Business Related Tax Deductions

In The Accountant (2016), Ben Affleck plays the role of an autistic accountant named Christian Wolff. One of my favorite scenes for this movie depicts Mr. Wolff working with a farmer and his wife over their worsening finances. While the farmer complains about how the cost of fertilizer, insurance, and all of the other expenses that are about to bankrupt the farm and the wife raises the possibility of putting this years taxes on their credit card; the accountant asked the farmer’s wife, Dolores, about the necklace that she was wearing.

“Do you like it?” she gushed as she fingered the jewelry. “I made it myself.”

“Not particularly,” replied the accountant. “Do you ever sell these?”

When the woman admitted to having sold necklaces at fairs and church socials, the accountant went on to explain that since she operated a home based business, she could deduct a percentage of the family’s living space as an office area.

“What room in your house do you use to make these?” asked the accountant.

“Oh, I don’t really. I just make them wherever I happen to be I guess.”

“It would be better if you could remember the one specific space that you use. The IRS allows us to deduct from your taxable income a percentage of your workspace relative to your overall income.”

“What?”

The accountant turned his attention to the husband and asked how large the dining room, Dolores’ “office.” was.

“Well approximately 200 …”

The accountant gave an upward nod and then jerked a thumb towards the ceiling.

After giving his wife a puzzled look, the farmer adjusted his statement. “… make it 300 square feet.”

“Excellent!” The accountant turned his attention back to the wife. “When you order supplies do you do it on-line?”

“I drive the truck …”

“The company truck,” interrupted the accountant. He then went on to make the farmer and his wife really happy with all of the deductions they now qualified for because of Dolores’ home based business.

What does The Accountant (2016) have to do with my candle making workshop? Aside from needing the space to organize and work, the IRS allows deductions for home based businesses for up to a maximum of $1500 for 300 square feet.

Since I’m a bachelor who typically eats in his den or his office area, I haven’t had much use for the dining room. Last week I repurposed the dining room to centralize the growing amount of supplies that had previously been stored in over a dozen different locations. After pushing the dining room table against a wall, I added shelving to accommodate candle dyes, wicks, the wax fruit that I use to make glazed berry tart candles, and all of my candle fragrance oils.

The fragrance oils (pictured left) are organized in alphabetical order. Some candles are in bins because I have a lot of fragrances that correspond to the same first letter. My “B’ aromas include berry surprise, blueberry, blueberry muffin, blackberry, blackberry jam, bread, bacon, butter cream (vanilla), butter cream (chocolate), birthday cake, brownies, basil, banana bread, banana cream, buttered popcorn, and buttermilk pancakes.

A half baker’s rack (pictured above left) holds candles in varying stages of assembly. A wire shelf that stands perpendicular to the dining room table (see picture below) holds all of the silicone and plastic molds that I use. The molds have been organized into bins and boxes depending upon whether they’re fruits and vegetables, breads, cookies, garnishes, meats, or cookies, bread, pies, cake, cupcakes, or other baked products.

The office swivel chair pictured top left and the dining room chairs pictured top right hold different cases of candle wax. I stock twenty pound boxes of beeswax and 50 pound boxes of Golden Soy 402, 416, and 422. Additional cases of wax are stored in the garage. These boxes replace the ones in the dining room as they’re used up so that I’m never out of stock. Whenever I get down to my last case, I reorder multiple cases to again restock the garage. At this time a typical order from me only involves the purchase of up to 100 pounds of wax.

The side table to the left of the baker’s rack holds a digital scale and plastic cartons for transferring the wax to a melting pot that I then weigh. Having a scale is important to ensure that the amount of fragrance oil being used does not exceed 10% of the candle’s weight in soy wax or 4% of its weight for medium density gel.

The dining room is a perfect area to store my candle supplies because it’s adjacent to the kitchen where I do most of my production and assembly. The stove is used to melt the wax. I then assemble the candles using a steel prep table that serves as an island in the center of the kitchen.

My master bedroom is now a supplemental work room. The bedroom furniture that used to be there was moved into a guest bedroom. I needed the larger space of what used to be the master bedroom to store my completed candles. I also use this area as my painting room. Since some candles need to be hand painted using water based acrylics, I have a table with a swiveling light where I do this work.

The computer in my office is used to develop and maintain this blog. I use it to order supplies. I also use it for creating Tasty-Candles production demonstration films that are uploaded to YouTube. The computer, camcorder, tripod, and editing software are all deductible as home office expenses.

All told, I now have roughly 300 square feet that’s dedicated to my business and at least another 300 square feet that’s shared with personal home usage.

According to Insider Personal Finance, If I were to use my car at least half of the time for my candle making business, I could deduct up to $25,000 depending upon the mileage and depreciation. The IRS currently allows standard mileage deduction at the rate of $.0545 per mile. Since my usage currently falls drastically under the 50% mark, I will not be able to claim this particular deduction.

If you’re a home hobbyist who is reading this and are thinking of taking advantage of some or all of these deductions, be aware that in order to be considered a business, the IRS requires that your business generate a profit for at least 3 out of every 5 years. If you are unable to do this, the IRS will regard your business as a hobby and your business related deductions will either be denied or audited.

Related to the idea of staying on the right side of the law is the need to have a state business license and a seller’s permit. I have previously referred to the importance of having a business license in this post.

In the event I am ever audited, this post, this blog, and all of my supporting documentation should serve as prima facie evidence that Tasty-Candles is a business and not a hobby.

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