# Gamble for Entreprenuer



## blockgear (May 24, 2008)

I have been working out of my garage for 4 years as a second income. In 2010 I got laid off. So I decided to open a brick and mortar store front. I used all my savings and finances to open this store front and stock it. About $50,000 with remodeling, rent, marketing, and inventory. I only pulled in about $12,000 in sales for 2011. Thinking this is my first year as a store front things will grow. Plus with all the talk about small business tax incentives this is now or never. So I went to do my taxes and found that since I only pulled in $12,000 as an income and spent $50,000 I am negative $38,000 for 2011. So I get a $0 return and actually have to pay a penalty for pulling my 401K. I thought how is this possible because I'm investing and starting a business. My tax expert said, that as an entreprenuer the government considers us taking a gamble. That since there was a loss of income, I lost. If I had a job and had the business loss that would have helped. But since I had no real income and was negative I lose. How is this possible? How can the government expect people to start business. Just keep this in mind when you go into business and spend your savings.


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## lben (Jun 3, 2008)

No matter if you'd made any money or not you still have to pay a penalty and pay taxes on that cashed in retirement account. Even though it's your money, you took it out before you reached retirement age. I had the same thing happen to me in 2010.

I hope your storefront does better this year. I'm still working from my basement.


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## dptk (Aug 14, 2009)

I'm not sure exactly what you were expecting, but this is a good lesson for anybody to talk to a tax accountant before starting a business


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## bern (Feb 14, 2007)

Thank you for posting your story , I hope everything picks up for you and best of luck with this years sales .


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## Judon (Jan 29, 2012)

wow.. that sucks.. But, it's true, if you pull from your 401k before the "due date".. you'll pay penalties, it's set up for when you get old, not as a "start a business account". So, that's the reason you paid penalties. 

As far as the negative "income", if you had a primary job also, the negative amount from the entrepreneurship would have offset the amount of your primary income you would pay taxes on. As in, if you made 100k and all of it was taxable income, but you lost $38k on your business, your taxable income would be not the original $100k, but something less, probably not (100-38=) $62k, but something less in any case. A decent Public Accountant or tax lawyer could help with making sure you maximize that deduction. 

However, no matter how "good" the accountant/lawyer is, the penalties for the 401k withdrawal would still apply. 

Some areas have classes on this sort of thing through the "SBA" (Small Business Association) (more specifically SCORE), that for a very nominal fee will teach you alot of the basics of business tax law (and other things). It might be worth looking into, even if your area of SCORE doesn't offer organized classes, you can still get an assigned "coach" of sorts who can help you to be aware of these types of traps. 

Oh, and I can't help myself....I'm gonna throw this grenade.... Next election, vote Libertarian... they are the only party that's actually for free markets and logical tax codes. (sorry sorry sorry... I know I shouldn't have thrown politics in.. ) 

Maybe someone else will be able to learn from your mistakes....and if not someone else... I bet you've learned alot about business in this first year. Congrats on your accelerated learning course in advanced business....

uhhmm forgot the human part..  sorry your first year was tough, I genuinely wish you better business in the coming years. Good luck.


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## TinyRivals (Jan 26, 2012)

I am so sorry that this happened to you. It seems sometimes like the system is anti-entrepreneur. Which makes no sense because it is the American Dream. 

I definitely would tell people to talk to an accountant before cashing in their 401k. There are better ways. I have a friend who used 401k money to open his own gym. But he didn't cash it in. Instead of having his 401k invested in stocks and mutual funds he invested it in his company instead. It took some fancy footwork but it is totally legal.


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## Enrique (Apr 27, 2011)

With all the money invested in the store, surely your write-offs would've offset the 401k penalty? Unless your retirement account was MASSIVE...


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## mordey (Jan 24, 2012)

I agree, you definitely need to talk to an accountant before starting any business! Sorry for your loss, and hopefully you'll make lots of money in 2012!!


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## dmMatrix (Jan 10, 2012)

Actually I think you need to get yourself a new tax guy.... maybe.

If you file a form called a 72(t) you don't have all the penalties... of course there are still taxes but no penalties.

Also, if you take your business start up cost and spread that out over 5 years that actually puts you at $2K in profits for the year (assuming 50K spread over 5 years is 10K a year).

This is just a small little piece of how this stuff works and I am also not a professional.


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## blockgear (May 24, 2008)

Thank you all for your responses. I have learned so much from this forum. I wanted to post this so that people know and can learn from my mistake. It's amazing that if nobody tells us, we don't know. Learned something else, social security goes back 40 quarters(10 yrs.) and if you don't pay into your SS and miss a quarter this will effect your SS payment. Not even close to retirement, but just wanted you to know, if we don't tell eachother we'll never know.


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## lben (Jun 3, 2008)

Great, I'm on disability now. Wonder how that will affect me? I guess I better get busy printing...


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