turning a bonsai hobby into a business

DaveG

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I'm not so sure about that.

I'm at a phase in my bonsai development where I need to start working with better material, and I am more confident in my ability to keep it alive. So I'm planning on buying a fair number of high quality collected trees and pre-bonsai over the next 5 years or so.

So let's say I plan on spending $10,000 over the next 5 years on trees. Add in about $2000 for quality pots to go with the trees. $1000 for soil, fertilizer, water bill etc. $1000 for a few nice stands and scrolls. $1000 for tools (gotta get an ichiban! ;) ) and other misc stuff for a nice round number comes out to $15000 over a 5 year period.

If instead of spreading that out over 5 years, I buy it all in 2 years, as a business expense, and deduct it on my taxes, it ends up only costing me aprox $9 - 10,000 because of the decrease in my taxes (if I'm understanding things right, and I'm no accountant so maybe I'm not.)

So I've saved $5000 over a 2 year period. I then sell a couple of my older semi-crappy trees at club meetings and so on for the next 3 years, thus showing a profit for 3 out of the 5 years, meeting the criteria for business instead of hobby.

So as long as the costs of starting and running the business are less than that $5000 in tax savings, I've come out ahead. Right?

- bob

From the way you've described it, some modification of this plan may be necessary in order to make it look like a business to the IRS if they showed up and knocked on your door. Specifically, they could ask why certain purchases (pots and plants you intend to keep) are business expenses if they're not up for sale or contributing to the business in some other way. Bonsai tools, water, and soil components are probably inherently safer. Of course, if you're both buying and selling some of these trees, the IRS would have less ground to stand on in a disagreement. And it's easy to argue that some trees just aren't quite ready for sale yet. Have a plan in mind about what you're going to tell them if asked and try to be sure you're not just kidding yourself about it sounding convincing.

If you get this to work in your favor, the knowledge of how you did it would make an awesome guide.
 

cbobgo

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Seems like, and taking ethics courses from Charlie Rangel, Chris Dodd and Tim Geithner.

I think my Respect-O-Meter must be unplugged or broke or something - damned thing just isn't registering at all today.

How is this idea unethical? I am just considering the tax implications and the headache level of having a bonsai business versus having a bonsai hobby. I don't think I've proposed anything illegal or immoral. I plan to buy trees and sell trees over the next 5 years and more. I will be doing it either as a business or as a hobby, whichever ends up making the most sense.

Every business has start-up expenses, and I imagine most business loose money in their first years in operation. How is that unethical? I am not setting out to defraud anyone, or to sell someone worthless things.

- bob
 

Vance Wood

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No, if you read my post before last, you see I plan to stack the expenses at the front end over the first 2 years. Start up expenses to deduct from my taxes, as mentioned. Then little to no purchases for the next 3 years with a few sales, thus "profit" for those years. Over the whole time period I obviously spend more than I earn - but I'm going to spend that money anyway whether or not I have a business. So I might as well try to get whatever benefit out of it that I can.

- bob

However: You cannot get the government to underwrite the money you spend over the money you make. Your loses can only be deducted up to your total income for your business. So if I spend 5G, and only make 1G the government is not going to give me back 4Gs. The two best things you may accomplish is getting things whole-sale, proved the businesses you work with sell whole-sale. As to buying tax free--yes that can be done if the businesses you deal with are willing to go there with you and you have a tax number.
 

cbobgo

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No, I realize they aren't going to give me back the 4 Gs from your example, but they also aren't going to tax me on that amount, right? That's where the savings comes - essentially spending money pre-tax as opposed to after taxes.

Obviously I will talk to an accountant before I move ahead, because this is the point of the whole thing.

- bob
 

ianb

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No, I realize they aren't going to give me back the 4 Gs from your example, but they also aren't going to tax me on that amount, right? That's where the savings comes - essentially spending money pre-tax as opposed to after taxes.

Obviously I will talk to an accountant before I move ahead, because this is the point of the whole thing.

- bob

Yes, as Vance said you can only deduct your losses to offset your business income not your regular income. I'm not sure how far you can carry the losses forward though from one year to the next.
 

Brian Underwood

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Why so much hostility? I say go for it and have fun! Just don't get in any trouble over it... Oh, and be sure to show us the new loot when you start buying! Did you get a chance to visit Jim Gremel's yet?
 

Vance Wood

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No, I realize they aren't going to give me back the 4 Gs from your example, but they also aren't going to tax me on that amount, right? That's where the savings comes - essentially spending money pre-tax as opposed to after taxes.

Obviously I will talk to an accountant before I move ahead, because this is the point of the whole thing.

- bob

They are not going to charge you tax on the purchase if you can get who you purchase from to sell an item without sales tax. There is a modicum of difficulty going down that road for the seller. They are supposed to charge sales tax for everything they sell. An exempted item must be accompanied by the proper paper work, they may not be willing to do. Of course all of this may go down the drain if Obama gets his value added tax shoved down out throats.
 

Vance Wood

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Why so much hostility? I say go for it and have fun! Just don't get in any trouble over it... Oh, and be sure to show us the new loot when you start buying! Did you get a chance to visit Jim Gremel's yet?

I didn't notice any hostility, of course today honesty is sometimes perceived as hostility.
 

cbobgo

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I have not felt hostility, though the comparisons to Goldman sachs and so on were a little harsh.

- bob
 

Smoke

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I have not felt hostility, though the comparisons to Goldman sachs and so on were a little harsh.

- bob

If you think that was harsh, wait till California and the IRS get done with you. I was in the bonsai business. 1994 to be exact. California Bonsai Supply. CBS for short. I supplied the soil for Matt Chroust at Tree Bay. (bonsaiTALK). I sold fertilizer, made my own pots and stands, as well as sold a few plants from time to time. Soil was my biggest seller. Tons were mixed and sold. During that time the govt was still collecting inventory tax. That has for all intents and purposes been phased out due to it being business unfreindly. (Look for it to peek back in as Obama looks for more money stream).

Wholesale goods not sold were charged a floor tax at the end of each year after inventory. Tax as high as 3.1 percnet in Ca was charged on unsold goods. So this is a plus for you. A business license will be required as well as a wholesale license. A wholesale license will not be issued untill you have run a fictious business name in the local paper for two weeks, as well as getting a commercial bank account. Proof of all these will be required. The commercial account is quite expensive and was my main reason for dissolving my business. The expense of the account cut fairly deeply into my cash flow as it went up and down. Most business account must maintain a certain level of cash or be subject to even more expenses. Banks right now are not too freindly. Many now are requireing a business plan before even opening an account which keeps the riff raff out. All these hoops are there to keep the riff raff out.


You may find it easier to just sell on ebay and hope for the best. As Obama moves for the juguler, look for internet sales to be ripe for taxing as well as Paypal to report business sales by users yearly. Trust me it is coming. So get what you can soon cause the vice is tightening quickly.

Did everyone get a form to fill out this year asking how much out of state, as well as in state internet shopping you did? I know of many in my circle, I am interested if this was regional. Let me know I am interested. This may have been a CA. thing. They wanted me to pay my share of sales tax on everything I was willing to declare. Those fiends!
 
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bob shimon

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Bonsai Business

I recently joined the forum, and this is my first posting. I hope that I get it on o.k. Zack and I started Mendocino Coast Bonsai about 13 years ago here in Calif. We wanted to sell collected native trees, mainly redwoods. We applied for and got a business license, were then soon notified that we needed a nursery license and have that. We are inspected monthly and each year they take random samples back to the lab to test for sudden oak disease. like any other business, we have all the tax stuff to deal with. However, I must say that our county ag inspectors have been very friendly and helpful to us in shipping to other countries. Along with state regulations, I would assume that each county would have there own also.
 

nip

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In other words, you want to create a tax shelter (aka tax avoidance). That is why the term "unethical" was brought up.

If you were to proceed with your plan, showing a profit for 3 out of 5 years will not as easy as you may think. And that is just one of several factors considered when attempting to prove your business is not a hobby. The fact that you have a well-paying job will not help your situation. I advise against your idea(as it is). Hopefully, your own accountant will give you a similar opinion.

At least you are honest enough to seek advice and do things right. I'd love to know the number of other "hobbyists" that don't claim any of there numerous bonsai transactions (seedlings, trees, pots...)

Regardless of your decision, I hope you post pictures of these premium stock purchases. Not everyday that a non-professional spends that much on unfinished trees. You must be very confident in your bonsai skills. I hope I reach your position in the next decade. I began bonsai well over ten years ago and I still consider myself a beginner.
 
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cbobgo

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Thanks again for everyone's input.

Bob it's good to have you here, I hope that you will continue to contribute. Your trees are great!

Nip, I don't think I would be doing anything unethical as long as I was following all the applicable laws. I don't plan on doing anything illegal, I am just trying to figure out if setting up a business would be worth doing. If it turns out that my understanding of how it all works is wrong, and I can't save any money by legally going that direction, then I wouldn't do it. I'm not trying to illegally evade taxes, I'm trying to find a legal way to decrease my taxes. There is nothing unethical about that.

- bob
 

nip

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I, personally, see nothing unethical about your idea. The Supreme Court gives us the right to legally reduce taxes. I was just stating the reason that others mentioned the word.
And I also used the wrong term. Tax avoidance is the correct language to describe your idea.
 

Smoke

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Thanks again for everyone's input.

Bob it's good to have you here, I hope that you will continue to contribute. Your trees are great!

Nip, I don't think I would be doing anything unethical as long as I was following all the applicable laws. I don't plan on doing anything illegal, I am just trying to figure out if setting up a business would be worth doing. If it turns out that my understanding of how it all works is wrong, and I can't save any money by legally going that direction, then I wouldn't do it. I'm not trying to illegally evade taxes, I'm trying to find a legal way to decrease my taxes. There is nothing unethical about that.

- bob

If it was easy everyone would be doing it.

A person does not start a business for the purpose of finding a tax shelter. they start a business to get a piece of the pie with a product that no one else has and hopefully it will be profitable enough that taxes would not even be a problem. Starting a business to pay less taxes is like borrowing money to invest in the stock market. Sure you could do it but would it be the smart thing to do.
 

grog

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I skipped from first to last pretty quick, just wondered if anyone asked if you'd talked with Brent about this? Seems like he would be an excellent source of advice considering how long you've worked with him.
 

cbobgo

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I'm heading up to Brent's in 2 weeks. We've got a 2 hour car trip together, so we'll have plenty of time to talk then.

I just wanted to get opinions from other hobbyists, whose perspective is a little different from the professionals.

- bob
 

mcpesq817

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It's been a long time since i took a course on federal income taxation law, but I recall that there are specific rules about income earned from hobbies (versus those from businesses). I would imagine that the key would be to figure out what camp you want to be in, and how best to stay in that camp for tax certainty.
 
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