We had our income tax done...

[Sandhill Crane]

I did not sell firewood in 2020, so they, the accountant, listed the 'business' as "in active".
We are both retired, small pensions, and drawing social security. No stock investments, no rental property, nothing extra.
Since retiring we have had to pay quarterly income tax.
Kids are grown, mortgage paid off... none of the deductions we had when younger and working.
At that time we had the same accountant for twenty five years. We looked forward to our hour with him, the first Saturday morning in February, then out for breakfast...for twenty five years!
We have had three different accountants since, and all drop it off and we will call you.
And now another lump sum is due, plus our quarterly amount due took a pretty good jump.
Because someone else does the numbers I'm not sure how the firewood business benefits from deductions.
Obviously being inactive there were no deductions for 2020.
Do any of you have a better understanding of deductions?
Say you bought a tractor for $25k ...
Or something more consumable, like $500. in fuel?
The question of hobby vs business came up last year?
If I'm paying state sales tax I figure I'm a business.
What if I took out a loan to buy ten acres to grow the business?

 

[Harmon]

It sounds like maybe look into your numbers! If your business was "active" maybe you could write off the price of a small business accounting class. As far as the "paying state sales tax" what does that pertain to?

 

[old CB]

You might look for someone in your area who can answer your questions, as they seem basic. Sometimes you can find volunteers, maybe through the local library, who can help with tax matters.

If you have firewood sales in other years but had no sales last year, you might still consider firewood sales to be a business activity and your expenses might be deductible even if you had no income. It's like a farmer who had no income in a given year (theoretical here)--his expenses to produce are deductible even if there's no income in a given year.

Without knowing your exact circumstances it's hard to comment. But I would look for someone nearby who could help you. A senior citizen center might be a good start.

 

[sevensandeights]

I am by no mean an expert but, for tax purposes, I think the difference between a hobby and a business is whether or not it's profitable. You have to show some sort of profitability (or at least that you generated some revenue) over time but you don't have to have profit every year. I don't think there is any reason to label the business "inactive" last year. Any expenses incurred last year can be carried forward to offset profit this year (so you don't have to pay additional income tax on that profit). Again I'm not an expert but I do have one vacation rental property. We almost never have enough revenue to offset the costs so the costs are carried forward (this can be done for several years but I'm not exactly sure how many). Our rental income was down a little bit last year due to COVID but we had to replace the back deck on the property. We had more expenses due to the deck, property maintenance, taxes insurance, etc. then we had in rental income. We showed no profit for the year but we still have some expenses from 2020 that we can carry forward and offset any income we receive in 2021.

This should be very simple for any reasonably good accountant to manage.

 

[Sandhill Crane]

(It's not letting me quote Harmon post#2)
I pay state sales tax on each firewood sale.
Cord price is $300.
6% Michigan sales tax, but I don't add that on. It comes out of the $300.
formula: $300. = 106%
question: What is the actual cost of the firewood to customer, pre tax, per cord?
$300./106% x 100% = $x.00 or $283.02 per cord.
Sales tax collected per cord. $16.98
The point being if I'm collecting MI State Sales Tax for the government, then I'm a business, profitable or not.
I have 120 cord to sell this year, generating a possible $2,037.60 in state revenue.

 

[Sandhill Crane]

I am by no mean an expert but, for tax purposes, I think the difference between a hobby and a business is whether or not it's profitable.

What is profit?
And who determines it?

 

[farmer steve]

(It's not letting me quote Harmon post#2)
I pay state sales tax on each firewood sale.
Cord price is $300.
6% Michigan sales tax, but I don't add that on. It comes out of the $300.
formula: $300. = 106%
question: What is the actual cost of the firewood to customer, pre tax, per cord?
$300./106% x 100% = $x.00 or $283.02 per cord.
Sales tax collected per cord. $16.98
The point being if I'm collecting MI State Sales Tax for the government, then I'm a business, profitable or not.
I have 120 cord to sell this year, generating a possible $2,037.60 in state revenue.

If the firewood is for home heating I don't understand why there is a sales tax on it. Is there sales tax on home heating oil in MI? Just curious.

 

[sevensandeights]

I would think in terms of revenue instead of profit. You are a business if you generate revenue. Every time you sell a cord of fire would you generate revenue. However, there are costs associated with generating that revenue. Generally speaking, all costs associated with generating that revenue can be used to reduce your taxable income from the business. My father has a small beef farm that he has used to supplement his income for years and this is how it works for him. Rarely ever does he show a significant profit (more revenue than costs) but he always shows some revenue. The big thing here though is that you can't use your costs to offset other taxable income you may have like social security, pension, salary from another job. Business costs can only offset business revenue.

 

[Sandhill Crane]

Quick search showed in 2012 home heating fuels have a 4% sales tax in MI.
I'll have to do more digging tonight.

 

[old CB]

If you have sold or will sell firewood, you would report that on Schedule C (business income/expense) on your federal income tax. In one area you report your income, in another you show your expenses. Income minus expenses = profit, known as "net income." Like sevens&eights said above, there are rules about carrying forward expenses to offset income in future or previous years. I've forgotten a lot of that stuff so can't quote the rules. Again, find someone who can sit down and discuss this with you (or over phone), as it's pretty basic stuff.

 

[farmer steve]

Quick search showed in 2012 home heating fuels have a 4% sales tax in MI.
I'll have to do more digging tonight.

The reason I asked was because years ago we had to collect sales tax on firewood. Someone fought it because home heating oil wasn't and the won the case.

 

[CUCV]

A bit of info from Turbotax on business vs. hobby
https://turbotax.intuit.com/tax-tip...classifies your,claim those expenses in full.
The best person to ask is your accountant. My accountant is a wealth of knowledge and I make sure to always request the hour together (in person or virtually) while she does my taxes. For years I would do my taxes in Turbotax and have her review them. Personally, I would make sure they don't classify you as a hobby and your accountant should guide on how to do that if they also believe it is in your best interest.

 

[Sandhill Crane]

We have friends that used to be part owners in a business that did contracting in many states. Millions in contracts. They have since moved.
I recall him saying something about a calendar year verses a fiscal year.
I process one year, and sell the next.
Expenses/Sales.

Last year, 2020, was some large expenses.
And no sales.
I sold the big truck, which my understanding is, it is considered income.
I think I bought six loads of logs, at $2,100. ea. Maybe seven.
Yesterday and today I had two more loads delivered.
(If I want to have seasoned wood to sell next year, I have to buy and process now.
Even though I've only sold one cord so far this year.)
I replaced the truck with a dump trailer.
And two or three years ago I bought the shipping container strickly for firewood equipment, and the accountant said don't claim it. $6,400., plus sales tax and delivery.
When I bought the Posch PackFix I ordered a pallet of netting, a savings comparison of $160. per single roll vs pallet cost of $100. per roll. A pallet is 64 rolls. I ordered a pallet, of which I have forty rolls left. And I did not say what the Posch itself cost. I waited years to buy it, and then took out a small loan. I payed it off, and took out another small loan last fall on the dump trailer.
I would love to get a processor. How do you do that?
I don't have a YouTube income, or have companies give me thousands, to tens of thousands, of dollars worth of equipment to use.
If you Google a satellite image of our address you could see the wood lot, the shipping container, and 120 -140 cord stock piled.

I'll now be using our personal pickup to pull the dump trailer.
The money coming in from sales over the years goes out in various ways described above.
I've not listed the dollar value of actual firewood equipment.
And yes, it has taken years and years to afford $15k in logs to turn into sellable firewood, and three times that in equipment. If you don't have logs, you can't sell seasoned firewood.

I obviously don't have an accountant on retainer like my friend did, who took advantage of their knowledge to make decisions on a weekly/monthly basis. Including stimulus money for bigger companies this past year.
For us little guys trying to do a hundred cord plus a year, it's a hamster wheel.
I joined AS in March 2010, with the wood splitter in my avatar, and a recently purchased, used, conveyor I drove 400 miles to get and tow home with a mini van. First I had to get a trailer hitch installed.

This is the first year I have over one hundred cord, in large part due to no sales last year.

 

[cantoo]

Sandhill, my wife and I have a small business cutting grass and lawn services. I work a day job full time so very little input to the business other than maintenance. Due to my income the business is something like 60% mine and 40% hers now. I'm sure you've read my story years ago about us getting caught up in our taxes and "not reporting" income and the $17,000 settlement I had to make. They couldn't prove that we did anything wrong but they said our business was one that people deal in cash a lot so they assumed we did too. They said our income dropped very fast so they assumed we starting dealing in cash. Actually the reason our income dropped was that we did a ton of lawn spraying, the government banned weed spraying and we lost over half of our income as we had few mowing only customers. We finally got tired of them showing up every couple of months demanding our records and banking info. We have since changed Accountants and things have been much better. What we did was talked to friends who also had small businesses and one spouse had a full time day job not tied to their business. I would suggest you do the same. So many Tax firms now are just inputting the numbers and letting a programs spit out the number you owe or get back. A smaller Accountant who does a bunch of small businesses like yours will be more used to how you run your business. FYI, I would think that just because you never had any sales it doesn't mean that your business was "inactive" it just means that you had no sales. You still had costs by buying the logs, fuel to process the logs, repairing any equipment and buying any equipment for your business. If you sold the truck then yes for sure your business was "active". Sounds like your Accountant has turned you into a cookie cutter job for a junior worker in the office. Even right now I would take my paperwork to a new company and have them redo it. We changed our accountant just after tax season ended and she was able to claim some of the previous "mistakes" on the next years return. Get a 2nd opinion.

 

[CaseyForrest]

My first thought is you need to find a new accountant.

Profit is any money you have left over from sales after all your expenses are factored. If your shipping container is being used 100% for your "business", its an expense. You should claim it. Your pallets, netting, splitter, conveyor, dump trailer, saws, gas, oil.... all expenses and can be claimed.

Are you operating under a DBA?

 

[Sandhill Crane]

Cantoo, thank you for your input, and everyone else as well.

I don't mind having to pay taxes. I use the roads, and county services, and infrastructure like everyone else.
Just doesn't seem like a level playing field, but rather something you have to pay to play.
Very much like the legal system, is a balance of do you pay, or do you fight it.
Not right or wrong, but a financial decision.
Who can afford an attorney?
We are on fixed incomes, no cost of living except a little in social security. So our buying power to income actually decreases each year with inflation.
Today I did a little processing, paid my visa bill and got new boots when I was out. Last week we ran into Cabella's to get a gift certificate for our daughers birthday. They had the brand boots I use. Keen's, nice stuff. But I went back to the home town shoe store today instead. The young woman that helped me turned out to be the daughter of the guy where I've shopped for years. Paid a little more and got the American made safety boot.
And I'm claiming them on my taxes next year...

 

[CaseyForrest]

RE your pickup.... Keep a log. Even though its a personal vehicle, you can claim the fuel and mileage when its being used for business.

 

[Sandhill Crane]

Are you operating under a DBA?

LLC

 

[CaseyForrest]

LLC

Then your accountant advising you to not claim something as a business expense when thats what its being used for doesn't compute.

 

[old CB]

You absolutely need better advice. Any equipment you buy or use for producing income should be either deducted or capitalized (which is another little wrinkle, but not terribly complex for a proper accountant). Sounds like you were not getting the right kind of advice. I've never heard of a business being "inactive." If you are or were working to produce, you have an active business in which you deduct your expenses.

That shipping container you bought is a business expense--you use it for no other purpose but your business. Whoever told you otherwise is not fit to advise you. Now, sometimes large equipment like that cannot be simply deducted--you "capitalize" it and deduct it a little each year over time, for which there are schedules. I also remember there was a $10,000 option where you could deduct such stuff in one year, but can't say if that still exists since I no longer do my own taxes.

Call around and find out who can help you on this.