How you can resist funding the government → other tax resistance strategies → home-based business

I’m making the jump from unemployed to self-employed, which sounds better on a first date don’t you think?

So I’m trying to learn about the differences between a “sole proprietorship” and a “limited liability corporation” and between “cash-based” and “accrual-based” accounting, and so forth. Which is to say, I’m learning about business and accounting for the complete idiot, since up ’til now, the most I’ve really done is checkbook balancing.

And my continuing education in the tax laws is now extending to Schedule C, on which business gain or loss is reported. I doubt I can afford much business gain this year if I want to stick with the experiment, although if I do have any profit I might be able to offset that by taking a deduction for health insurance, so we’ll see.

But my goal this year is to have a modest business loss in preparation for what will hopefully be a modest profit . We’ll see how it goes.

I never thought much about the intricacies of tax law back when I was paying hand-over-fist, but now I’m diving into the details. To anyone who’s been dealing with this sort of thing for years, I’m sure I seem charmingly naïve, but it never occurred to me that I’d have to keep track of my business expenses in 20 different categories in order to fill out a tax form. Now I know.

If you’ve been down this path I’d be interested in hearing from you and comparing notes.

This blog may turn into The Amusing Tale of a Naïf At Large in the World of Business and Tax Law. I went downtown to register for a “seller’s permit.” It was refreshingly free-of-charge, though the fine print held the threat that the government might force me to put up a security deposit in case my business flops before I have a chance to pay sales taxes.

What does a seller’s permit get me? Two things — one, an obligation to report to the state of California how much I’ve sold and how much sales tax I owe on it; and two, an exemption from sales tax on the supplies that I buy as raw materials for what I intend to sell.

This is turning out to be quite an education. I’m creating just about the most simple business possible — no employees, no storefront, almost nothing in the way of property or inventory, no partners, no stockholders, no fictitious name, no trademark — just me and some stuff I’m going to make and sell. I’m getting a good lesson in just how much red tape we’ve got in our allegedly free market.

Every little helpful-pamphlet-for-the-small-businessperson that I pick up I have to mark up with another handful of “whoops, here’s another regulatory agency I have to register with” notes. I head to another agency for another certificate…

I started my over at a small business fair in Oakland. The IRS was putting on a little show about home-based businesses and tax law that I thought would be informative.

The IRS has gotten a bit twitchy in recent years about home-based businesses because a lot of people try to use them as an angle. You stuff envelopes in the living room while watching TV and try to take the cost of your home and the cable bill as a deduction — that sort of thing.

So they’ve gotten anal about what you’ve got to do in order to deduct expenses for a home business. In order to deduct, say, a portion of your rent corresponding to the room in your house that you use for an office, that room has to be physically distinct from the rest of the house (walls), it’s got to be used exclusively for business (no crib for junior; no skis leaning up against the wall in the corner), and it’s got to be used regularly for business. And that’s just some for instances — the restrictions go on.

But I found some stuff I can use, and also picked up a lot of informative bits from other agencies that were at the fair.

One question that had been on my mind had to do with California Sales Tax. Its rate these days is 7.25%. But in San Francisco, where I live, this is boosted by four local and district taxes — two for 0.5% and two for 0.25% — to a total of 8.75%. But here’s where it gets tricky.

If you live in California, you know about the sales tax — it gets added to your bill for just about everything you buy. But did you know about the use tax?

I didn’t.

Let’s say you order a book from a mail-order company outside of California and they ship it to your California address. Does that company have to collect California sales tax and hand it over to the California government? No — because the regulation of interstate commerce is a federal thing, and states can’t tax it on their own, so sez the Constitution and the Supreme Court.

So — get this — the California government doesn’t tax the “sale” of the book, but the “purchase” of the book (which does happen in California). You, as a good California citizen, are supposed to keep track of everything you buy from out of state, and pay a “use” tax (the same percentage as the sales tax) voluntarily.

Yeah, I bet that happens a whole bunch.

But anyway, how this relates to me and to district taxes is as follows: The same sort of deal applies within the state of California to these additional local and district taxes. If the sale takes place in the district, all of the district taxes apply; but if the purchased product is shipped outside of the district, you don’t have to collect those taxes.

So, I’m thinking… I live in four of these districts. If I start selling something mailorder, do I have to check a map every time I get an order to see which of those districts my customer lives in?

Well, the answer I got from behind one of the tables today is that for all intents and purposes, the four districts are coëxtensive with the city/county of San Francisco, so I’d charge 8.75% to customers in The City, and 7.25% to other Californians. That’s a relief.

Remember when I said I was planning to spend some of my new free time starting a small business?

Well, I’ve finally finished all of the filling-out-forms, creating a product, finding a manufacturer and all the rest and on Friday I shipped the first copy of The Annotated Hasheesh Eater CD-ROM to a paying customer.

The relevance to my Picket Line project is this: Having your own home-based business can be a good way to regulate income and income taxes. In years when I may earn too much money to stay below the tax line, I can invest more in the business and take the investments as a business expense that lowers my taxable income. In years when things are leaner, I can work harder to increase my profits from the business.

In addition, I should be able to take a percentage of my rent off my taxes as a business expense , as I’ll be using my home to store the inventory (which is bulkier than I’d anticipated — 1,000 CD-ROMs in DVD-style cases take up a lot of space).

One of the biggest advantages of this approach is that this is a product that I care about, and so producing it and selling it is something I’m eager to do. Now I’m doing what I love and care about professionally — which for a lot of people seems an unreachable dream goal.

You know what I should have said to “Overpaid in Peoria” ? I should have said: “Start a business, young man!”

If, instead of trying to lower his taxes by shoveling his excess money into a charity, he instead shoveled that money into a home business, he might be able to deduct much of those expenses as a business loss. And that’s a deduction that applies before the Adjusted Gross Income is calculated, and so it’s much more useful than the itemized deductions.

Starting a business means a lot of work and paperwork, though. And it doesn’t represent a long-term solution to OIP’s dilemma. Why? Because if you run your business at a loss every year the IRS may conclude that it isn’t a business so much as it is a tax shelter and may disqualify your deductions.

Fortune has an upbeat article about the rise of small-scale, someone-with-a-dream, Do-It-Yourself businesses:

[A] number of factors are coming together to empower amateurs in a way never before possible, blurring the lines between those who make and those who take. Unlike the dot-com fortune hunters of , these do-it-yourselfers aren’t deluding themselves with oversized visions of what they might achieve. Instead, they’re simply finding a way — in this mass-produced, Wal-Mart world — to take power back, prove that they can make the products that they want to consume, have fun doing so, and, just maybe, make a few dollars.…

Numerous currents have converged to produce this reaction. Bloggers, those do-it-yourself journalists, showed big media that the barriers to entry (like owning a printing press, say) didn’t much matter. Podcasters took radio into their own hands, creating audio shows and putting them online. Amateur music producers, using software that was once the province only of major labels, invented mash-ups: combining songs into totally new ones, then giving them away or selling them. And with the advent of services like Google AdSense, which let people easily put advertising on their sites, these tinkerers could — while not vaulting themselves into Bill Gates territory — at least break even.…

Citizen engineers are taking this even further, trying their hand not just in the digital world but in the physical world too. Much as eBay transformed distribution, they’re redefining design and manufacture. The infrastructure is there: Yahoo.com Groups make it easier for people to trade ideas and learn quickly; free or cheap computer-aided-design (CAD) programs allow users to cobble together blueprints; and inexpensive manufacturing in China allows the idea to go from file to factory. There are even websites like Alibaba.com that will help these small-timers find Chinese factories eager for their work, meaning that the amateur nation has its own Match.com.

In “Ghetto Capitalism”, Patrick Radden Keefe reviews Sudhir Venkatesh’s Off the Books and looks at how people who are least able to afford the costs of participating in the government-regulated and -taxed above-ground economy find and invent alternatives in the underground economy.

Kay Bell at Don’t Mess With Taxes has pointers to some useful resources for people who want to take advantage of federal, state, and local tax incentives for energy-efficient and alternative-energy home improvements.

And The Wandering Tax Pro gives us the skinny on the most advantageous tax treatment of home office expenses by people who are employees of their own one-person corporation.

I’ve picked up some flotsam and jetsam that have come bobbing by my raft as I veer off course whilst surfing this Internet.

  1. An interesting article from author Thomas E. Woods, Jr. on What the Warfare State Really Costs. Not just the tax dollars that are vacuumed out of our pockets and shot into Iraqis — but “opportunity costs” like the diversion of talent toward destructive aims and the resources tied up in maintaining a warfare state that otherwise could be used for useful purposes.

    According to the U.S. Department of Defense, during it used (in dollars) $7.62 trillion in capital resources. In , the Department of Commerce estimated the value of the nation’s plant and equipment, and infrastructure, at just over $7.29 trillion. In other words, the amount spent over that period could have doubled the American capital stock or modernized and replaced its existing stock.

  2. The Treasury Inspector General for Tax Administration takes a look at taxpayers who have sideline businesses that always seem to lose money and speculates that many of these are essentially hobbies that are being reported as businesses for tax reasons. Well, of course, but the report also has some numbers, if you’re curious.
  3. The Keene Free Press has published part three of Dave Ridley’s jail memoirs from his brief imprisonment after trying to petition some IRS employees for redress of grievances. (See and for parts one and two.)
  4. Joe Jenkins, of the United Kingdom tax resistance group Peace Tax Seven, is releasing a feature-length documentary about the group.

Some bits and pieces from here and there:

Some bits-and-pieces from here-and-there:

  • If you’ve been following along with my Aristotlethon, you may be interested to know that I’ve posted PDFs of the many translations and commentaries I’ve been relying on at a supplemental bibliography page. These are corrected versions of the PDFs available from Google Books. I’ve adjusted the page numbering to accurately reflect the page numbers of the original books, have removed blank, damaged, or duplicate pages, and have added bookmarks that allow you to quickly jump to particular books and chapters.
  • Here’s an interesting trick I hadn’t heard of before:
    1. Overpay your taxes with a substantially too-large bad check.
    2. The IRS automatically sends you a refund check.
    3. The IRS notices, too late, that your check was worthless.
    A new Treasury Inspector General for Tax Administration report says that this happened over 15,000 times during the last tax filing season, and the IRS lost more than $20 million this way.
  • If you’re a tax resister, tax protester, or tax evader, would this interfere with your ability to sponsor your fiancé(e) during the process of getting a visa extension or citizenship? Hmmm… good question. Take it away, immigration lawyer Brad Bernstein.

  • There’s a new group called “Oath Keepers” that I’ve been hearing about mostly on fringe paleocon sites, but that now is getting big enough to get some MSM buzz.

    The gist is that the group purports to consist of members of U.S. law enforcement and the military who have vowed not to obey any orders that contradict their understanding of their duty to the U.S. Constitution, as given in their oaths of office (typically, such oaths include a promise to “support and defend the Constitution of the United States against all enemies, foreign and domestic”).

    They anticipate that the government will become more tyrannical, and that the “domestic” enemies to the Constitution will come from within government and will issue unconstitutional orders to disarm Americans, put them under martial law, eliminate state sovereignty, blockade American cities, enlist foreign troops in the subjugation of American citizens, put Americans in detention camps, and so forth.

    In preparation for this, they are trying to build a movement of folks in uniform who insist that they will refuse to obey orders to do such things.

    That the group formed with sudden urgency and enthusiasm just as Obama was taking office may lead you to suspect that this is largely a group of paranoid right-wingers of the OMG The New World Order Is Vaccinating Us Against the Flu; Next They’ll Take Our Guns And Lock Us In Concentration Camps Run By ACORN variety. You’d be right. But, like it or not, this is what grassroots dissent from within the ranks is liable to look like, at least at first. And any such movement that advocates that folks in uniform judge and possibly disobey orders is salutary, at least to that extent.

  • There are some ominous signs that the IRS may turn on sole proprietors next. The government suspects that many sole proprietors who declare losses on their tax returns are doing so fraudulently — by deducting fake or non-business-related expenses, by not disclosing income, or by pretending that their expensive hobbies are really businesses. The agency estimates that over half of the losses claimed by unprofitable sole proprietorships were not legally justified, and fully 70% of such sole proprietorships reported such losses. In spite of this, the agency has not put much effort into plugging the leak, in part because the losses on each return are typically small and the effort involved in auditing a sole proprietorship return is costly.

Janet Novack looks at a new report from the Treasury Inspector General for Tax Administration about self-employed tax filers in the United States and asks “are the self-employed tax cheats or financial failures?”

Of the nearly 19 million taxpayers who filed a Schedule C (showing profit or loss from a business) , 25% reported a net loss on the form and 65% reported a net profit of less than $25,000. Another 6% reported profit of between $25,001 and $50,000, leaving just 4% with net earnings above $50,000.

But even those who are ostensibly living off their self-employment earnings aren’t — as they tell it to the IRS — earning much of a living. According to the TIGTA report, 92% of the 2.5 million taxpayers who reported only income from self-employment (no wages, no interest, no capital gains) had total income of less than $25,000.