IRS Deductions for Start-Up Costs for a Crafts Business

Tax deductions make it easy to market handmade jewelry.

Many talented people have beautiful handiwork but no idea how to market their craft. Or perhaps they know how to market, but can't imagine how to afford the costs of starting a business. Fortunately, the IRS recognizes how difficult starting a small business can be, and has many deductions for start-up costs and other expenses that make it easier for craftspeople to start businesses in their homes.

Function

A craftsperson cannot make and sell crafts without purchasing bulk materials. A candlemaker needs wax and wick, a painter needs canvas and paints, a quilter needs fabric.

After obtaining a business and a resale license, small-business owners purchase craftmaking supplies in bulk and at wholesale cost. They do not pay sales tax on anything that they will resell, for example, a candlemaker does not pay sales tax on wax because she will make a candle to sell. When the candle sells at retail, sales tax is added to the purchase. In addition to the benefits of bulk pricing and no tax, the cost of the wholesale crafting supplies is tax deductible.

Travel

Most crafters use their car for both work and personal use. Only the business use of the vehicle is tax deductible.

The IRS lets business owners deduct car expenses based upon how many miles were driven for business use. For example, John D. drove 50 miles for personal reasons and 50 miles for business reasons. During the tax year, the IRS allowed 60 cents per mile driven. John D. can deduct 50 miles times 60 cents, or $30.00 from his taxes.

When traveling for business, such as to a craft fair, overnight lodging is tax deductible. Fifty percent of meal costs is tax deductible.

Benefits

IRS tax deductions for crafts business start-up costs make it much easier for people to start small businesses. The most advisable setup for a crafter who works at home is to have a room set aside for business only. The percentage of square footage of the room becomes the percentage of home expenses that is tax deductible. For example, Jane D.'s home office is where she keeps all of her quilting supplies. She has a 100-square-foot home, and her office is 10 square feet. Therefore, 10 percent of her home costs are tax deductible. These include electricity and heat. If Jane is a renter, 10 percent of her rent is tax deductible.

If Jane chose to rent office space outside of her home, all of those costs would be tax deductible. By keeping her crafts business in her home, she saves money, making it easier for her to afford quilting supplies.

Prevention/Solution

Business expenses that will not be resold, such as a truck for traveling to craft fairs, should be amortized. This means that the business owner can deduct costs of the truck over five years. In order to do this, however, the business must be in existence before the truck is purchased. Small-business owners must plan carefully when they make start-up purchases or they may lose the tax advantages.

Expert Insight

Start small. Purchase the bare minimum that you need to make a sale. When it becomes clear that you have marketable crafts, and you have a business license, a resale license and a record of sales, you are officially in business. Now is the time to consider what larger purchases are necessary for the business. Purchases made during the first year of business are start-up costs.

References

• IRS
• Craft Marketer: Tax advantages