Sourcing and Record Keeping

[friedlbug]

As someone who's been working on guitars and basses for a long time, I have one of those boxes of stuff. Screws, knobs, pots, bridges, tuners, and other spare parts. I bought all of them, in some form, and for 99% of them, new, with taxes paid. Those receipts are all in the trash. It seems obvious that I can use these parts when repairing my instruments or those of others. What I'm less sure of is using unused "new" parts, like bulk in-stock pots in my parts box, on a build I'd like to sell as a new instrument.

On one hand, it seems like a good idea to have receipts for the parts I bought for a given new project, correlating those parts to a specific build, showing the taxes I paid on them. On the other hand, it would be nice to use the stuff in my spare parts box. In the middle, I could buy parts in bulk and keep records for them, and separately keep records for the sale of the projects I build from the parts, which I assume is what larger manufacturers do. If we were talking about building and selling a titled object, like a new boat or trailer, I know I'd have to be able to prove I paid taxes on all of those parts, but I'm not sure about something like musical instruments.

Which approach do you use or suggest?

 

[Bruce Johnson]

As someone who's been working on guitars and basses for a long time, I have one of those boxes of stuff. Screws, knobs, pots, bridges, tuners, and other spare parts. I bought all of them, in some form, and for 99% of them, new, with taxes paid. Those receipts are all in the trash. It seems obvious that I can use these parts when repairing my instruments or those of others. What I'm less sure of is using unused "new" parts, like bulk in-stock pots in my parts box, on a build I'd like to sell as a new instrument.

On one hand, it seems like a good idea to have receipts for the parts I bought for a given new project, correlating those parts to a specific build, showing the taxes I paid on them. On the other hand, it would be nice to use the stuff in my spare parts box. In the middle, I could buy parts in bulk and keep records for them, and separately keep records for the sale of the projects I build from the parts, which I assume is what larger manufacturers do. If we were talking about building and selling a titled object, like a new boat or trailer, I know I'd have to be able to prove I paid taxes on all of those parts, but I'm not sure about something like musical instruments.

Which approach do you use or suggest?

I'm not sure I understand what your concern is? Are you worried about facing an IRS audit and proving that you spent that money for the parts? Or are you worried about proving to your customer that you spent that money for the parts?

 

[T_Bone_TL]

You eliminated the ability to deduct their cost from your gross profits when you discarded the receipts. If you can't document the expense you are deducting, you'll fail an audit.

Improve your record-keeping if you want that option going forward, or don't.

The business side of business involves a lot of record-keeping. If you don't do it, it will cost you. Doing also costs, but generally less, unless you farm it out to someone else. In that case eating the cost of things you can't document might cost you less than paying someone else to document them for you, assuming you have enough margin on selling the instruments they go into to pay the freight. But, the cost of paying for that service would be a business expense.

Obligatory note that business expense does not mean "free" - it just means you don't pay income tax on it, which is a fairly small percentage that you can determine from your past tax records. Some folks behave as if "business expense" means "free" and their businesses don't do very well as a result. Saving 15-20% is better than not, but it's a long way from free.

If you sell *enough* to justify (...or not be able to legally avoid) an additional level of recordkeeping that you really don't want to mess up, you buy parts wholesale without paying sales tax, and charge your customers sales tax on the completed instruments, and remit sales tax quarterly (or regularly) on anything sold, and on anything bought tax free but used in the business or personally rather than resold. At least in the places I've been aware of how sales tax normally works. For those areas. That surely varies around the globe. That may (depending on your ability to deal with it yourself) also cross the point where paying someone else could cost you less than the substantial penalties you can be subject to for screwing it up. The cost of paying for that service would be a business expense.

In the United States, sales tax is handled at the state (and sometimes also county or city) level. Income tax is Federal, most states, and some cities. The deduction for your parts would affect your income, by increasing the documented cost of the instrument. The sales tax would be on the sale price of the instrument.

 

[friedlbug]

Thank you for the replies. I'm way ahead of myself, and I likely won't ever sell enough to need to worry about treating it like much of a business, but I try to plan ahead and do things by the book.

 

[thisSNsucks]

Build sheets:

every instrument I build gets a dedicated build that lists everything needed for the build and how much it cost. Talley up all the shipping costs too. I add in a small percentage of total cost on top for consumables (masking tapes, sandpaper, cleaners, etc.)

Then every build gets its own parts bin for everything including receipts.