Developing a Prototype - Logging Expenses for Tax Purposes

[rawdog]

Mods- feel free to move. Wasn't sure where to put this.

 

Without getting into the product itself (you can PM if curious), I'm developing a piece of golf equipment and have incurred ~$1,000 of associated expense. As testing and R&D continues, I could expect that expense to double or triple. Even $1,000 reduction in my taxable income would be a nice savings.

 

As someone with a 9-5 in an unrelated industry, as the costs add up, the tax implications are becoming clearer. I've spoken with my tax preparer, and was told I could file a schedule C while still taking deductions for business start-up expenses.

 

My question is, for any of you in "the industry", how do you track your expenses related to work vs. related to leisure?

 

For example, I play once a week in a group on Wednesdays where I play 9 holes for ~$25, using that time to test the durability of my product and share it with the others in my group. I consider this and the associated 50 miles of round-trip commute as pure business expense.

 

It's easy for me to show orders from McMaster-Carr or 3d printed models as being R&D expenses, but I'm unsure how scrupulous the IRS is when it comes to things like a weekly round for testing, and a small meal after where I discuss next steps / design / follow up with my CAD designer and my machinist.

 

It's not like I'm booking trips to Pebble! I've read a ton of articles on how to show the IRS that this is a legitimate business pursuit and not just a hobby. Anyone else found themselves in the same boat?

[arkurczi]

I am self employed and use QuickBooks. Easiest way to track your expenses, tax deductible and cheap. lt is imo only that you will have issues if you make no profit, and have a lot of fluff write offs as a loss. Golf and meals can definitely be tax deductible, but if they are the majority of your expenses then it will definitely raise red flags. Typically I don't start writing golf off until late in the year when the accountant tells me I need to spend more to pay less taxes.

[moegolfer11]

Controller here. Quickbooks is really easy to use and very organized.

[rawdog]

I am self employed and use QuickBooks. Easiest way to track your expenses, tax deductible and cheap. lt is imo only that you will have issues if you make no profit, and have a lot of fluff write offs as a loss. Golf and meals can definitely be tax deductible, but if they are the majority of your expenses then it will definitely raise red flags. Typically I don't start writing golf off until late in the year when the accountant tells me I need to spend more to pay less taxes.

 

If you don't mind me asking, what industry are you in? And yes, the issue will be if after 2-3 years there is no profit. In the first year, developing the product, I'd think a loss would be expected.

[raynorfan1]

Deducting $25 rounds and meals is taking a lot of audit risk for very small benefit. The IRS tends to have a burr in their saddle with respect to greens fees, and also can be *****ly on entertainment (which is only 50% deductible).

[Wriggles]

I'm a retired CPA. I only had one client (in the 1980's) that was similar in nature to your situation. She was a photographer, who bought thousands of dollars of high end camera equipment, including medium format stuff, Haselblads and such. Big bucks. She also went to seminars all over the USA, did renovations to her house, and even built a gazebo in her back yard for photographing weddings and such. She was throwing money around like water. Her poor husband agreed with me that she was spending a fortune they couldn't afford.

 

Her husband, I believe, was on some military pension, and collected SSI on a disabled daughter. Together, they were paying basically no income or self employment taxes whatsoever.

 

The year I prepared her taxes was her "start up" year. Her expenditures were in the stratosphere, and her gross revenue was less than $2K. It was a nightmare just to look at her records. I advised her to report a slight profit that year, a few hundred or so, just to establish herself as a business. I suggested that her "business" might be looked upon as a hobby, just like someone mentioned above.

 

Anyhow, that year, somehow, the IRS erroneously considered her daughter's SSI payments taxable, and sent her a bill for tax due. My Dad, who was my impromptu "office manager" took her call, screaming at him that I fouled her taxes up. I promptly called her back, got together with her, and resolved the issue appropriately..

 

She kept insisting that so and so said EVERYTHING she spent were legitimate deductions, and that she shouldn't be punished for being in business. This lady could intimidate Clint Eastwood or Steven Segal. I quietly advised her to get another opinion from a different accountant.

 

She moved on to another CPA, for which I'm eternally grateful. I have no idea how she fared in later years.

 

Retirement is great!

[Loki]

Sounds like your tax preparer should be able to answer your questions. If he can't, find another.

[jkc-rva]

Find a small business CPA. I use Quickbooks for bookkeeping but I don't mind paying qualified professionals for their expertise much like people paying me for mine. My CPA is fantastic and also been a great business mentor.

[rawdog]

Thanks for all the advice and anecdotes. I actually work in finance, but the nuances of tax law are outside the scope of my expertise.

 

It sounds like I should just keep tracking all my expenses (valid or not), see what (if any) revenue is produced this year, then weigh how I want to make it appear to the IRS. As someone mentioned, why risk an audit if the benefit is minimal?

 

I did a lot of reading about hobby vs. business, and am confident I can show a legitimate "pursuit of profit". It seems most likely that will involve not deducting casual rounds of golf for now.

 

Appreciate the help.