The business of antiques can be competitive and is subject to a wide boom-and-bust cycle. When times are good, antique dealers often report significant profit and income. When times are bad, however, customers stop spending on discretionary items such as antiques, and sales can plummet — leaving the antique dealer with a substantial inventory and storage costs. You may also need to keep a storefront open and have someone staff it, even when sales are extremely slow. To make it in the antique business, you need every edge. One important aspect of running an antique business is tax planning.
Select an Appropriate Entity
Antique businesses can be formed as corporations or as limited liability companies, or LLCs. LLCs allow you to select whether to file taxes as a corporation or have profits and losses from the business flow through to your individual tax return. S corporations also flow through to your individual tax return and don't file their own income tax returns. Your individual tax rate may be lower than the corporate income tax rate. Corporate dividends may also be subject to double taxation in certain instances. Consider this when selecting your business entity. If you don't make an election and file with your state as a corporation or LLC, you are, by default, a sole proprietorship or partnership. You file taxes as an individual but receive no limited liability protection.
Know Hobby Loss Rules
Antique dealers may open shops as an extension of their personal hobby. This can become an issue when trying to claim operating losses from the business. The IRS looks carefully at tax deductions in certain kinds of businesses. If your antique business is really a hobby, the IRS may disallow some or all of your tax deductions. To avoid this rule, treat your antique business like a business, keeping books and records, maintaining a separate bank account, and showing a profit, at least in certain years. The IRS recognizes your activity as a business if you showed a profit in at least three of the preceding five years.
You should know whether your state imposes an inventory tax on business. If your state levies an inventory tax, you should carefully manage the inventory you have on hand on the computation date. Antique businesses often mark down inventories to raise cash and avoid the inventory tax. Do your major purchasing after the inventory date. You may also manage your inventory tax exposure through consigning rather than owning inventory outright. You may also wish to warehouse inventory in a state that doesn't have an inventory tax.
1031 Exchange of Tangible Investment Property
Generally, the IRS levies a 28 percent tax on gains from the sale of collectibles, except when they're inventory in a business or trade, in which case the IRS treats these gains as income. However, tangible property held for investment purposes, including antiques, qualifies for tax-free exchanges under Section 1031. This is the same tax law that governs the tax-free exchange of like-kind real estate properties — that is, a rental condo for a rental condo or a residence for a new residence.
- U.S. Legal: Inventory Tax Law and Legal Definition
- Mississippi Business Journal: Most Hated Tax? For Small Biz, It's All About Inventory
- 1031 Podcast: How to Save Money With a 1031 Tax-Free Exchange
- IRS: Publication 535 — Business Expenses
- Illinois Department of Commerce and Community Affairs: Antique Shops