My sister an I have been decorating cakes for about 7 months now. For now all of our cakes are done from her home in NY. I do some advanced prep and work on some pieces at my home in NJ (about 40min away from my sis) I have invested quite a bit of money in the last 7 months on Classes and equipment and supplies. We want to set up an LLC and open up a small cake studio where we can bake and decorated and store our cakes but that wont happen until sometime next year. 

Because NY and NJ do not have cottage food laws in place the cakes we do have been done as gifts so most times we foot the bill for ingredients, supplies and tools and use the time as a way to practice techniques and get better. 

My question for the community is this...

How do you all record your expenses for taxes? 

Can you only claim business expenses if you are a legally registered business?

Should I complete the LLC before the end of the year or can I claim the expenses In the year we incorporate (2014)?

Right now the expenses are bordering on about $2000 - $3000 with no profit.

Several years ago I was a Pampered Chef Consultant and I was able to just draw up a spreadsheet with my expenses and hand it to my personal accountant and he took care of everything. 

I'm using a new accountant and since we are in business for ourselves and not consultants for another company I'm not sure if it's any different. I'm setting up a meeting to discuss this with our new Personal accountant but curious as to how others have managed this.

Any advice is appreciated.

Mikey

AWe recorded expenses and income with QuickBooks. If you have basic accounting knowledge it's pretty easy to set up, if not you can hire someone to do the initial setup for you so all you would have to do is enter receipts for expenses, income from orders, and bank deposits. With all your info in QB it is much easier to do your taxes.

The IRS's definition of business vs. hobby has nothing to do with the definition of the health dept or the city. You do not have to be legally registered or licensed to claim business expenses, but you do have to be operating as a business to be able to fully deduct business expenses against income. More info: http://www.irs.gov/uac/Business-or-Hobby%3F-Answer-Has-Implications-for-Deductions

Regarding when to start the LLC, I would set it up once you are ready to start accepting orders. If you have to pay an annual fee based on calendar year you should wait until 2014.

Note that even though you have no business income this year, you may be able to deduct business startup expenses against your other 2013 income. Your accountant would be able to provide more guidance specific to your situation.

Jason, thanks so much for your input. So based on your response I'm going to say that if we charged for a few cakes and our intention is to make this a business and we are still in the start up phase then all the IRS cares about is whether we made a profit or a loss? They don't care if we are a registered business and have proper licensing, etc? 

I havent used QB in years. I just bought CakeBoss cloud and saw it has an expense feature. I'm going to look into it some more and see how it may be able to help keep track of expenses.

Thanks again!

Mikey

A

That's correct. There is even a spot on the 1040 where you can report illegal income (bribes, drug dealing, etc.), the IRS gets their cut of net income regardless.

I havent used QB in years. I just bought CakeBoss cloud and saw it has an expense feature. I'm going to look into it some more and see how it may be able to help keep track of expenses.

I don't have experience with Cake Boss but you may want to compare the accounting side with a trial version of QuickBooks to see which one makes more sense for you (Cake Boss has a 30 day trial), and talk to your accountant about it as well. Any accountant would be able to work with a QuickBooks file, but unless Cake Boss can export to a compatible format you may be looking at an additional expense for data formatting.

Thanks again Jason!