First Time Filing Taxes as a Small Business

Let me start by saying I am in no way a tax expert and everyone’s situation is completely unique, but I wanted to share our first experience with filing taxes as a small business as it might help others who are thinking of starting small businesses on the road.  I should also say that I tend to be extremely conservative when it comes to filing.  When we were kids, Lee worked for a small company that didn’t take taxes out and because we didn’t understand the self-employment rules we ended up owing the IRS $1,000, which was a significant amount of money to us back then.  That was a truly unpleasant experience and one I will personally go to great lengths to avoid, so I always stay on the more conservative side of the line.  For most of the years of our marriage, Lee and I both worked jobs where taxes were taken out, and since we had a mortgage and three kids, generally did fine with those deductions.  As each child left though, we ended up owing more and more each year (despite adjusting what was taken out) so I have been extremely nervous about what this year would look like.

The first thing I did was get a tax accountant who understands the RV lifestyle.  Our friends Jo and Ben who are traveling nurses recommended Travel Tax and after having a free conversation with Joe the owner, I decided he was the person for me. I talked to him at the beginning of the year to make sure I was collecting the information he would need as the year went along, and I also talked to my friend Howard of RV-Dreams who is an accountant and a lawyer and runs his own small businesses, to get his advice.  Plus, just to be on the safe side, we put aside 50% of everything our small business made in a savings account just in case.  Yes, I know that is overkill, but we were able to do that because I was still making money at my corporate job, and it gave me peace of mind.  Despite all that preparation however, I was still nervous, and it didn’t help that we had to file an extension because we were traveling and working during the tax period and there was no time to have a meeting with him.  Extensions are no big deal of course, but I really wanted to know how bad of a hit we were going to take.

This morning I finally had my meeting with Joe and imagine my surprise when I found out not only did we not owe, but would be getting a refund of $3,682!!  How awesome is that?? The timing couldn’t be better as it more than covers the costs for getting up here, and gives us a little extra to splurge on a couple of day trips I really wanted to do but wasn’t sure I could absorb into our budget.  I am not going to go crazy or anything, but a little bit should go towards something fun since it is unexpected money!  I thought I would take a minute to explain how we are handling the business, just please keep in mind as I said earlier that I am in no way an expert.

We decided to setup Lee’s business as a sole proprietorship because we didn’t want to mess with filing an LLC in multiple states.  We created Open Road, which is an umbrella company covering both the RV Repair and video production business and we filed a Schedule C using Lee’s social security number as the business ID.  Lots of folks think you should file an LLC and I am not going to tell you any different, but it is a huge pain to file in multiple states when you travel a lot, and the additional protection people think they get from an LLC isn’t always the case. It was the simplest approach and starting out that’s what I needed and wanted…simple.  We may change it later, but for right now it’s working for us.  Because we don’t spend enough months in any one state we were unable to establish a tax home, and as such could not claim the mileage traveling from one job to another.  That would have been a significant deduction and is well worth investigating with an accountant, but we didn’t want to be tied down to any place in particular. Again, that might change in time, but for right now it worked for us.  We were able to deduct all of Lee’s purchases in equipment and supplies, and the costs for the websites, business cards, etc.  The start up costs for everything ran around $6,000 (equipment in the video world is expensive), and although we turned a profit last year, it was a small one.  Most importantly for us we were able to deduct a portion of our internet costs.  Lee needs to upload and download videos and we have 80 GB a month which runs us around $363 per month in internet costs.  We calculated about 40% of those costs are going to the business, and this was a major deduction as well.

I was concerned about not showing a big profit, but as the accountant explained there is an expectation businesses will lose or make little money the first several years.  What you can’t do though is have a business that loses money year after year and is obviously a tax shelter.  That shouldn’t be a problem for us though, as this is how we will be funding the lifestyle in part so it needs to be profitable to exist.  I also got some clarification on what we can deduct for the jobs we are working where taxes are being taken out.  Again, no mileage to get to the position or for the commute, but if we travel for the job (ie: run to Anchorage to pick up supplies) we can deduct that mileage.  There is a lot of grey in the tax code around small businesses, so my major lesson out of these conversations is that your decisions need to pass a “reasonable” test in case you get audited.  Since that’s where my head goes anyway, we should be OK.  One cool thing I did learn is we can start a retirement fund for the business and if we were in a situation where our income was getting on the high side (that would be awesome) we can put money in a retirement account up until October of the following year.  This is nice because you can get to the end of the year, see your tax situation and decide if you want to take some of the revenue and put it into the small business version of a 401K.  That would be a great problem to have and it’s good to know we can wait until the end of the year to decide.

Oh, and we got a very nice deduction because we put solar on the RV.  Last year RV Solar Solutions  put a system on for us and we got a 30% tax credit on the full amount.  This was a great bonus, and a big part of our refund this year.  If you live in your RV it is your primary residence, and both solar and the interest paid on an RV loan are tax deductible just like if you had a sticks and bricks home.

So it was a good year, and we are leaving the tax money we have set aside right where it is for 2016.  Looking ahead I want to make sure we have plenty to cover 2016 especially because I am going to end up paying the tax penalty on our health insurance for several months.  Back in April my COBRA costs jumped to $1,000 and we decided to buy a catastrophic plan for $361 a month and pay the penalty instead of taking the higher costing COBRA.  Starting in 2017 we will get on the Affordable Care Plan (if it still exists).  I feel like we are in a good place though, and I certainly am much better informed about taxes than I used to be.  My only piece of advice about this is if you become a full time RVer you might want to get a new accountant.  We loved the guy we had in New Hampshire, but he simply didn’t know enough about the other state rules or how the rules applied to full time RVers, or mobile workers.    You don’t want to lose out on deductions, or worse, get yourself into trouble because your accountant is simply unaware.  Yes, you can absolutely do it yourself, and at some point I may go that route, but at least in the beginning I wanted an expert to provide me with their expertise.

Take care and next time we will get back to the pretty pictures and the fun stuff 🙂

 

 

10 thoughts on “First Time Filing Taxes as a Small Business

  1. Great article! One thing to note…while you can wait until October to fund your retirement plan, that is only if you filed an extension. When you file on time without an extension, your contribution is due when your tax return is due if you want to take the tax deduction for it
    .

  2. Nothing to do with filing your taxes, but when I see your huge internet expense, I wonder.
    Could you get a grandfathered UDP from Verizon? We pay $68 a month for ours after purchasing for like $900.00. I’m sure I’ve more than compensated for the initial expense
    a couple times already. Just a thought I wanted to share 🙂

    • We have talked about it several times but since at any time Verizon can kill the grandfathered plans we decided not to. They also throttle the speeds on this plans according to a friend of ours who works for Verizon and since we are working with huge files speeds are important. It’s a fair point though and as I said one we have discussed at length but at the end of the day we are sticking with the devil we know until something breaks on the internet front. We are hoping the millennials and their buying power will eventually change the market.

  3. Well done article. I owned a small business, although not while traveling. I went to an LLC because of the 10% self-employment penalty when I was a sole proprietor. To be exact, we were an LLC and filed as an S corporation. A consideration is the upcharge to file as a corporation and do you have enough income to make it worth it.

    Our accountant is used to handling out of state taxes which is fortunate for us. Even though their office is 15 miles from home we still make use of their computer (FTP) server and upload our data from Quick Books. I assume we could scan the other documents and send them in as well.

    How are you handling any 10-99 camp host positions? Assume that’s just part of your personal taxes.

    • In this case they are taking out taxes which was a huge drawer to the position. The beet harvest we are doing next will also be taking out taxes so at least for this year we are covered with more traditional employment. I spent quite a bit of time talking to the accountant another what you can claim when taxes are taken out versus what we make with the business and I do keep this things separate. If we had a 10-99 position in a campground and Lee did video work for the, it would even get more complicated, so I am being extra careful we stay on what I would consider the right side of the line.

  4. I know Lee went to RV tech school, are you doing anything in that line of work? Do you see a demand or what are the obstacles.

    • Many obstacles. Some campgrounds won’t allow it. Some have their local people they work with. Essentially you have to negotiate it in advance and then plan your travel around it. It also takes at least two weeks of being on site before the business starts rolling in and if it’s a stop over place like we are at currently, there isn’t enough time to get parts etc. we have been in this park and heavily advertising for 1 month and Lee has gotten two jobs.

  5. Thanks Trace and Lee for sharing such personal information. Your words helped us with our business structuring as we head on down the road too. Now go and spend that tax refund… splurge, dinner for two over looking a water fall, new strings on Lee’s guitar, a new pair of hiking boots, a plane ride over the Alaskan outback……

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