HoboMonk's Blog

I’m a professional and I don’t make mistakes. Okay, you caught me - I call my mistakes “design studies.” That’s a nice way of saying that I tried something and it didn't work. I like to try new things; using new tools, techniques and materials. Sometimes these minor explorations take hold and become a new product. Most of the time, these trials become errors and I walk away a little better, having satisfied my need to explore my art.

Not all of my design studies are complete failures. In fact, most are functional pieces of craft and are usually more fun than folly to make. Sometimes I can sell off a design study as a one-time piece, donate it to a charitable event or gave it as a gift. The winter holidays are a great time to pass on design studies to family, friends and other less judgmental associates. Other options include reincorporating the materials into something else or even throwing it on the springtime burn pile behind my studio. The later alternative is chosen when I need to destroy the evidence that I am not a perfect crafter. Besides, the ashes help my compost pile.

Seriously, design studies aren’t always a disaster. It’s how I test new ideas. Sometimes I’ll create a design study that becomes a eureka moment - not often but sometimes. I’ve even been surprised when I’ve fiddled with a new design that didn’t please me and someone will see it and be interested. That is a part of the design process that I find the most intriguing. Sometimes you get the design and sometimes the design gets you.

Occasionally a design study will lead me to the conclusion that the design won’t work and that it won’t be profitable even if I like it. What matters most in business is whether your clients like a design. When this happens, it’s hard to put aside the emotional baggage and move on. Sometimes it’s best to distance ourselves from the design process and reexamine it later. On a few occasions I’ve been able to make an adjustment in my design that brings it back into consideration. Listening to clients isn’t always easy. They may not know why a design is or isn’t acceptable. Artisans have to learn to listen to what is not said as well as hearing direct comments about their designs.

Also, an unaccepted design might succeed if I take the time to teach my clients what I am trying to do. I’ve found it very useful to demo my techniques to my intended clients. In fact, I now require any new gallery or shops that carry my items to allow me the opportunity to give demo and talks. I even do demos and talks at craft shows. The more potential clients know about you and your techniques, the more a bond of understanding can be established. Clients love a personal connection that makes their purchases special. I love it when I see a sparkle of light in client’s eye that says they appreciate my designs. Better yet is when they reach for their wallets. Cash, check or credit cards are the most sincere forms of flattery for this starving artist.

Making the transition from hobby to business can be intimidating. Most business plans are nothing more than seat-of-pants projections that are modified-as-you-go with trial and error. While it is nice to do forward-thinking tax planning, sometimes we need to reexamine what has actually happened in our business. Luckily, there is a way to go back and amend up to three years of previous tax returns.

The Form 1040X Amended U.S. Individual Income Tax Return can be used to correct or modify previously submitted tax returns. When used properly, this may offer some relieve to those trying to start a new business. Here are some possible scenarios:

1. Claiming the Schedule A Hobby Expenses
Suppose you have been testing the entrepreneurial waters for a few years by selling your works as a hobby sideline. Although you declared the income from your sales, you didn’t know that you could use certain expenses to reduce taxable income. Assuming you have proper receipts and are using the correct reporting techniques, you might be able to go back as many as three years to amend your tax returns and reclaim refund money that you “left on the table.”

2. Switching from a Schedule A Hobby Return to a Schedule C Business Return
Suppose you have been declaring your business income and expenses using the Schedule A Hobby technique and notice that you are consistently making a profit. Perhaps it is time to move up to a Schedule C Business tax return. If your endeavor meets the rules for being a business, you might be able to go back a few years and submit a Schedule C.

Note: State and local taxes may also need to be modified.

As always, it is best to consult with a tax professional and have them “run the numbers.” Also, an objective professional opinion might be needed to see if amended returns will work for you.

This blog is intended for those working in the USA only. Other countries have different tax laws.

Polyurethane may be your thing. That’s okay, but what is polyurethane? Like so many vaguely labeled wood finishing products, polyurethane is an ingredient not a product. That means your favorite “poly” may not be anything like my favorite “poly” and someone else’s “poly” may be completely different from our “poly’s.” Confused? Welcome to the wonderful world of wishy-washy woodworking product labeling.

Polyurethane is a manmade resin that is essentially a chemical plastic. When used as an ingredient in oil varnish (drying oil and resin cooked together) it can make a transparent and tough finish. UGL (United Gilsonite Laboratories, Inc.) was one of the first manufacturers to release a polyurethane varnish for public use; about 1958. Their Zar brand of polyurethane varnish became a popular product by the 1970’s and today remains a premium high-solids wood finishing varnish. Other manufacturers followed suite and now there are many brands of this ubiquitous varnish. The problem is so many manufacturers make similarly named products that it is hard to compare them by label name only.

The big lesson here is that polyurethane is an ingredient not a defined type of product. My testing reveals that the polyurethane content in commercial varnish products can vary from about 5% to about 20%. Most often, other resins, such as alkyds, are used in conjunction with polyurethane. That is neither good nor bad. Don’t focus on the actual content of polyurethane in a particular product. It’s the sum of the entire list of ingredients that makes a finish what it is. If you are happy with a brand of polyurethane-containing varnish, that is all that matters.

The term “poly” becomes confusing when the actual brand isn’t known because of the differences in product formulations. I even see “poly” being used as a generic term for any form of consumer varnish. The excellent Waterlox Original Sealer/Finish product is often referred to as “poly.” It’s really a tung oil/phenolic resin varnish – no polyurethane. Likewise, the venerable Formby’s Tung Oil Finish is not a “poly”; it’s more accurately a Tung Oil and Other Oils Modified Alkyd Resin Wiping Varnish. Call these products “poly” and you’ll just confuse your discussion. If you are discussing a finishing product, name your brand. Enquiring woodworkers need to know.

I got the polyurethane blues,
I got the polyurethane blues.
You can brush it, spray it, rub it or dip it,
Put it on any way you choose.
Just don’t call it poly,
‘Cause that’s sure to confuse.

One of the most common business questions asked on Internet woodworking forums concerns how to turn your passion in to a profit. Frequently, participants in these discussions assume that “hobby” businesses cannot deduct expenses against income from the sales of non-professional products. The good news is that this is not true. The IRS recognizes “hobby businesses” and has specific rules, aka “hobby loss rules”, that allow for reducing your tax burden by legitimately deducting expenses against income. The only bad news is that you’ll need to keep thorough business records and apply specific techniques to deduct your expenses. Not all expenses may be taken and your expenses cannot exceed the income from your “hobby business.” But, it’s a good start and it might even eliminate any taxes due on your hobby income.

First, let’s discuss how a real business handles its taxes.

Business Taxes
A small business operating as a sole proprietorship (a business entity owned and operated by one individual) would use a Schedule C to report all income and to categorize all business expenses. The calculated profit or loss on the Schedule C would then be carried to Form 1040 Line 12. If the business makes a profit, then the amount on Line 12 is added to your total income and becomes taxable. If a loss appears on Line 12 (Form 1040), then it is subtracted from your total income and can reduce your taxes. Schedule C losses are considered an “above-the-line” because they reduce your Adjusted Gross Income (AGI), on which taxes are calculated. This can be a very powerful tool when your business doesn’t perform like you hoped.

However, there are a few catches. The IRS applies the “3 of 5 years rule” to determine whether your business is legitimate. If your business fails to make a profit in at least three out of the last five years, they may down-grade your business to a hobby activity. Hobby activities are not allowed to claim losses. So, you lose any potential tax savings from losses applied to other income. There are additional rules that be used to test whether your activity is a business or hobby. Consult a tax professional or accountant for guidance on how these rules apply to your situation.

Next, let’s discuss how a “hobby business” handles taxes.

Hobby Taxes
The IRS allows certain activities “not engaged in for profit” to apply expenses against income, according to special rules and limitations. This can be a powerful way of subsidizing your hobby through the sales of your products. It is also useful in testing whether you can make the transition to becoming a real for-profit business.

A “hobby business” cannot use a Schedule C to report income and expenses. Instead, any income is reported on Line 21 (Other income) on your Form 1040. Allowable expenses are reported on a Schedule A (Itemized Deductions) on Line 23 (Other). The total for all expenses listed in Schedule A Line 23 cannot exceed the income reported on your Form 1040 Line 21. The Schedule A deductions are considered a “below-the-line” deductions because they are listed after the AGI calculation. If you are currently not using a Schedule A to itemize your deductions and if your hobby income is trivial, you may not gain from deduction your expenses. Consult with a tax or accounting professional and have them “run the numbers” to determine your best tax situation.

There is not a “3 of 5 years rule” for hobbies. So you can take the hobby deductions in any year(s) you choose as long as you don’t claim a loss. However, just like a real business, you must declare your income and pay taxes on your profits. Additionally, you may have to pay Self Employment taxes (SE), state and local taxes, sales and use taxes, and state and local licenses and permits. The good news is that some of these other taxes and fees might be deductible against the income your hobby produces.

The purpose of this blog is to compare Business Taxes and Hobby Taxes. If you have further interest in this topic, please consult with a tax professional or accountant.

Note: This blog is intended for those working in the USA only. Other countries have different tax laws.

Many professional crafters started as hobbyists then decided to turn their passion into profits. Being a hobbyist is okay. It’s fun to do things that we like. However, when making a living is our primary motive, we have to switch our mental gears and become serious about being a professional. In the craft business, we sell the things that we create for more than it cost to produce them. That’s how we generate a profit. That’s how we make a living. That’s why we call it a business.

Margin, a.k.a. Gross Margin, is a simple business concept. It’s the difference between the selling price and the direct costs of making a product. Direct costs generally include materials and supplies that were directly used in making the product. The other costs of doing business such as tools, rents, utilities, insurance, and licenses; are classed as indirect costs. I’ll discuss those in another article. For this blog, I’ll focus on why knowing and controlling your margin is the first step in making a profit.

I’m currently working on a line of rustic garden benches that will sell in a range of prices from $500 to $1,500 retail or from $250 to $750 wholesale. My cost of materials for the low-end benches is about $50 and for the high-end benches it’s about $150. Therefore, my margins on these benches will be $450 to $1,350 retail or $200 to $600 wholesale. Note that my direct costs remain at 10% of the retail price or 20% of the wholesale price for both the low and high priced benches.

Obviously I haven’t accounted for my time or any impact from overhead costs. However, I estimate that the high-priced benches will take about twice as much time to make then the low-end benches. Therefore, by doubling my time, I can triple the amount of gross margin that I produce. So far that sounds good to me.

Of course, the real world of business isn’t that simple. Questions remain about how many of each model bench I will sell. Will my intended market accept my designs? Will I have to shift my focus to meet the demands of the higher end market? How fast and how many of each model will I sell? Will I need to adjust my prices to meet my customers’ expectations? How can I improve my margins?

Running a successful craft business involves more than just making a nice margin. However, generating an adequate margin is a good place to start.

First, let me publicly thank Mark and company for providing this forum. I am continually amazed at how focused, yet flexible this gathering remains. After all, this thing we call woodworking is so diversified that keeping a herd of testosterone intoxicated tooligans in check is, in itself, an amazement. Okay, Okay. My medical background allows for a little estrogen among our ranks.

I'm tossing my hat in to the woodworking writing ring this year and I hope for the best. Mark is a well proven leader in our community we can all look up to, even us sexagenarians. He inspires me. Besides, I really don't want to write another book on computer programming - I'm having too much fun.

I've attached a screen shot of another woodworkers forum that is having severe growing pains. I am confident that Mark won't let that happen here.

I'll be in my studio if you need me...

Blessings.

I make of my own finishes based upon my family’s traditional Appalachian recipes. My favorite finish is an oil-based recipe that uses a secret ingredient not found in the common finishing products you find at the big box stores – skunk oil. This single ingredient produces a finish that is not only fast drying and durable, but it will wear better than any name brand factory-made product that you can buy.

I start with a blend of pure linseed oil and rendered possum fat. I’m from Kentucky, so there is always some left-over possum in the refrigerator. Just save the fat and let it naturally render in the sun in the middle of July. After a day or two of sun-rendering, scrape off any dead flies and strain the fat through an old unwashed sock.

Mix equal portions of linseed oil and rendered possum fat. To the oil and fat mixture, I add a few drops of skunk oil. Voila! The final mixture takes on characteristics that are magical. You are now ready to apply one of the best kept finishing secrets of traditional Appalachian woodworkers.

I like to hand-rub my skunk oil finishes. I generally work outdoors at the request of my family. My neighbors aren’t always appreciative of my craft but no one can deny the quality of the final finish. I have a coffee table in my living room that I made a few years ago and finished with my skunk oil recipe. It still looks as good as the day it was finished and appears hardly touched.

If you would like to try my skunk oil finish, you’ll need to stop by my studio in Kentucky to pickup a bottle. Federal postal regulations forbid shipping this product.

I’m a woodworker by nature - a sixth generation woodworker to be exact. However, I call myself an artist. Why? So I can take advantage of artistic license and follow my own path. I’m a traditionalist by choice because it too fits my nature. I have no qualms about pursuing modern ways when I choose to do so. I’m predominately a hand-tool user because it fits my course. Yet, I have no problem plugging into modern tooldom when I see the need. Who I am is the product of where I've been, what I've learned and how I see the world. I have chosen to be my authentic self, yet not be self-centered – it’s a Zen thing. In essence, I am me – authentic yet artistic.

Continued here...

It’s been said about woodworkers that the last thing we do and the first thing our end-users see is the finish. Perhaps that’s why we call this terminal process a finish. Although the unvarnished truth is that design and execution make the piece, it is often the finish that sells it.

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I just finished restoring a little Craftsman DD9-4231 Hand Drill, aka egg beater. I noticed a number stamped on the back shaft near a hole that looked like “710”. After a fruitless Google search to see if the number had any significance, I gave up. Then I turned the drill upside-down. Now the engraving next to the little hole reads “OIL”.

Is this how the new year will go?

I found a box of old wood-carving knives given to me last year by the widow of an old friend. Other than dirt and a little rust, they were easy to cleanup. And, yes, they were still razor sharp. I only cut myself twice.

Is this how the new year will go?

I just had to try out an old brass woodcarvers chisel. The head flew off the handle and broke a glass jar filled with walnut husk dye.

Is this how the new year will go?