Starting a business for some writeoffs

[Bimmerbill]

Anyone have a good link to an executive summary about business deductions?

I got my eye on a nice used pickup truck and would like to write it off as a business deduction for a newly formed business.

Will I be able to deduct it as start up costs, or limited to the profits of the business?

I am hoping to leverage the tax deduction to cheapen the truck a bit!

 

[FlogBlogger]

I deduce this board is not about "business"....

 

[thefed]

usually u are writing it off AGAINST profits....startup costs like a vehicle are often depreciated over time, per IRS rules....


not sure though if business LOSSES for the year offset other income....i assume they do?

 

[SecondCor521]

usually u are writing it off AGAINST profits....startup costs like a vehicle are often depreciated over time, per IRS rules....


not sure though if business LOSSES for the year offset other income....i assume they do?

In the case of a schedule C sole prop, yes, they do. It flows right onto your 1040 on line 12.

I think that is probably true of other "flow through" entities as well, like some partnerships do. But I am definitely not an accountant.

2Cor521

 

[runchman]

Same with an s-corp. Even though my laundromat puts money in my pocket, after depreciation expenses it looked like it lost $10k, which came off of my 1040 income.

- John

 

[saluki9]

Start up costs can be deducted up to $5K. The remainder must be amortized over not less than 180 months. In order to qualify they must be expenses that would otherwise be deductions in an operating business. (which a truck is not) a truck is depreciable property and not expensable. It would be considered a MACRS 7 year asset. However you could deduct the whole thing under a section 179 deduction.

I would suggest that you really should have a business purpose and not try to just deduct a new truck. The service tends to frown upon that.

 

[WM]

I have been looking in to starting a business also, but have only done very preliminary reading. One thing I read that was emphasized is that you should start the business first (advertise, etc.), and then do your shopping - this will maximize the tax advantage. Don't know the answer to your specific question, though, sorry.

I was reading NOLO's Home Business Tax Deductions.

 

[saluki9]

I have been looking in to starting a business also, but have only done very preliminary reading. One thing I read that was emphasized is that you should start the business first

That would be correct. Once you pass $5K in startup costs you have to capitalize all the expense after that. So you do maximize your benefit by first starting the biz, then making your purchases.

 

[thefed]

Same with an s-corp. Even though my laundromat puts money in my pocket, after depreciation expenses it looked like it lost $10k, which came off of my 1040 income.

- John

i was always intrigued by lundromats....figured it would be a nice cash business to run...hows it working out? minimal hours needed i assume to tend to it?

 

[FinanceDude]

I would suggest that you really should have a business purpose and not try to just deduct a new truck. The service tends to frown upon that.

Like my client that bought 4 new $250,000 bulldozers in a windfall year?? Hey, I'm not his CPA..............

 

[runchman]

i was always intrigued by lundromats....figured it would be a nice cash business to run...hows it working out? minimal hours needed i assume to tend to it?

It's not bad if you are good at fixing stuff. Mine is small, isn't making me a ton of money, but it's some extra cash for relatively little time involvement.

- John

 

[perinova]

Best source of info fpr business tax deductions is.....

believe it or not.....

the IRS.

the deduction is probably not limited to the profit of the business but needs to be depreciated over 5 years or you can use section 179 and write off up to about $3,000 maximum per vehicule.
also the depreciation is prorated if the use is not 100% for business.

Of course: - usual dislaimer - always consult with your financial advisor first

I am not sure you can create a business for some write-offs. You need a real business purpose, customers and to make profit at least 3 years out of 5 (I think). Or it will be considered a hobby and your deductions disallowed.

 

[WanderALot]

i was always intrigued by lundromats....figured it would be a nice cash business to run...hows it working out? minimal hours needed i assume to tend to it?

I can see the cross-marketing opportunities now: "Gets your ducts cleaned, your lawns mowed AND your laundry done"

Not mocking you, I really admire your drive!

 

[runchman]

Being a laundromat owner we *do* have to get our ducts cleaned once in a while, so I suppose you would save a bit on that if you have a duct cleaning company !

 

[FlogBlogger]

I deduce this board is not about "business"....

I wonder if I can deduct that false deduction....

 

[Peaceful_Warrior]

I am not sure you can create a business for some write-offs. You need a real business purpose, customers and to make profit at least 3 years out of 5 (I think). Or it will be considered a hobby and your deductions disallowed.

This information is slightly misleading. The guidelines say profit in 3 years of 5, but that's not a hard and fast rule. What really matters is the intention and the way the business is run.

Also, note that not all deductions will be disallowed for a hobby. Specifically, you can still take all expense-related deductions for the hobby as long as those deductions do not exceed the income from that hobby.

The primary advantage of the home-based business vs. a hobby is that if the business takes a loss, the loss can be carried against personal income tax (which in most cases is higher than that of what your business will pay).

 

[perinova]

This information is slightly misleading. The guidelines say profit in 3 years of 5, but that's not a hard and fast rule. What really matters is the intention and the way the business is run.

Also, note that not all deductions will be disallowed for a hobby. Specifically, you can still take all expense-related deductions for the hobby as long as those deductions do not exceed the income from that hobby.

The primary advantage of the home-based business vs. a hobby is that if the business takes a loss, the loss can be carried against personal income tax (which in most cases is higher than that of what your business will pay).

This topic (hobby vs business) is big gray area. One thing to remember your hobby can be a business but needs to make profit. And yes sometimes the IRS lets you make deduction if you are not making profit 3 out of 5 years depending on other circumstances...

Sometimes you may have to fight the IRS to get your deductions. From what I read - if you post a loss the IRS is likely to have a very close look at your "business enterprise" and you should be ready when they call you for an (good) explaination.

I didn't know that you could deduct expenses in a hobby up to your income. It looks like you deduct hobby income/expenses on schedule A so it is to be compared with the standard deduction.

http://www.irs.gov/newsroom/article/0,,id=169490,00.html

 

[Bimmerbill]

The whole business v hobby thing is confusing. I think you get better tax treatment with a business.

I'd never do anything shady, but I like to take full advantage of all legal tax incentives.

 

[Peaceful_Warrior]

The whole business v hobby thing is confusing. I think you get better tax treatment with a business.

I'd never do anything shady, but I like to take full advantage of all legal tax incentives.

It sounds more confusing than it is. To make it simple, it goes something like this:

- With a hobby, you can only deduct as much expenses for income you had. Therefore, if you have $2000 of expenses and only $1000 of income, you can deduct $1000 of those expenses.

- With a business, you can deduct all of your expenses regardless. Therefore, if you have $2000 of expenses and only $1000 of BUSINESS income, you can deduct all of the $2,000 from your tax return (so in effect you've used $1,000 of business expenses to reduce your personal income tax).

The key differentiator between the two is to ask yourself: "Do I run this like a business or a hobby?"

A few things that typically show it's a business where hobbies tend to lack:
- Profit motive
- Business and marketing plans
- Good bookkeeping records

Also a minor note about the hobby... I believe (but am not certain) that you can still carry your losses forward. So suppose you lose $1,000 for 5 years (so $5,000 total in carry-forward losses from your hobby). Then in year six you have a profit of $6,000 (after you've accounted for that year's expenses).

In this year 6, then you'll be able to duduct all of your previous $5,000 of carry-forward losses, and thus you only pay tax on $1,000 of this year's profit.

 

[inquisitive]

I've seen it written in a lot of places that starting a business is one of the best ways to lower taxes, just one place being Asset Protection 101, a new book in the Trump series, but I haven't understood the basic premise for the following reason:

I think the idea is that by starting a business there are many more possible business deductions, but if these were from new, business-related expenses, then you'd actually be paying more money because you'd only get the tax bracket dependent savings and would be paying the other 85% or so depending on the bracket. So basically one would have to deduct expenses that they are already incurring but wouldn't normally qualify for without the small business. Is this how it works? Wouldn't it follow that one would have to justify old expenses with the new business?