Starting a small business

neonstag5 said:Computer repair—software or hardware—I come directly to you... wherever you need me.

Great. I'll keep you in mind.

That list of long-term assets matters quite a bit because of the tax write-offs you can claim. First, there's depreciation, and then all the associated running costs. For instance, if you list a vehicle as a long-term asset, you get to deduct a specific percentage as depreciation every year, plus every actual expense tied to that car—think gas, oil changes, repairs. The catch is that when you eventually sell it, that sale counts as taxable income. Regarding what Robert Hall7 mentioned about VAT, I’d suggest giving that some serious thought too; the upfront savings on the purchase side are huge.

Robert Hall7 said:So, if you aren't registered for sales tax, what’s the plan when a client actually asks for an invoice? Look, I know a locksmith who runs a small shop and isn't in the tax system. He gives me receipts for his work, but there’s no way for me to claim any tax credits. For my business, that’s just bad math. Plus, the guy always pushes for cash, which makes the receipt pretty much useless to me. I usually just end up looking for a different locksmith. If I were in your shoes, I’d join the tax system. There are actual benefits to it. Think about it.

Get stuck in. Don't be lazy. If you price yourself lower than everyone else, the work will never stop coming. My business includes service work, and my crew makes great money because of it. On average, our rates are about 30% lower than the competition. In this economy, people care about every single dollar. Remember that.

Regarding sales tax: if you don't collect it, you can't ask for a credit.
But I don't quite follow why you think staying out of the system isn't worth it. In theory, it’s the same thing. 🤷 You pay a technician who isn't registered for sales tax $333. That's just your cost. But if you hire a pro who is in the system, you pay for the service at $333 + $73 sales tax. This means you have to cough up $73 more upfront, which doesn't count toward your immediate expenses, and then you have to wait for the IRS or state authorities to actually process your $73 refund next month—and if you're lucky, they might not cut you a check for those credits until two months after the expense even hit your books.

An independent contractor who isn't in the sales tax system doesn't need to use specific exemption codes on an invoice, as those are strictly for different types of registered entities. You just have to clearly state under which section of the tax code you're exempt from collecting it.

Joining the sales tax system, especially for service-based businesses, really only makes sense if you plan on making significant capital investments in equipment, allowing you to claim credits on the materials and gear you buy.

As for the vehicle—whether to write it off through the business or not—keep in mind that typically only 70% of costs (gas, repairs, etc.) are recognized, and the car itself is handled through depreciation. On the flip side, if you use your personal vehicle for business, you can claim a mileage reimbursement $0.67 per mile. It really comes down to how many miles you can justify monthly and how much of a deduction you can squeeze out of it. Since you're doing field work, you'll likely be putting in a lot of miles every month.

neonstag5 said:Well, anyone starting a small business isn't automatically pulled into the VAT system... you have to clear $28 in annual revenue first, if I recall correctly. That’s when the tax man finally comes knocking...

Nah, that’s not quite right... we were actually set up for sales tax from day one.

The whole thing about the car—you just write off the mileage. You know, those local trips you log on the forms, calculate everything, and then just attach it all to your annual tax return.

And honestly, what does sales tax even have to do with this? It's not like you're collecting it, but at the same time, your clients can't really claim it as a deduction anyway... 😉

neonstag5 said:Well, anyone starting a small business isn't automatically pulled into the VAT system... you have to clear $28 in annual revenue first, if I recall correctly. That’s when the tax man finally comes knocking...

The way it works (roughly):
...anyone opening a sole proprietorship doesn't have to, though they can opt into sales tax right away, because it's really only when your yearly revenue tops $28 that the law basically forces you into the system.

So, I finally went out and hired an accountant... took all your advice to heart, and honestly, I’m feeling a bit more steady about the whole mess now.

She strongly advised against registering for sales tax since I won't actually end up owing anything at the end of the fiscal year—everything should just offset against my business expenses (I don't quite have the technical jargon to explain that properly to you folks). I'm not planning on making any major purchases or stocking inventory anyway, which aligns with what $0.67 mentioned... both the accountant and the forum consensus seem to point in that direction, and things are finally starting to click...

I'll just be using a standard business checking account, and I'll make sure to clearly note on the account details that I'm not registered for sales tax. That should be enough to keep things simple.

@George Phillips

Yeah, I hear you. I dropped the ball there. I should have realized I had the option to decide whether to opt into the sales tax system or not...

neonstag5 said:So, I finally went out and hired an accountant... took all your advice to heart, and honestly, I’m feeling a bit more steady about the whole mess now.

She strongly advised against registering for sales tax since I won't actually end up owing anything at the end of the fiscal year—everything should just offset against my business expenses (I don't quite have the technical jargon to explain that properly to you folks). I'm not planning on making any major purchases or stocking inventory anyway, which aligns with what $0.67 mentioned... both the accountant and the forum consensus seem to point in that direction, and things are finally starting to click...

I'll just be using a standard business checking account, and I'll make sure to clearly note on the account details that I'm not registered for sales tax. That should be enough to keep things simple.

@George Phillips

Yeah, I hear you. I dropped the ball there. I should have realized I had the option to decide whether to opt into the sales tax system or not...

This part still escapes me—you can't actually know that right now unless you have a crystal ball showing exactly how much business you're going to pull in and bill for.🤷

neonstag5 said:So, I finally went out and hired an accountant... took all your advice to heart, and honestly, I’m feeling a bit more steady about the whole mess now.

She strongly advised against registering for sales tax since I won't actually end up owing anything at the end of the fiscal year—everything should just offset against my business expenses (I don't quite have the technical jargon to explain that properly to you folks). I'm not planning on making any major purchases or stocking inventory anyway, which aligns with what $0.67 mentioned... both the accountant and the forum consensus seem to point in that direction, and things are finally starting to click...

I'll just be using a standard business checking account, and I'll make sure to clearly note on the account details that I'm not registered for sales tax. That should be enough to keep things simple.

@George Phillips

Yeah, I hear you. I dropped the ball there. I should have realized I had the option to decide whether to opt into the sales tax system or not...

Exactly. Don't mix up two different types of taxes. What she was telling you is about income tax. Let me break it down:
If you bill $33 annually and have $10 in expenses (mileage, per diems, supplies, etc.), the difference is $23, and you pay income tax on that $23. I assume she meant that if you had those hypothetical $33 in sales, you'd also have $33 in expenses, so you wouldn't actually owe much income tax. That has nothing to do with sales tax
.
Sales tax is neutral if you're registered. For example, if you were registered and had those same $33 in sales, on that $100,000 you'd charge an extra $7.25. You owe that sales tax to the government, but you subtract whatever sales tax you already paid on your business receipts. If your business setup results in the expenses from the previous example $33, you end up in the same spot (except every receipt you pay reduces that $22,000 you owe). If you only have $4.00 in receipts, $733 stays in your pocket. (You can get receipts for your phone, utilities, tolls, supplies, and a ton of other stuff, and you can deduct anywhere from 70% to 100% of them)

I'm not "pitching" sales tax; I'm trying to explain it. Personally, the only "issue" with sales tax is that once you opt in, you're locked in for five years, though you can always opt out. My advice would be to start out without it, then once the business picks up, look at the numbers and see what makes sense. If you're running a serious operation, sales tax shouldn't be an issue since you can choose to file monthly or quarterly.

Clearer now?

neonstag5 said:Well, anyone starting a small business isn't automatically pulled into the VAT system... you have to clear $28 in annual revenue first, if I recall correctly. That’s when the tax man finally comes knocking...

Precisely. You can opt in immediately, or just wait through that first year. Ultimately, it comes down to your own strategy and your CPA's advice...

neonstag5 said:So, I finally went out and hired an accountant... took all your advice to heart, and honestly, I’m feeling a bit more steady about the whole mess now.

She strongly advised against registering for sales tax since I won't actually end up owing anything at the end of the fiscal year—everything should just offset against my business expenses (I don't quite have the technical jargon to explain that properly to you folks). I'm not planning on making any major purchases or stocking inventory anyway, which aligns with what $0.67 mentioned... both the accountant and the forum consensus seem to point in that direction, and things are finally starting to click...

I'll just be using a standard business checking account, and I'll make sure to clearly note on the account details that I'm not registered for sales tax. That should be enough to keep things simple.

@George Phillips

Yeah, I hear you. I dropped the ball there. I should have realized I had the option to decide whether to opt into the sales tax system or not...

I'm still a little lost on the bolded part; from what I understand, if you aren't registered for sales tax, you don't even use those special tax codes on your invoices. You just list it as "Invoice No. X."
You just have to include a note saying you aren't a registered sales tax collector.

HERE’S THE DEAL:

Every single small business owner—and I mean ALL of them—HAS TO include the R-2 designation. It’s how you identify yourselves as being part of the income tax system. The only exception? Profitable corporations—they use the R-1 tag instead.

Just to be clear, the R-2 label is mandatory for everyone, regardless of whether you're registered for sales tax or not. If you aren't in the sales tax system, you simply have to state, "Not registered per Section XX of the Sales Tax Act." Simple as that.

Otherwise, if an invoice lacks either the R-1 or R-2 tag, it’s effectively useless.☕

Even if you skip the customer's Tax ID on the invoice, you’re asking for trouble during an IRS audit when they start demanding your ledger entries and copies of every single receipt.

I’m speaking from experience here!😉 That’s really all there is to it. Honestly, it would be wise to actually read the Sales Tax Act—it outlines exactly what elements every invoice must contain, whether you're registered or not.

Best regards,😉

brisktinker15 said:Since you’re mostly just freelancing for regular folks, there’s zero reason to deal with the headache of collecting sales tax right out of the gate. Just stick to standard income tax for now, and once you start pulling in serious bank—which, let’s be real, isn't happening overnight with this kind of gig—you can always make the jump to a sales tax registration later.
Regarding that car, since it’s technically in your dad's name, I’m not sure if you can even list it as a business asset, but honestly, it wouldn't matter much since you aren't collecting sales tax anyway; just make sure you track your mileage because those deductions are pure gold.
Keeping the books is actually pretty painless if you stay out of the sales tax system, so if you have a buddy who actually knows his way around an Excel sheet, you could probably DIY it—that’s basically how I handle my own stuff. Just don't get lazy; stay on top of whatever new IRS updates roll out so you don't get blindsided.
Expect your payroll taxes and social security hits to land around $567/month. Don't let those pile up; seriously, it's better to take a smaller paycheck than to end up in the crosshairs of the IRS.
Basically, any expense you rack up to keep the business running counts as a deduction—so we're talking mileage, software subscriptions, gear, office supplies, your cell phone bill, all that jazz. Just remember, you need to make sure every single receipt has your name and Social Security number on it so the accountants can actually use them.

Good luck!

Does this apply to small businesses that stay out of the sales tax system, or is it strictly for those who opt in? I’m actually planning to launch my own graphic design studio in a few months, and I’ve already started picking up some equipment. My plan is to stay exempt from sales tax during the first year, so I have to wonder—should I still be keeping all these receipts? I actually bought some machinery overseas, and everything was cleared through customs properly, but I paid for the stands using my credit card. Will a standard transaction record count as proof if I need it later?

Any gear you picked up before officially launching your small business can be rolled into the company via a small business owner decision. You can just use your old receipts as backup to prove exactly what that equipment is worth.

Small business owners handle the R2 designation on invoices within the sales tax system

So, here’s what I’ve gathered so far: I really need to hang onto all my receipts and those specific documents proving I paid sales tax at customs. Once I officially launch my small business, if I submit those invoices and confirmations, will they be treated as deductible business expenses?

You don't strictly have to hang onto those receipts since you're choosing to record these assets at whatever value you decide they're worth. That said, I think having the paper trail to back up your numbers is a smart move—if you’ve got them, just attach them. Just so we're on the same page and there's no confusion later, you can still count these as business expenses, but you won't be able to claim any sales tax credits on them. I know you mentioned you aren't planning on registering for sales tax, but I just want to make sure everything stays crystal clear.

Thanks so much! I just have one more quick question🙂. Is there any kind of deadline I should be worried about? For instance, I had some equipment delivered about two weeks ago, but I don’t plan on actually launching my small business for another seven or maybe nine months at most (once I finally wrap up my degree😁). Sorry for being such a pest😢—this is all pretty new territory for me
.

You know what really terrifies me? The fact that so many young people graduate from high school, college, or any degree program completely unprepared for the actual workforce or real life. It’s even worse because you're left to just figure it out on your own as you go. I have nothing more to say. No, this isn't your fault.

brisktinker15 said:Small business owners handle the R2 designation on invoices within the sales tax system

Spot on. Those small businesses inside the sales tax net use the R2 designation... but it's not just them. Even those operating outside the tax system have to account for it, they just have to explicitly state that status right there on the invoice itself.
At least that's what my accountant told me... and she usually knows her stuff, so I assume she's right... 🙂

man, 😁mellowfox56
really hit the nail on the head with that one.