

PS: I live in the US.

 

[TheGecko]

Since you aren't planning on 'opening' your business until 2025, you will want to keep track of all your expenses and then you would capitalize them as a Fixed Asset in 2025 and then depreciate them over the useful life for larger assets or you can do a Section 179.

And since you aren't planning on selling until 2025, I would hold off on starting an LLC. Instead, to secure the business name, just get an Assumed Business Name...it's half the cost, is usually good for two years and requires no Annual Report. If you want to open a separate bank account, you will need to apply for TIN/EIN...make sure you go through the IRS website as it is free.

 

[Jorah]

Thanks for the thoughtful reply, T.G. I've been able to keep my equipment costs very low by making some things myself and haunting the local thrift stores, so I don't have anything to list as a fixed asset (I am tracking the costs, but more because that's what I do...). Too late on the LLC, I pulled the trigger this past week; they don't do Assumed Business Name in South Carolina and I wanted to make it real. The EIN is coming with the LLC package, so that's covered!

 

[MelissaG]

Until you make a true profit. And that can take years. Depending on the economy, it may still happen from time to time.

 

[AliOop]

they don't do Assumed Business Name in South Carolina

Yes, they do. They call it "fictitious business name" aka DBA (doing business as). EDIT: here is a bit more info about that.

As Gecko said, you would be better off starting that way rather than filing for an LLC at this point. But since it's already done, find out if there is a way to put your LLC on inactive status until you do start selling. Some states do offer that.

 

[Jorah]

Yes, they do. They call it "fictitious business name" aka DBA (doing business as). EDIT: here is a bit more info about that.

As Gecko said, you would be better off starting that way rather than filing for an LLC at this point. But since it's already done, find out if there is a way to put your LLC on inactive status until you do start selling. Some states do offer that.

This is what comes of me replying on the forum while making 12 pounds of soap... I knew that it was possible to have and use a DBA/ABN in SC, but I'd confused myself when I'd read that it is not required to register one before starting the business. Instead of 'They don't do ABN in SC' I should have said 'They don't require that you have an ABN in SC.' None of it really matters for your point, though, and thanks for the link.

Oh, and if people are curious about why I went for my LLC so fast; it's because my wife is afraid that someone will sue me for soap-related damages and we'll lose our retirement savings, so the LLC and insurance are my attempts to insulate our tiny savings from the business. I know that where I live I could have started the business as a 'Doing Business As' structure or sole proprietorship at a lower cost, but it didn't give me the features I needed to start sending out test batches confidently.

 

[AliOop]

Oh, and if people are curious about why I went for my LLC so fast; it's because my wife is afraid that someone will sue me for soap-related damages and we'll lose our retirement savings, so the LLC and insurance are my attempts to insulate our tiny savings from the business. I know that where I live I could have started the business as a 'Doing Business As' structure or sole proprietorship at a lower cost, but it didn't give me the features I needed to start sending out test batches confidently.

Actually, having really good insurance is the best defense against costs of liability. An LLC doesn’t actually stop people from trying to sue you personally -- thus requiring you to pay for an attorney to defend you, until you can get your personal self dismissed from the case. So, make sure your insurance covers costs of defense, as that will bankrupt most people long before they get to the judgment stage.

Also, an LLC will only protect you (personally) from a money judgment IF you have scrupulously kept your business accounts separate from personal, have a dedicated business space that isn’t also used for personal things (your kitchen, for example), etc. Where there is any commingling of assets, it is pretty easy to bypass an LLC and go for personal liability. Many small business owners fail at this piece and pretty much undo all the LLC protections for which they paid.

Hopefully your lawyer or CPA explained all that to you up front. Still, I always share this info when the subject of LLCs comes up, because many folks who might read this thread haven't consulted a professional advisor, and aren’t aware that they really need to spend money on insurance first, or that they will render their LLC useless if they commingle personal and business assets and debts. Assuming you were already advised of all that, thanks for bearing with me while I preach from my soapbox for the benefit of other readers.

 

[TheGecko]

Oh, and if people are curious about why I went for my LLC so fast; it's because my wife is afraid that someone will sue me for soap-related damages and we'll lose our retirement savings, so the LLC and insurance are my attempts to insulate our tiny savings from the business. I know that where I live I could have started the business as a 'Doing Business As' structure or sole proprietorship at a lower cost, but it didn't give me the features I needed to start sending out test batches confidently.

As noted by @AliOop, asset protection by an LLC is not absolute when it comes to personal liability...especially when it comes to single-member or in-family (spouse) members. All you have done really, is spent a lot of money you didn't have to and make things slightly more complicated because now you will have to file Annual Reports and taxes and open yourself to audit risk because your business will be running at a lose for the next couple of years until you start selling and even then, it will take a couple of years before you earn a profit.

 

[Jorah]

Actually, having really good insurance is the best defense against costs of liability. An LLC doesn’t actually stop people from trying to sue you personally -- thus requiring you to pay for an attorney to defend you, until you can get your personal self dismissed from the case. So, make sure your insurance covers costs of defense, as that will bankrupt most people long before they get to the judgment stage.

Also, an LLC will only protect you (personally) from a money judgment IF you have scrupulously kept your business accounts separate from personal, have a dedicated business space that isn’t also used for personal things (your kitchen, for example), etc. Where there is any commingling of assets, it is pretty easy to bypass an LLC and go for personal liability. Many small business owners fail at this piece and pretty much undo all the LLC protections for which they paid.

Hopefully your lawyer or CPA explained all that to you up front. Still, I always share this info when the subject of LLCs comes up, because many folks who might read this thread haven't consulted a professional advisor, and aren’t aware that they really need to spend money on insurance first, or that they will render their LLC useless if they commingle personal and business assets and debts. Assuming you were already advised of all that, thanks for bearing with me while I preach from my soapbox for the benefit of other readers.

I appreciate you sharing, and hope this helps others! Too late for me, but you've given me a lot to chew on.

Edited to add: I knew about separating the business money from the family money, and I'm working on that now, but hadn't realized the importance of separating the workspace that clearly; that will help me focus my workshop design, so thank you.

All you have done really, is spent a lot of money you didn't have to and make things slightly more complicated because now you will have to file Annual Reports and taxes and open yourself to audit risk because your business will be running at a lose for the next couple of years until you start selling and even then, it will take a couple of years before you earn a profit.

Thankfully, it wasn't all that much, but I do wish I'd found this forum even a week ago; I didn't jump into this decision, but it's clear that I didn't find a wide enough variety of input... I was reading mostly on state 'how to start a business' sites. I hope others see this thread and it helps them!

 

[Zany_in_CO]

So far, I've bought some equipment, a bunch of raw materials, done a trademark search, started the LLC process, purchased insurance, bought a domain name, joined the HSCG, etc. I've spent some money, in other words.

I'm so sorry to read this. It brings tear to my eyes. The last Beginner that spent a year establishing her business was astonished that all her money was gone and when she opened her Etsy shop she had NO sales! And she couldn't even afford to keep it open! Sad, sad, sad.

Before I started selling wholesale, I sold soap for 4 years in an annual garage sale. Along the way, I added other products, like lotion, with a MUCH better profit margin than soap. I borrowed $500 from our joint checking account and paid it back after the first year. With the profit, I opened a dedicated checking account and savings account at my bank and used a dedicated credit card to make all my purchases, with few exceptions paid by check.

I was a business minor and had enough accounting moxie to become a CPA. As such, I used my checkbook for my accounting system. Easy peasy. I deposited all income from sales into my checking account. Paid off the credit card expenses with one check monthly.

At the end of each year I knew exactly what my net profit was (income minus expenses) for tax purposes. I kept $500 in the checking account to start up the next year and moved the rest to the savings. When I retired in 2017 I had $36,000 in savings. It would have been more except for emergencies like a new hot water heater, a new roof, etc.

I am a hobbyist and never want to become a business. I didn't want to destroy the enjoyment of my hobby by turning it into a business -- been there; done that -- too much stress!

I sold to wholesale customers over a period of 10+ years. Our CPA advised me that I could net $3,000 a year as "Casual Sales" and not have to report it on our income tax. So simple and it suited me perfectly. I had a hobby that paid its own way from the very beginning!

Bottom line, you're putting the cart before the horse. In my experience, when starting a business, you need to need to be capitalized for 4 years. First, you need a product. Second you need a customer base. Then you need a Business Plan of how you are going to make it though the lean years as you grow.

Now i fully realize that how I did it is no longer viable to small timers like yourself. Hopefully, you'll use the Search feature in the upper right corner of this page to read more about it.

But the bottom line is the same.

HTH and GOOD LUCK!

 

[Ephemerella]

In my experience, when starting a business, you need to need to be capitalized for 4 years. First, you need a product. Second you need a customer base. Then you need a Business Plan of how you are going to make it though the lean years as you grow.

This is an excellent thread and thank you so much for starting it @Jorah

I have to say I agree with @Zany_in_CO. I started making soap as an idle hobby, but then I found an unfilled market, a need and an opportunity, and decided to go for it.

Unlike @Zany_in_CO I find business building a thrilling prospect, almost as fun as making the product itself.

When I decided to shift from hobby to business, my anal-retentive side wanted to get the business side of business buttoned up first, then play with soap... but I quickly realized I was putting the cart before the horse, as Zany said.

What I really needed was a brand that solved a problem elegantly, and a customer base that believes in my brand and story, and values my product. I've spent the last four months working on that and made the conscious decision that the business side will figure itself out in time. I'm sure I'll regret some decisions, but what road doesn't have a few potholes?

I decided, both for market research and my sanity (as I already have a very full-time job), to go wholesale first. I've got my products retailing in several locations that work for my brand story, and it's giving me valuable feedback on what items are selling where, what is hot, what is not, what kinds of questions people have, and what people and merchants want. I get all this feedback without having to show up at farmers markets, etc., which are already saturated with very fine products.

It's not the most lucrative way to start, especially I make sure my merchants have 100% markup to keep it enticing, which keeps my margins extremely thin because I'm not a bulk producer yet. But it gives my brand clout as I'm already in some pretty well-known places. When I introduce myself to strangers, they say "oh, you're so and so.... I've heard of you! I bought your [product] at [place]." I can also advertise my line being found in notable places, and that really seems to drive interest. All the while, I can fine-tune my line and offerings based on what is selling. AND I don't have the burden of managing online sales and packing and shipping product.

I also give a lot of product away to non-profits that align with my values and brand story, and that helps promote my brand -- and frankly just feels good.

So my advice to you would be to think about WHAT you are going to sell, WHERE and to WHOM. Start there.

There are also numerous online courses for new soapmakers to get a foothold, I would look at what is out there and maybe pick one that fits your learning style and goals.

Good luck!

 

[cmzaha]

Good luck thinking that LLC or any Corp is going to keep you from being sued personally not in this world. Make sure you label properly have every disclosure you can think of and the best insurance you can get.

We had someone threaten to sue us because the stupid woman gave her toddler in the backseat of her car one of our Marshmallow soaps to eat that she had just taken out of a cosmetic sample box while driving. Well, the kid gave it back to her in liquid form. As we told her to go for it. the package was labeled on all sides Soap "do not eat" or give to children unsupervised. We never heard from her again.

 

[Zany_in_CO]

@Ephemerella Brilliant! Good advice. Well written. I bookmarked it to share with others in the future. I have a feeling that you will be missing this time next year due to your success! You'll be too busy to be here! I just wish all Newbies were as smart as you when it comes to building a soapmaking business. There are more ways than one to skin a cat. I'm truly impressed how you figured out how best for you to go about it.

Thanks for sharing!

 

[TheGecko]

Good luck thinking that LLC or any Corp is going to keep you from being sued personally not in this world. Make sure you label properly have every disclosure you can think of and the best insurance you can get.

We had someone threaten to sue us because the stupid woman gave her toddler in the backseat of her car one of our Marshmallow soaps to eat that she had just taken out of a cosmetic sample box while driving. Well, the kid gave it back to her in liquid form. As we told her to go for it. the package was labeled on all sides Soap "do not eat" or give to children unsupervised. We never heard from her again.

I am a somewhat similar story. I made a Pumpkin Pie Spice Soap and on the back, in big bold capitol red letters: CONTAINS WALNUT SHELLS. Now I watched this woman pick up my soaps and look at back...where the ingredients label is and then as she chatted with her friend about her severe nut allergy, she hands me a bar of the soap. I was like WHOA WHOA WHOA...you can't buy this soap if you have a nut allergy. She got angry with me, practically accused me of trying to kill her, said she didn't see anything on the label. I just turned the bar around.

Now I probably would have won the lawsuit, but it would have cost me. That was the one and only batch of soap I made with walnut shells. And I'm leery of even using 'nut' oils in soap.

 

[melinda48]

Hi, all

I'm a newbie soap maker, but from my first batch I had an intuition that this will be my way of bringing in some cash when I retire. I've started the process of setting up the business, and I'm not in a hurry; I have a two-year plan, building to my launch date in June 2025. I have been through traditional training in three crafts in my life; foundryman, carpenter, and print shop, so I take the terms 'craft' and 'artisan' seriously. I say all this to be assure the reader that I'm not in the 'oh, I've made three batches so I'm going to start selling' camp. I'm taking the time to learn about soap making from as many angles as I can, to be sure when I do sell, the product is a good one.

What I don't know about is dealing with taxes. So far, I've bought some equipment, a bunch of raw materials, done a trademark search, started the LLC process, purchased insurance, bought a domain name, joined the HSCG, etc. I've spent some money, in other words.

If I am not selling, though, can I still take these costs as losses? I'm under the impression that I have to be actively trying to earn money in order to file as a business, and I don't plan to sell anything until early 2024 at the earliest and I'm wondering if the money I've spent so far can be used in my taxes for 2023.

I'm still looking for an accountant, so I can't ask them, or I would!

PS: I live in the US.

You can take these as expenses (not “losses” per se as they are a cost of doing business.) I would be sure to set up your LLC now so that you can claim these expenses this year. If you do not have a business, you cannot take business expense but if you have registered your business name, you have a business and can claim expenses.You really don’t need an accountant as you have no business to account for.. I have a smallish business and we used an accountant exactly once (to get our initial paperwork set up). When she did our taxes, my husband found several errors. We stopped using an accountant; my husband does our taxes.

 

[Jorah]

I am a hobbyist and never want to become a business. I didn't want to destroy the enjoyment of my hobby by turning it into a business -- been there; done that -- too much stress!

Zany, thanks for this thoughtful reply, and please take my reply in the spirit of offering more information for the conversation, not as arguing points!.

My advantages here... I have never done soap as a hobby; I have card weaving, knitting, photography, etc. to eat up my time, and I've seen people think 'I could earn money by starting a business doing this,' and end up hating the hobby they used to love. I come from a background in manufacturing and have no illusions about what working in a factory is like. I've done medical packaging in a clean room environment, worked in foundries, built houses, spent years in warehouses, worked on shipping docks, done inventory management; I think my background gives me a lot of the skills I need to spin up a production soap operation, and I'm spending the next couple of years filling in the gaps (sales, marketing, branding). If I don't have things working the way I expect by summer 2025, I'll put off my retirement another year or two (my manager is asking me to stay) and continue studying & practicing. I'm starting a soap course as soon as my current project ends at the start of July; my goal there is to ground my skills in real-world practice. I'll continue to take classes and study. I know the difference between 'book learning' and doing the craft (two years in an aluminum foundry helps tamp down any ego you might have around that; your errors show up right away and are glaring!).

 

[Jorah]

Thanks for the clarification on expenses vs losses. Still learning the vocabulary...

. Make sure you label properly have every disclosure you can think of and the best insurance you can get.

I have insurance from the soap guild, but I need to learn a lot more before I can evaluate whether it's okay or if I need to go past that.

 

[AliOop]

@melinda48 you really can't recommend an LLC to anyone without having legal and financial expertise, and then only after reviewing their specific financial and legal situation, including exactly where they live. So please don't recommend LLCs as a general rule. Despite all the buzz about that among small bath and body vendors, for most of them, it is 100% a waste of money, and doesn't accomplish what they hope in terms of protecting them from being sued. Most small crafters are working on limited budgets, and can save themselves so much money by not doing this. Good insurance, GMP, and marketing (in that order) are where you want to spend your money as you grow your business.

Also, from the IRS' perspective, you absolutely don't need to have an LLC or even a DBA to be considered a "business" or to deduct expenses. One can be a sole proprietor, with or without a DBA, and still deduct business expenses. I have several myself, and do not have an LLC or DBA. I have no problem whatsoever with deducting business expenses on my returns.

 

[TheGecko]

@melinda48 you really can't recommend an LLC to anyone without having legal and financial expertise, and then only after reviewing their specific financial and legal situation, including exactly where they live. So please don't recommend LLCs as a general rule. Despite all the buzz about that among small bath and body vendors, for most of them, it is 100% a waste of money, and doesn't accomplish what they hope in terms of protecting them from being sued. Most small crafters are working on limited budgets, and can save themselves so much money by not doing this. Good insurance, GMP, and marketing (in that order) are where you want to spend your money as you grow your business.

Also, from the IRS' perspective, you absolutely don't need to have an LLC or even a DBA to be considered a "business" or to deduct expenses. One can be a sole proprietor, with or without a DBA, and still deduct business expenses. I have several myself, and do not have an LLC or DBA. I have no problem whatsoever with deducting business expenses on my returns.

I have to agree with @AliOop.

I get that you had a negative experience with someone who possibly made errors on your return. I say "possibly" since I don't know the specifics and given the errors you made in your advice, it's also possible that you simply didn't like the outcome. I deal with that all the time with clients when I have to inform them that this or that isn't deductible and if they can't provide me with proof of their deduction then it becomes net profit that they have to pay taxes on.

You don't need a formal business structure to go into business. You don't even need an ABN/DBA or whatever your state calls a fictitious name to start a business so long as use are using your name. So if your name is Melinda Johnson, it is legal to use "Melinda Johnson Soaps" as your business name. But if you are going to use "Johnson Soapworks" as your business name, you will need a ABN/DBA. You also don't need an EIN if you are filing a Schedule C, or if you want to open a separate account if you are using your name, but if you are using an ABC/DBA, most bank will require it.

As noted by @AliOop, having an LLC will not protect you from being sued...people sue companies all the time. Where an LLC can offer protection is in the personal assets of a multi-member LLC, but even that has its limitation depending on a number of factors. But just as the IRS treats a single-member LLC the same as a Sole Proprietorship, so do many courts.

You also want to be careful about claiming a loss too many years in a row because it is going to trigger an audit...business and personal. Jorah isn't planning on selling for a couple years, so it would be stupid for him to be filling a tax return and claiming a loss for the next three to four years when he can simply capitalize them when he actually does start selling.

 

[Shelley D]

Hello
While I don't have any <serious> plans to make soaping a business, I have entertained the thought because my quest started out of necessity but it totally baffled me that so many soap makers tout their products to be natural when they still contain all the things I need to avoid. So, when I filed my taxes 2 years ago I asked my tax guy and he said, "to keep it simple, about 2 years". In Florida you can claim expenses on your taxes as losses, as long as you don't turn into an overnight sensation and actually make profit. It's assuming you spend and spend and spend, but only make pocket change in the beginning. So, my hobby expenses would subtract from employment income (from my day job), and he said I wouldn't need to itemize my expenses in those first 2 years, just give him a total. For the record, I use H&R Block, because my last divorce was dirty and my ex-husband told me he claimed stuff that he didn't and since our names were both still on that tax mess I ended up paying a chunk of fines and returns So now I pay a professional because if my name gets tangled up in anything like that again, I don't want to say "I did my own taxes"