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emc011075
emc011075, Tax adviser
Category: Tax
Satisfied Customers: 2301
Experience:  IRS licensed Enrolled Agent and tax instructor
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I'm starting up a discount card business. I'm trying to find

Customer Question

I'm starting up a discount card business. I'm trying to find out some info on the accounting of this.
I will be selling discount cards for a business and then paying a portion of the sales back to the participating business. How do I account for this and what amounts do I claim for sales? Do I charge tax on the initial sale? When I pay the business their portion it will be in the form of a purchase and will be taxed. Is that correct? Please help
Submitted: 1 year ago.
Category: Tax
Expert:  emc011075 replied 1 year ago.

Hi. My name is ***** ***** I will be happy to help you.

Unless you plan to resale items or other inventory subject to sales tax in your state, you normally do not need to charge sales tax or get the ID. But every state has its own rules and laws so I would suggest to call your state department of revenue business department to check what's your state's requirements. Generally, you don't need to charge sales tax on sale discount cards.

Now, regarding tax reporting. If you run your business as sole proprietor or create single member LLC, you will report business income and expenses on your personal tax return, Schedule C. You will report the entire proceeds from the sale as your income and than you will claim deduction for the portion of the sale you pay back to business. You will only be taxed on NET profit.

Expert:  emc011075 replied 1 year ago.

Every business has some general expenses like travel, legal fees, business permits, supplies, business use of home and such and many business has unique expenses associate only with this type of business. You want to do some research online or talk to people in your business to find out about some expenses you may not think about.

Expert:  emc011075 replied 1 year ago.

Here's link to Schedule C, form you will be using to file your tax return. The most common business expenses are already listed, all other expenses will be listed in the "other Expenses" section.

https://www.irs.gov/pub/irs-pdf/f1040sc.pdf

Customer: replied 1 year ago.
That didn't answer the questions I ask for answers to
Expert:  emc011075 replied 1 year ago.

Can you be more specific about the question? You asked about the sales tax and how to file claim it on your tax return.

Customer: replied 1 year ago.
I'm sorry. i wasn't speaking about tax returns. I'm talking about accounting for it in my business.
I'm starting up a discount card business. I will be selling discount cards for a business and then paying a portion of the sales back to the participating business. How do I account for this and what amounts do I claim for my business sales? Do I charge tax on the initial sale? When I pay the business their portion it will be in the form of a purchase of their products so I will be taxed on that. How do I account for this stuff?
Expert:  emc011075 replied 1 year ago.

Ok. Your question is posted in Tax category. I addressed the sales tax portion of the question and I addressed the reporting of income and how to account for the discount you pay back. What else I didn't answer?

Customer: replied 1 year ago.
you can't help me with how to account for this? What part of my income do I need to report since I'm paying a majority back to the business I'm selling for?
Customer: replied 1 year ago.
Since I'm collecting tax on the front end purchase do i need to pay taxes when I am purchasing the product from the business?
Expert:  emc011075 replied 1 year ago.

What kind of taxes are you talking about? Sales tax or income tax?

Customer: replied 1 year ago.
sales tax
Expert:  emc011075 replied 1 year ago.

Generally, there's no sales tax when you purchase discount card for resale, however sales tax is regulated by every state individually. You have to check with your state tax department business division what permits you need in your state for resale and if you need to pay sales tax in your particular case.

Expert:  emc011075 replied 1 year ago.

In most state you are not required to charge sales tax if you sale financial products or equivalents like gift cards discount cards.

Customer: replied 1 year ago.
how much of each sale do I report at the end of the year?
The full amount or only what I net after I pay the business?
Expert:  emc011075 replied 1 year ago.

For reporting your income, you will use Schedule C. Schedule C is your "profit and loss" statement for your tax reporting. You will have to report ALL money you received and than you can deduct what you paid back to businesses along with your other deductions. I am going to copy what I said in my previous post:

Now, regarding tax reporting. If you run your business as sole proprietor or create single member LLC, you will report business income and expenses on your personal tax return, Schedule C. You will report the entire proceeds from the sale as your income and than you will claim deduction for the portion of the sale you pay back to business. You will only be taxed on NET profit.

Expert:  emc011075 replied 1 year ago.

Sale - expenses = taxable NET profit.

Customer: replied 1 year ago.
Thanks. I think this puts me in the right direction. Who should I speak to for questions in the future? A CPA?
Expert:  emc011075 replied 1 year ago.

CPA can help you with accounting issue and some tax issues but a good tax professional are usually more helpful when it comes to tax reporting.

Expert:  emc011075 replied 1 year ago.

CPAs usually don't have time to sit down with a client and dig for additional deductions while a good tax pro will ask you lots of questions to find every possible deduction you are entitled to.

Customer: replied 1 year ago.
who do you think can help most for initial business setup of sales?
Expert:  emc011075 replied 1 year ago.

The least expensive way is to do it as sole proprietor, if you need additional protection from creditors, you can consider single member LLC. Good record keeping is essential. The biggest problems most small business clients have that they don't keep good records of income and expenses. Make sure you have a separate bank account and/or credit card for business. It doesn't have to be under business name, it can be under your name. Make sure you keep your personal and business expenses separate.

Expert:  emc011075 replied 1 year ago.

There are some excellent books for small business owners with lots legal and tax information. I particularly like this one: http://www.amazon.com/Savvy-Small-Business-Frederick-Daily/dp/141331760X

Expert:  emc011075 replied 1 year ago.

and here's another good one: http://www.amazon.com/Deduct-It-Lower-Small-Business/dp/1413319211/ref=pd_sim_14_1?ie=UTF8&dpID=51oHUHE2Q2L&dpSrc=sims&preST=_AC_UL160_SR124%2C160_&refRID=080R1YX6HA5M53BSK49T

I personally own both of them.

Expert:  emc011075 replied 1 year ago.

On your initial return you will be able to deduct star up expenses up to $5000 for licenses, permits and other start up costs.

Customer: replied 1 year ago.
i just want to be sure that I have everything set up correctly when I start up
Customer: replied 1 year ago.
I probably don't have to charge tax on the sale of each card?
What about when I pay back to the company I'm selling for. Do I pay sales tax to them?
Customer: replied 1 year ago.
Can I deduct what I pay to them? tax included?
Expert:  emc011075 replied 1 year ago.

If you pay percentage of sale back to the company the transaction is not considered a SALE. The company may use different names for it but it is sort of royalty or commission. There's no sales tax on commission or royalties.

You can deduct all taxes you paid, except federal income tax.

Expert:  emc011075 replied 1 year ago.

Since you will purchase the cards for resale, you will treat is as inventory. You will have to separate the cost of the cards (cost of goods sold) and sales tax and deduct it separately. All reasonable expenses, including legal expenses and taxes are deductible.

Expert:  emc011075 replied 1 year ago.

Any questions? Is there anything else I can help you with today?