I'm a CPA with a Masters degree in tax. Note that I don't specialize in small business, but I will give some comments.
Some of the comments others have provided are good, but the best one is to get some professional help with the accounting and taxes.
If you plan on trying to say you have a one man woodworking business, you'll actually have to set things up to prove this is the case. It can be a sole proprietorship, in which case you just file a schedule C with your 1040. Note that you'll be paying Social security and Medicare on the earnings, but half is deductible as a business expense.
You'll need to set up a separate bank account, which is used for the business only. You'll need to set up a reasonable method of accounting for the business, and keep good records. You'll need to record your sales, none of that "cash isn't taxable income" nonsense that many contractors love to do.
You'll need to register your business with the state for sales tax. You'll have to charge sales tax on everything you sell, and file the returns and remit sales tax to the state. This is a big one that helps to prove you're actually running a business.
You can use part of your home, but if you deduct any of the expenses associated with that, you lose the federal exemption on that amount of the gain when you sell the house.
You can use a personal vehicle for the business, and then you can only deduct based on mileage used for business. You'll have to track mileage, and report the business use on another tax form. You will have to inform your insurance that your vehicle is sometimes used for business.
If you buy a vehicle just for the business, you can take deductions for the insurance, gas, repairs, and depreciation, but then you can only use it for business. The mileage option above is usually a better economic choice for most part time small businesses.
And don't expect to be able to continually take losses. That makes it look like a hobby, not a small business. Loss making "businesses" are big red flags.
Last edited by sanchez; 01-28-2016 at 10:25 AM.