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I have started a new LLC business in Ohio for which I have acquired multiple amusement vending machines (these are prize redemption machines e.g. claw machines) with the plan to lease space and start a route. I have been trying to estimate potential income per machine as well as future taxes, however, I am unable to determine the tax portion. I don't have very much experience with business taxes, owning an LLC, etc so please bear with me.

I am trying to negotiate a new account with a mall in my area. They would like me to pay $200 per month per machine in rent as well as a 40% break point percentage. There are also other fees that would be included with placing machines such as prizes, monthly insurance, replacing bill acceptors yearly, and general maintenance. These costs add up quickly.

So if I am to pay sales tax on the gross income of each machine, as I believe I am required to in my state, and I also pay tax on the net gains of the business and income tax on the money the LLC pays to me, I may never actually turn a profit. Is my understanding of the number of times I pay taxes incorrect? And are those taxes cumulative?

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    This question is unanswerable without numbers. You are asking if taxes will put you in a loss position, when we don't know your revenue, and we know only a small portion of your expenses. In short: taxes on income cannot create a loss [ie: if you have profit, you pay income tax on a portion of that profit, so you would still have some profit leftover]; taxes on revenue, like sales taxes, may create a loss, but that would typically only happen if you had razor thin margins. Do you even have a forecast of your income and expenses, before covering taxes? – Grade 'Eh' Bacon Jul 27 '17 at 17:28
  • Actually I am asking if I have to pay taxes 3 times. Please read the question before you comment. I never once asked if I will be at a loss. – user60952 Jul 27 '17 at 17:29
  • For instance, if a machine made $600 one month, I would have to pay: $200 rent, $240 percentage, $30ish insurance, $42 sales tax.. At that point I have $88, most of which will be prize and maintenance costs. Then I would have to pay 20-30% tax on any profit, which would probably be 0. If the business somehow made a profit, I would have to then pay an additional 20% tax when I paid myself that profit. Is that process correct? That is what I am asking. I don't care about the actual outcome, just whether or not this is actually how the process would go. – user60952 Jul 27 '17 at 17:47
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    " I could never actually turn a profit?" Right there, you specifically asked if paying taxes would eliminate your profit. And the "number of times" you pay taxes is irrelevant. What's worse, 10 different sales taxes of 1%, or 1 sales tax at 10%? [they are the same]. Now that you have numbers the question is more answerable - you should edit those numbers into your question to provide additional context. – Grade 'Eh' Bacon Jul 27 '17 at 18:09
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    @MicHorvath Grade is trying to help you improve your question. You are the only one here being rude. – Ben Miller Jul 27 '17 at 18:53
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You're not paying taxes three times but you are paying three different taxes (or more).

Sales tax is a business expense, just like costs of goods sold or interest on a loan. Then, depending on how you structure the business, the net income of the business just hits you personally and you pay income taxes. You can work with a tax person to lend some efficiency to this on a long term basis, but it's not like you pay all the taxes against your gross receipts.

Whether or not you can make this profitable is a whole different issue.

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Actually, calculating taxes isn't that difficult. You will pay a percentage of your gross sales to state and local sales tax, and as a single-owner LLC your profits (after sales taxes) should pass through to your individual tax tax return (according to this IRS article. They are not cumulative since they have different bases (gross sales versus net profit).

That said, when determining if your future business is profitable, you need to ask "what aspects of the business can I control"? Can you control how much each item sells for? Increasing your prices will increase your gross margins, which should be higher than your fixed and variable costs. If your margins do not exceed your costs, then you will note be profitable.

Note that as a vendor you are at a slight disadvantage to a retailer, since tax has to be baked in to your prices. A retailer can advertise the pre-tax price, and pass-through sales tax at the point of sale. However, people expect to pay more at a vending machine, so the disadvantage is very small (you aren't directly competing with retailers anyways).

  • Okay, thank you very much! This is a lot clearer than most of the IRS articles I have been trying to wrap my head around. – user60952 Jul 27 '17 at 19:37
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    Well, the IRS is not responsible for telling you how to create a profitable business, so that doesn't surprise me. It's also not responsible for sales taxes. – D Stanley Jul 27 '17 at 19:40
  • I understand. I am not really trying to figure out profitability at this point, just what taxes do I have to pay so I don't get arrested. – user60952 Jul 27 '17 at 19:43
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    @MicHorvath Fair enough, but that's not clear form your question. Your question seems to indicate that you can't be profitable because of all of these taxes. – D Stanley Jul 27 '17 at 20:30
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    @MicHorvath It's not a problem at all - I'm just trying to help you get started. You have to know these things in order to have a successful business. If you "just wing it" you are very likely to fail. – D Stanley Jul 27 '17 at 21:17

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