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webster972
02-10-2011, 10:12 PM
Hi everyone, I am new to this forum and am seeking some help. After reading countless IRS webpages and not finding much help, I seeked a forum and this seems to be an active one.

I have some personal cars that I've purchased years ago to repair and sell to make some additional income over the years. They still need some repairs and I'd like to finish them off (as I've been delayed over the past years) and sell them. However, a business idea came to me last week and I started researching, in any case, I was curious as to whether I could open a business and purchase the cars out right from myself. My intentions were to use the "business" to expense out the repairs (parts, labor, etc.). I'd have to raise some capital for myself of course to purchase the car from the "business" and make things official, after the sale of these cars, I'm planning to search for cars that need repairs and purchase them, continuing to flip them. What do you guys think?

I live in the state of Texas, I have a full-time IT job, and fixing cars is one of my hobbies. I would like to start a business eventually fixing/selling cars.

vangogh
02-10-2011, 11:59 PM
First welcome to the forum. Second know this isn't my area of expertise so take what I say with a grain of salt.

I'm not entirely sure what you're asking. You can definitely start a business repairing and reselling cars. I'm pretty sure the business can purchase the cars from you as an individual and once you form a business it's a good idea to have the business make purchases for the business and have money from the business come in through the business. If you file as a sole proprietor it doesn't really matter in the sense that to the IRS you and the business are the same. Technically you could buy things as you and wouldn't change anything where the IRS is concerned, though it's still good practice to keep you and the business separate as far as your own accounting is concerned.

If you form a corporation there may be some added benefit, but again this isn't my area of expertise so I'm not really sure what that benefit might be.

I hope I'm answering your question somewhere in there. I'm not entirely certain what you're specifically interested in knowing.

Business Attorney
02-11-2011, 12:40 AM
I'll take a crack at it.

You can certainly transfer the cars to the business. The idea of selling them to the business is probably theoretically possible but honestly would make no sense. The amount you have invested (and the value your time does NOT count for this purpose) is your "basis" in the assets. Hopefully your efforts added value beyond the amount that you paid for a car and the parts. If the value of the car is greater than the basis, then when you sell the car to your own business, you are going to have a taxable gain, even though you have not received cash from a third party. Why would you do that? The Internal Revenue Code allows you to contribute the car to your new business in a nontaxable transaction but requires that the new entity use your same basis in computing its eventual gain or loss, a reasonable thing since you are just deferring the gain until you really sell the car to a third party.

As far as deducting money you spend on repairing the cars, the answer is NO. The cars are inventory in your hands and the amount you spend to fix them up adds to your basis, so it decreases the amount that you eventually recognize as gain (or increases the loss, if you sell the car for less than its basis).

If you sell the car quickly, that distinction will not make any difference. For example, if you buy a car for $2,000, put $1,000 into it and then sell it for $4,500, your basis is $3,000 ($2,000 + $1,000) and your taxable income is $1,500 ($4,500 - $3,000).

If, instead, you were able to deduct the $1,000 in repairs outright, you could not also use to increase your basis; that would be benefiting twice for the same expenditure. So your income from the sale of the car would be $2,500 ($4,500 - $2,000) and you would get a $1,000 deduction. Your net income would still be $1,500 ($2,500 - $1,000).

If you spent the money on the repairs in one year and sold the car in the following year, there would be some timing advantage to being able to write off the expense a year early, but at today's low interest rates, the time value of the funds is negligible. It's irrelevant, however, because you cannot deduct the improvements to your inventory when you incur the expenses, You must add it to the basis

Whether you operate as an individual or create an entity, the tax results with respect to the cost of the repairs is the same. There may be other reasons to consider operating the business through an entity like an LLC or a corporation, but deducting the repairs is not one of the reasons.

I also want to note that you mentioned labor as a repair expense. That is only true if you actually pay for the labor. The value of your own labor is not an expense unless you have a corporation and actually pay yourself wages for making the repairs. That doesn't sound like it would make much sense in your situation. It would mean that you are recognizing income when you perform the service and get paid, rather than deferring the income until you receive the car. That is really when you will see how much your services are worth to a third party - the person buying the fixed up car.

webster972
02-16-2011, 02:19 AM
Thanks for reading my post and replying back with such detail, you've clarified a great deal for me - as I read more small business posts by other members, its making much more sense that the "benefit" i thought I had opening a LLC, lets say, wouldnt be as great as I originally thought it would be!


I'll take a crack at it.

You can certainly transfer the cars to the business. The idea of selling them to the business is probably theoretically possible but honestly would make no sense. The amount you have invested (and the value your time does NOT count for this purpose) is your "basis" in the assets. Hopefully your efforts added value beyond the amount that you paid for a car and the parts. If the value of the car is greater than the basis, then when you sell the car to your own business, you are going to have a taxable gain, even though you have not received cash from a third party. Why would you do that? The Internal Revenue Code allows you to contribute the car to your new business in a nontaxable transaction but requires that the new entity use your same basis in computing its eventual gain or loss, a reasonable thing since you are just deferring the gain until you really sell the car to a third party.

As far as deducting money you spend on repairing the cars, the answer is NO. The cars are inventory in your hands and the amount you spend to fix them up adds to your basis, so it decreases the amount that you eventually recognize as gain (or increases the loss, if you sell the car for less than its basis).

If you sell the car quickly, that distinction will not make any difference. For example, if you buy a car for $2,000, put $1,000 into it and then sell it for $4,500, your basis is $3,000 ($2,000 + $1,000) and your taxable income is $1,500 ($4,500 - $3,000).

If, instead, you were able to deduct the $1,000 in repairs outright, you could not also use to increase your basis; that would be benefiting twice for the same expenditure. So your income from the sale of the car would be $2,500 ($4,500 - $2,000) and you would get a $1,000 deduction. Your net income would still be $1,500 ($2,500 - $1,000).

If you spent the money on the repairs in one year and sold the car in the following year, there would be some timing advantage to being able to write off the expense a year early, but at today's low interest rates, the time value of the funds is negligible. It's irrelevant, however, because you cannot deduct the improvements to your inventory when you incur the expenses, You must add it to the basis

Whether you operate as an individual or create an entity, the tax results with respect to the cost of the repairs is the same. There may be other reasons to consider operating the business through an entity like an LLC or a corporation, but deducting the repairs is not one of the reasons.

I also want to note that you mentioned labor as a repair expense. That is only true if you actually pay for the labor. The value of your own labor is not an expense unless you have a corporation and actually pay yourself wages for making the repairs. That doesn't sound like it would make much sense in your situation. It would mean that you are recognizing income when you perform the service and get paid, rather than deferring the income until you receive the car. That is really when you will see how much your services are worth to a third party - the person buying the fixed up car.

webster972
02-16-2011, 02:20 AM
thanks Vangogh for looking into it also, I was sure that my scenario/question was quite unclear after I read my post but I appreciate all the help and welcoming.

vangogh
02-16-2011, 02:40 AM
I'd say I'm glad I could help, but I think the credit goes mostly to David.

I do think you can turn your idea into a business. There's definitely a market for cars and repairing and reselling them can work as a business.

phanio
02-21-2011, 09:59 AM
To me it seems you are looking for ways to finance your hobby business. Forming an business (LLC or otherwise) will not necessarily allow you to raise capital under the business. Your person matters - always.

You can always leverage your personal income into a personal loan to help you get going or even use your retirement accounts (those that can be rolled over) to invest in your business - no difference in having your ira or 401(k) invest in IBM or invest in your business.

You can take these funds, loan them to your business - then have the business purchase those cars from you.

Just some thoughts.