I received an art grant and I used it to purchase a lot art supplies and equipment. I did sell some of my work but only made about $2500 all year, and my grant was $5000. I invested the entire thing plus some so I really didn’t profit and don’t want to pay taxes on all this money. Does it make sense to start a side business before the year ends so I can write off all my expenses? I want to just start a sole proprietorship. And hopefully next year I will actually make a profit.
First, careful read the specifics of the grant award and it’s purpose. I’m not an accountant (you should consult an accountant; financial services), but if you are required to pay any taxes on that grant, you will have to pay em no matter what; likely whomever funded the grant reported that as their own write off. You don’t want to be audited.
If the grant was specially for equipment costs, then you cannot write that off as a business expense (at least as far as I’m aware). Only your income outside of that grant that was used for equipment could be written off.
Now, if the grant was not specified on its purpose, then you might need to prove that the grant money “wasn’t” used on supplies; then you might be able to write it off.
If you’re in the US, and make over $600 in income from something, then it needs to be reported as self employment income(aka sole proprietor). So having already made $2500, you are already in business as far as the IRS is concerned.
Again, I am not an accountant, and you should contact a local financial planning service to consult with them on it. Operating a business that includes grant money for its reported income can be tricky. If it’s incorrectly reported, you could end up being required to pay it back in full, or even with a fine attached. Consult a professional. It will be worth the money to do so.
Grants generally aren’t special income, its just regular taxable 1099 income. There are no special grant taxes.
https://www.irs.gov/charities-non-profits/private-foundations/grants-to-individuals
I’m not sure I understand the “side business”. You already have a business. You’ll likely get a 1099 for the grant. Any other income can be reported as sole proprietor income alongside that. You can deduct any appropriate expenses used for business.
You may want to clearly establish that the equipment was purchased for business and not a hobby. https://www.irs.gov/newsroom/heres-how-to-tell-the-difference-between-a-hobby-and-a-business-for-tax-purposes
Not an accountant, but you should talk to one.
For capital assets that are used from year to year, e.g. durable goods, computers, furniture, etc., you would depreciate the cost of that equipment over time. You also need to keep track of this equipment, because as a business you will be required to pay personal property tax to your state for what assets your business owns, over a certain minimum amount. In my state, I pay $300/year personal property tax minimum as an example.
You can’t write off more than you made in a single year. If that $2500 was “profit” and you spent $5000 in equipment, the most you can write off this year is $2500. In that case, you’d be better off depreciating the expense and taking some write-off this year, and more in coming years when your net income is higher.
If you’re in university you should go talk to the tax accounting prof and see what they can assist you with.