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Major life milestones often have a major tax impact. Changes in your marital status, having a baby or adopting a child can have significant impact on your taxes. This is the place to ask questions about dependents, real estate, and other various scenarios that play a significant role in what taxes you pay.

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Trusted Pioneer
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Registered: ‎09-21-2017
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Starting an LLC filing as a Sole Proprietorship

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I am looking to start an LLC and file as a sole proprietorship. If I went to my H&R Block tax professional how could they help me? Could they give me tips on record keeping and preparing to file?

Tax Pro
Posts: 5,780
Registered: ‎02-23-2016

Re: Starting an LLC filing as a Sole Proprietorship

Hi BrewerGray2012,

 

 

Welcome to the H&R Block community.

 

I can advise you on this from right here in the community.  I'm sure that if you visit a tax professional when you prepare to file they will also have plenty of advice for you as well.

 

You'll actually be keeping things pretty simple by starting out as a sole proprietor.  The main thing is to keep track of your revenue expenses.  Either keep receipts or use a good accounting software.  You will need to have a record of all of the payouts you make for your business as well as the cost of all assets that your purchase, and you'll of course need a record of all incoming money.  Your expenses are deducted from your revenue to determine your taxable income from the business.

 

If you drive for business purposes or if you have a home office then let me know and I'll fill you in on what to keep track of for those items.

 

As far as starting the business goes, there is not too much that you need to do.  Since you'll be filing a Schedule C you can either get an EIN (Employer Identification Number) from the IRS or, if you are the only person working for your business you can use your social security number instead of an EIN.  You'll need to register the company with your state and county, and if you are located within an incorporated city you'll also need to register with that city.  All three are easy to do since most states & localities have the applications on their websites in electronic form.  It's free to get an EIN for the federal level, and most states & localities charge around $50 to $60 each.  When registering your business with states & localities do it directly through them, do not fall for third party websites that mimic the real government registration websites.  Although many of them will actually register your business for you they will charge significantly more than the government will and you won't get anywhere if you try to contact them about any issues that may arise or anything else for that matter.  If you can tell me which state you're in I'll get you the links to the government sites that you need to go to.

 

Once you've registered your business it's all about keeping good records and making sure your taxes are paid.  Eventually you will have to make estimated payments if the business does well, however you will not need to make them for your first year if you did not owe tax for the previous year or if you expect to owe less than $1,000 for the current year.  Business losses carry forward, so if you end up with a first-year loss don't worry, it will reduce your tax liability to zero and if it's still not used up the loss will reduce your taxable income next year.  If you earn a profit then of course that's even better.

 

You're welcome to ask me any questions that you have at any time.

 

Louis,
Senior Tax Advisor (Tampa, FL)

Tax Pro
Posts: 5,780
Registered: ‎02-23-2016

Re: Starting an LLC filing as a Sole Proprietorship

BrewerGray2012,

 

 

What type of business are you starting?  Will you have a home office?  Will you drive for work?  Will you keep an inventories of raw materials or resale products?  Perhaps I can give you some specifics on what types of records you'll need to keep, etc.

Trusted Pioneer
Posts: 6
Registered: ‎09-21-2017

Re: Starting an LLC filing as a Sole Proprietorship

It is an online business in which I will be purchasing used childrens clothing from people or other used clothing stores and reselling them on my website. I am in Florida. I will run the business from my home and keep inventory (the clothes) here. One of my questions is what about clothes that are donated or that come from my personal supply? How would I keep record of those if they were not technically an exspense to me? Also what about things such as laundering supplies? Are all these part of the business record?
Tax Pro
Posts: 5,780
Registered: ‎02-23-2016

Re: Starting an LLC filing as a Sole Proprietorship

Hi BrewerGray2012,

 

 

So you'll have an inventory.  That means that you'll need to keep track of everything you purchase for resale, including its cost and the purchase date.  With clothes you should keep a record for each type of item.  For example:

 

Blue T-Shirts:  20    10.00 EA    200.00

Red T-Shirts:  10    12.00 EA    120.00

Yellow T-Shirts:  10    5.00 EA    50.00

 

You'll need to know the following to figure your cost of goods sold (which is a deductible expense) each year:

 

  • Inventory available for sale on January 1st.
  • Total purchases during the year.
  • Inventory available for sale on December 31st.

Any clothes that you "donate" or that are donated to the business have a cost of $0.  In your inventory records anything that is donated to the store should be entered with a cost of $0.  You'll earn a 100% profit on these items, and they won't add to cost of goods sold, but it's still important to track them.

 

Supplies must also be kept track of, and that includes laundry supplies for washing clothes in order to prepare them for sale.  If you use the same laundry room for your personal laundry as you do for your business then I would purchase separate laundry supplies exclusively for business use.  This way you won't have to figure out what the business use percentage is for the laundry supplies and you'll be able to deduct the entire cost.  Other supplies, such as pens, paper, and ink are also deductible.

 

The cost of licenses and the cost of registering your business are deductible costs as well.

 

You also said that you would be working & running the business from home.  You'll definitely be able to take the home office deduction since some of the requirements are waived when you're storing an inventory and since your home office will be your principal place of business for this business.  The home office deduction allows you to deduct some of mortgage interest & real estate taxes, utilities, and repairs costs (the indirect cost of your home) for the business.  It also allows you to take a depreciation deduction on the area that serves as your home office.  For this deduction you'll need to know:

 

  • The square footage of your home.
  • The square footage of your home office area by itself.
  • The amount of your mortgage interest.
  • The amount of your real estate taxes.
  • The amount of your utility costs (water & electric).
  • The amount of any repairs expenses.

 

Basically the deductible portion of the indirect expenses is figured by multiplying the total amount of each expense by a fraction that represents that part of the house that's used for the business.

 

You'll also want to keep track of miles if you drive for business.  If you drive to go and pick-up donated clothes or inventory that you purchased for example then you're driving for business purposes.  Since you have a home office, the miles you drive from home to a business location and back are deductible, so if you run to pick up inventory or supplies your business miles start adding up when you leave your driveway.

 

I'll be here if you have any other questions.

 

Louis

Trusted Pioneer
Posts: 6
Registered: ‎09-21-2017

Re: Starting an LLC filing as a Sole Proprietorship

What about sales taxing the items?
Tax Pro
Posts: 5,780
Registered: ‎02-23-2016

Re: Starting an LLC filing as a Sole Proprietorship

BrewerGray2012,

 

 

Sales tax is collected and remitted to the state.  In Florida you have to collect 6% on your sales for the state level.  Your county and city may add an additional percentage to that so be sure to check with local government in your area.  You should visit www.myflorida.com to set up a sales tax account with the state once the business has been registered on all government levels.  Note however that you only have to collect sales tax on sales made to people who are within Florida.

Trusted Pioneer
Posts: 6
Registered: ‎09-21-2017

Re: Starting an LLC filing as a Sole Proprietorship

What about use tax? Is that the responsibility of the retailer or the consumer? Also self-employment tax, what do I need to know?
Tax Pro
Posts: 5,780
Registered: ‎02-23-2016

Re: Starting an LLC filing as a Sole Proprietorship

BrewerGray2012,

 

 

Use tax is paid by the purchaser, so you are not liable for that.  A purchaser must pay the use tax to the state of Florida if you do not charge them sales tax.

 

For purchases that you make for resale you will not have to pay any sales or use tax.  Part of setting up your sales tax account with the state is getting a resale certificate that serves as your exemption from paying sales tax on items purchased for resale.

 

The self-employment tax has to be paid only if you reach a net income (income after expenses) of $400 or more.  If you reasonable expect to owe $1,000 or more in total taxes (including the income tax & the self-employment tax) on your tax return for the year then you have to make estimated payments at four times throughout the year.  The self-employment tax is comprised of the Medicare & social security taxes.  The medicare tax is 2.90% of your income, and the social security tax is 12.4%.  You get a deduction on your Form 1040 for 1/2 of the self-employment tax though because had you worked for someone else your employer would have paid 1/2 of the tax and they would have gotten a deduction for it.

 

There are tax calculators on both the IRS & the H&R Block websites that you can use to determine how much tax you should expect to owe for the year-to-date and that will tell you if you are at the point yet where you have to make estimated payments.

Trusted Pioneer
Posts: 6
Registered: ‎09-21-2017

Re: Starting an LLC filing as a Sole Proprietorship

Last question. Will the fact that my dad claims me on his return affect my taxes