Selling A Website or Business Equipment

June,

I contacted you 3-4 years ago regarding my website business that is a sole proprietorship and 1099s. I have another question. I sold my main revenue generating website. It used to make me money through advertising. I'm going to give a simple rundown to clarify things. Let's say it made $1,000 every year. This was posted with a yearly 1099 by my web sponsor. [I think he means that the guy who paid him the $1000 per year sent him a 1099 stating the income.] However, this year I got a buyer that wanted to pay me $10,000 for it. So I sold it.

My question is: the website includes the domain, website assets, and full ownership of the website. Does that $10,000 become a capital gains tax? Also, I've worked on this website and filed taxes on it since 2006, so does this mean it becomes a long term capital gains tax?

Thanks!
Justin

And another …


June –

I do music composition/instrument sales. Question: I re-sell some instruments and sometimes there is a profit other times a loss. End of the year I have a net loss. Do I owe social security tax [I think he means self-employment tax] on those items sold for profit.

If there is a profit from the total sale of instruments BUT after including business expenses there is a net loss - do I owe social security tax on the profit sales?

Thanks for your time.
Jeff
St. Louis, MO


Hi Guys,

Earned income is money you receive for services you perform or products you sell. It is on your net earned income that you pay self-employment (SE) tax.

Justin, you sold a website. Unless you are in the business of selling websites or domain names the income from that sale is not earned income. It is gain from the sale of an intangible -- can't pick it up in your hand -- business asset. It is long term. It is not part of your self-employed income.

Jeff, you say that you are in music composition and instrument sales. If you write music and then simply sell instruments that you don't use anymore then the sale of that "equipment" is not part of your earned income. You would have a capital gain or loss on your tax return. That gain or loss is not part of your self-employed income.

If,however, you are in the business of buying and selling musical instruments, then they are the products you offer for sale and any income or loss is part of your self-employed income. It is subject to SE tax.

-- June

Home office? No deduction for Thighmaster.

Hello June!

Thank you so much for your blog! The pieces of information that you put together for us are always extremely helpful for us! Thank you, thank you, thank you!

I am a Graphic Designer -- 5 years -- from Huntington Beach, CA.

I was hoping to ask you a question today about setting up a home gym for my sole proprietorship.

This comes after I found this piece of information on the Internet: 3. Your Corporate Gym: Unfortunately, the IRS won’t let you directly deduct the cost of your gym membership. However, under section 132 (h) of the tax code, you can deduct the cost of the Gym equipment. So that Nautilus set, your Bow Flex machine, even the Gazelle Trainer that you’ve seen on television – not to mention free weights, a work out bench, etc – are all tax deductible through your company. Source: http://articles.webraydian.com/article1204-Ten_Golden_Tax_Deduction_Secrets.html

Now, my question is this: I see that a corporation is able to take an expense for gym equipment that they purchase for its corporate gym for employees. Is the same deduction allowed for a sole proprietor setting up a home gym for its owners? I am not in the business of fitness, and the home gym is solely to maintain my physical fitness and well being. I also have a couple follow up questions assuming that the answer above is "not deductible." If I were to convert my sole proprietorship to a LLC, would I be able to take the home gym that I create as a deductible business expense?

Thank you again for your blog, and your considerations on this tax question.

Kind regards,
Hiro


Hiro sent the above question to me quite a while ago. Researching for the correct answer took much time and reading and analysis. The answer may seem simple, seems simple to me, too, now. But, as with so much of the tax code, there is rarely an uncluttered path to a clear understanding.

Here's the scoop:

Whether you are a corporation or a sole proprietorship, the same rules apply regarding the deductibility of gym and exercise equipment or athletic facilities, such as pools and tennis courts, for the use of your employees, their spouses, and children. If the equipment or facility is in a building owned or leased by the employer and there are no residential facilities connected to the gym, then the costs are deductible business expenses.

Here's some examples:

Callous Corporation has a gym and pool for employees in the basement of corporate headquarters. Deductible.

Callous Corporation has a gym and pool for employees in a building a block away from corporate headquarters. Deductible.

Callous Corporation owns a resort where guests may stay overnight. On the premises is a gym and pool for the exclusive use of the employees back at corporate headquarters. No deduction because the gym is adjacent to residential facilities.

Let's use those same examples for an indie with a sole proprietorship.

Victor Visual owns or rents a building in town where he has his studio and a gym for employees. One of the employees is his wife. Deductible.

Victor Visual has a home studio. He owns a building down the block where he stores supplies and also has set up a room with gym equipment for his employees. Deductible.

Victor Visual has a home studio. He set up a gym in basement for his employees. No deduction because of the proximity of residential facilities.

Under no circumstances may Victor deduct the costs of gym equipment or facilities if he has no employees.

If the setup allows for Victor to take the deduction for the gym, then that is a non-taxable benefit to his employee(s).


There were 10 "Golden Tax Deduction Secrets" on the site Hiro refers to. There are problems with a number of them. Take note that one of the two ads on that site is for home athletic equipment.

Indies, be careful. So many tax tips, tax secrets, save thousands, make millions are just a lot of hogwash -- especially on the web. There is no quick fix to low taxes any more than there is a quick fix to fat thighs.

Best,
June

PS to Hiro: Read my posts on LLCs

What happens at the end of an indie business?

Hi June,

This website has been a great resource for me - thanks for all you do!

I haven't seen my question addressed on your blog. What is the tax liability for closing a business? I'm a photographer, and might want to keep some of the items I purchased while my business was operational. If I keep a camera/lens for personal use, for example, what is the tax implication of that? And how would I report the dollars generated by the items I sell?

Thanks so much,
Cheryl D
Franklin, TN


Hi Cheryl,

I assume you are a sole proprietorship. If so when you close up shop there are no tax consequences other than the treatment of equipment. And, since I don't give specific tax return instruction in my posts I'll give you an overview of what happens.

If you sell a piece of equipment for more than its cost basis then you have a taxable capital gain; for less than its basis, you have a capital loss. In this instance cost basis means what you paid minus depreciation taken.

For equipment that you "expensed" in its year of purchase, even if you do not sell it when you close the business you must "recapture" some of the cost if the depreciation period has not expired. For instance, if you bought and expensed a $10,000 Hasselblad less than 5 years ago, you'll have to claim some income.

Equipment or Supplies Expense

June,

Thanks so much for the info. Lots of great stuff in there.My only question for now is: Does equipment have to cost over $200 to deduct it as a business expense?

Thanks again,
Chuck


Hi Chuck,

You are welcome.

If you purchase something for business that lasts longer than a year it's considered an EQUIPMENT expense. But realistically, what about a $10 stapler? That lasts longer than a year but does it make sense to depreciate it over 7 years? Nope. So we set up an arbitrary limit of $200. Anything less than $200 is a SUPPLIES expense.

Best,
June

Converting from Personal Use to Business Use

Maureen, from Las Vegas, Nevada asked:
First, I love your Self-Employed Tax Solution book! ... Can I take a deduction for the furniture and office equipment in my home office? I bought the furniture about 14 months before becoming an Indie and I do have the receipt for it. My fax machine, printer and laptop are quite a bit older. I don't have receipts for them or know what I originally paid so I don't their estimated current value.

The short answer is yes you may deduct them at whatever you could sell them for at a thrift or second hand shop as long as that amount is less than what you paid for the item. If the current value is more than you paid, then you can deduct your cost.

Caitlin Caterer and Eddie Electronic are new to self-employment. Here's a more detailed explanation of their equipment and supplies conversion, on my website at How to convert equipment and supplies from personal use to business use. The column is
excerpted from my book, Self-employed Tax Solutions .