Dealers - Question about Schedule C

Prethen

Next year will be the first time I'll be paying Uncle Sam for this year's coin transactions. I'm wondering if figuring out the taxes is as simple as the following:

* Mileage/expenses going to shows = EXPENSE
* Coin accessory expenses (2X2's, books for research, etc.) = EXPENSE
* Coins = EXPENSE
* Coin display cases = EXPENSE
* Coin Sales = INCOME

Anything obvious missing?

If I'm trying to build up inventory to sell, there's a good chance that I'll show more expenses (coins) than income (sales) at first. Is that unsual?

Any of you dealers in Colorado? I know there's no state sales taxes. Is there anything other than the forementioned that I need to
know that pertains to sales within Colorado?

Thanks for any advice.

Smittys

Coins are not an expense they are purchases and counted as inventory

Prethen

I'm confused...how is that different than an expense. Pardon my ignorance but I'm not sure how they get listed on "C". Is there a special area for "Inventory". Why would it look different than an expense? The last time I ever filed a Scheduled "C" it was for an independent consulting business in the late 1980's...no inventory to worry about.



<< <i>Coins are not an expense they are purchases and counted as inventory >>

Smittys

You have a beginning inventory plus purchases minus ending inventory
equals Cost of Goods Sold.

BillJones

One thing that I learned from my accountant is that you must have a location upon which you claim depreciation in order to take the mileage deduction for traveling to shows in your personal automobile or van. That location can be the size of your desk in your office (i.e. really tiny) but you have to have that BEFORE you can legally claim the mileage deduction.

Of course if you take a piece of your personal residence as a deductible asset this can affect your net income if you sell your home.

When it comes to taxes and knowing all the rules, the operative phrase is, “It’s never easy.”

wayneherndon

It is a bit more complicated. For example, the money you spend on coins does not equal your expense for coins. You are only allowed to deduct as an expense they amount you spent on coins that were sold. Unsold coins are an asset (inventory) that you have to keep track of. Essentially, your cost of goods sold expense is equal to beginning inventory plus purchases during the year less ending inventory. While generally inventory is valued at its cost, there are exceptions.

Money spent on non-coin assets (e.g., perhaps your display cases depending on their nature) also is not necessarily expenseable. Some of these must be shown as an asset and depreciated over their useful life.

Some expenses associated with your inventory may have to be capitalized as part of the inventory rather than being deducted. 2x2s technically become part of inventory for example (that's a very technical interpretation; you can probably expense these without a problem). Also, if you buy some 2X2s for resell, then they are certainly inventory and not expensable until sold. Grading fees may have to be capitalized as part of the inventory. Especially if they add value (ie, upgrade, crossover to better holder, raw coins being certified). If grading arguably did not add value (did not cross, regarded at same grade) they may be expensable.

In short, you will find yourself spending money this year that isn't necessarily deductible from you taxes.

In addition, there are probably other legitimate deductions you can take. For example, your show fees, 50% of meals at shows, perhaps your subscriptions to numismatic publications and dues to numismatic organizations, safe deposit box expense, you may be able to take a home office expense, and so on.

I would suggest that you get a copy of Schedule C and the instructions and study them now. This will help with your record keeping during the year and you'll know what you have to keep track of and how. None of the above should be construed as constituting tax advise. Rather, it is intended to illustrate some of the complexities and encourage you to do further investigation on your own or discuss it with your tax advisor.

WH

Millertime

Here'a a couple of comments I learned about a home office. I do CAD drafting on the side and I looked into deducting an office I have set up in my house. In order to deduct the office (heating, electric, etc...) it can ONLY be used for the business. Technically if you sit in your "office" and write a personal check for bills you can't claim the office. I have personal software on my computer so I didn't even try to claim my office. I've also been told that a home office is also a red flag for an audit. I have claimed my computer purchases a couple of times as a deduction though.

Millertime

Smittys

IRS hates "home offices" and from what I've heard also is a big red flag for audits
When I was a vest pocket dealer I never claimed my home as office and never
had any problem (knock on wood)

CarlWohlforth

Maybe you should hire tax help the first year? If you understand what he does then you can take over the following year. The cost of the tax help is tax deductable I think.

solid

Here's an example to understand the tracking of coin purchases/inventory:

Beginning of year inventory value (at cost): $5,000

During the year you make sales and record to a Coins Sales/Income account: $12,000

During the year you make purchases and accumulate to a Coin Purchases/Cost of Sales account: $10,000

At year-end, you do a physical inventory and come up with inventory value (at cost): $6,000

Now, to produce a Balance Sheet & Income Statement, you have to transfer $1,000 (the difference between
your beginning and ending inventory) from the Coin Purchases/Cost of Sales account to the Inventory
account.

Your ending inventory will be reported as: $6,000
Your Coin Sales/Income as: $12,000
Your Coin Purchases/Cost of Sales as: $9,000

Your Gross Profit = $3,000 (You bought 10k and sold 12k, but your inventory value has also gone up by 1k, which is profit)

There are other categories of Cost of Sales and Income that you might track as others have suggested such as
supplies, grading fees, shipping charges, etc.

Finally, from your Gross Profit you will subtract expenses such as mileage, subscriptions, show fees, etc. to
come up with a Net Profit, which is then added to (or subtracted from) your taxable income.

The best bet might be to meet with an accountant as soon as possible and they will help you come up with a
list of accounts, or categories, into which you will record all of your purchases, sales and expenses to match
your situation. This may save you a lot of time/trouble in the long run.

Ken

Deadhorse

<< <i>Maybe you should hire tax help the first year? If you understand what he does then you can take over the following year. The cost of the tax help is tax deductable I think. >>



The cost of "tax help" is certainly deductable and is one of the few above the line espenses out there. If you don't know, for example , what above the line expenses means, then by all means get some very qualified help. It is well worth the costs involved.

Coin dealers aren't looked at in a favorable light by the IRS. They know that there is quite a bit of cash trading hands at shows and elsewhere and any businsess like that is going to be under extra scrutiny.

Barry

Bruce,
I agree that tax help the first year would be very helpful to get you set up knowing what to do.

You also might want to look into some software like Quickbooks. You can track your inventory, expenses, sales tax, do inventory, etc. It also has a reports to track your Schedule C line items.

Pistareen

<< <i>IRS hates "home offices" and from what I've heard also is a big red flag for audits >>



A few of you mentioned this.

I've spoken to a few tax professionals about this very fact and they say that with so many people telecommuting over the last 5 years, sometimes with pay incentives from large corporations that run out of office space, the IRS no longer bats an eyelash at a home office deduction. 5 or 10 years ago, this was a red flag, but it is now common enough that the people that do taxes for a living no longer consider it as such.

I work exclusively from a home office, a room that contains my numismatic library, scale, lights, files, etc. I've claimed it as a renter (based on % of square feet in my home and % of rent) and as a homeowner (same thing, just with the mortgage + cost of improvements) and never had a problem. Of course, I'm pretty much the scenario that the deduction was designed for -- i.e. that room is used exclusively for work, I do not have a regular office I commute to, etc.

I'm glad to see that I'm not the only person worrying about documenting all their appropriate deductions at this time of year! Luckily, we collectors are packrats and we all save our receipts, right? Now if we can just find them all ...

Prethen

This information is very valuable. Thank you. I will look into getting professional help on the issues noted above. Can I get away with using Quicken Deluxe or should I get QuickBooks? Do I have to get very fancy or am I ending up in a doomed scenario if I try to use something like Excel spreadsheets for my accounting?

XXX

Would Grading fees be an "Expense" or cost of goods? And can grading looses be deducted? I would think so as they are a estential part of selling a coin for "profit".

CarlWohlforth

I use Excel to track my inventory. I do use Quickbooks to track my credit card and checking accounts. I just happened to own Quickbooks for another business and think, perhaps, Quicken might do the job.

Barry

<< <i>This information is very valuable. Thank you. I will look into getting professional help on the issues noted above. Can I get away with using Quicken Deluxe or should I get QuickBooks? Do I have to get very fancy or am I ending up in a doomed scenario if I try to use something like Excel spreadsheets for my accounting? >>


Go to Intuit's web site. They have info on Quicken, Quickbooks, and what's included in each version. Personally, I use Quicken Home and Business for my medical practice. I didn't need Quickbooks as I don't deal with sales tax and don't do invoicing (all insurance and patient billing is done through another (very expensive) software package).

The nice thing about Quicken, as opposed to Excel, is they have all the income and expense categories already set up (with customization available for individual needs) and tied into menu-selectable reports for the tax forms, P&L, Balance Sheet, etc.
Come tax time, when I need to get everything together, I print out a few reports, give them to the accountant, and that's it. What used to take hours or days, now take 15 minutes!

If you have any employees, look at Quickpayroll to do payroll checks - it handles all the payroll deductions, including local/state taxes, and will print 940 and 941 forms. My accountant used to do the forms himself when I first started with Quickpayroll, but he's come to the realization that what the computer spits out is correct and can be directly submitted to the IRS without any adjustments.

wayneherndon

Would Grading fees be an "Expense" or cost of goods? And can grading looses be deducted? I would think so as they are a estential part of selling a coin for "profit".

Arguments can be made both ways. My examples illustrate some of those arguments. If money is spent on something that adds value to an item in inventory, it should be capitalized as part of the value of that inventory item. If it is a selling or business expense, it can be deducted.

Can I get away with using Quicken Deluxe or should I get QuickBooks? Do I have to get very fancy or am I ending up in a doomed scenario if I try to use something like Excel spreadsheets for my accounting?

Excel will work just fine. The application is less important than understanding what to put into it.

WH

ajc

Here are your answers from a non dealer.

* Mileage/expenses going to shows = EXPENSE
This depends if you are taking the standard milage deduction or actual expenses. Either way you need to provide the type of vehicle, year it was placed in service, total miles for the year, commuting miles for the year, business miles for the year, and personal miles for the year. You will also provide the actual expenses to determine which avenue is most advantages. The actual expenses will be used as a percentage of business miles/miles driven.

* Coin accessory expenses (2X2's, books for research, etc.) = EXPENSE
This depends on how much of these supplies you have. More than likely the amount is immaterial and can be expensed. If not, you will have to capitalize this as inventory.

* Coins = EXPENSE
Only coins you actually sell will be expensed the others are inventory.

* Coin display cases = EXPENSE
This depends on the price of the display and the limit you have set to capitalize your assets. Even if you capitalize this, if you have more income than expenses you can section 179 it. If you have less than $0.00 as your income, you can section 179 this and carry it over to the following years or depreciate it.

* Coin Sales = INCOME

Bingo

ajc

Another thing I should probably add is that if you don't make a profit 3 out of 5 years, the IRS can make a determination that you operate this as a hobby. So you might want to read the rules they have set up for hobbies.

Prethen

<< <i>Another thing I should probably add is that if you don't make a profit 3 out of 5 years, the IRS can make a determination that you operate this as a hobby. So you might want to read the rules they have set up for hobbies. >>



I'm guessing that as a hobby, sales would be treated as investment sales and expenses as investment expenses. That aside, you're right, it would be interesting to see what rules they have for hobbies. Any idea on what part of the code one can find these hobby rules?

relayer

Selling anything you basically have three buckets:

1) Gross Income - what you took in
2) Cost of Goods - what you paid for the goods you sold
3) Expenses - what you had to spend as overhead to sell your goods

Taking a deduction for a home office is a big red flag.

I have an office in my home that my tax guy says meets all of the IRS requirements, but I don't take the deduction because I don't want to have a sit down meeting with them to discuss it.

ajc

Here is a link that will get you started:

http://www.irs.gov/businesses/small/article/0,,id=99239,00.html

relayer

<< <i>The cost of "tax help" is certainly deductable and is one of the few above the line espenses out there. >>



But it is in the group subject to a minimum of 2% of your AGI, so it normally isn't deductable for most people.