Equipment depreciation guidelines.

[careyb]

Man, now you guys are starting to confuse me! I'll try to help again but it may just be me thats causing the confusion. I'm sure its not anything to do with the exquisitely clear IRS guidelines.

CowboyDoc, according to the IRS there is no "Hobby Business". If it is a hobby they will not allow you to deduct expenses for it. At all. Your toy, you pay for it. If it is a business you can deduct "reasonable and ordinary expenses". I won't even get into what the IRS considers reasonable and ordinary. Back to section 179 - you can deduct 179 expenses up to the maximum of business income - for that business. If you split the asset basis among several businesses then I guess you could allocate the section 179 expenses accordingly. You would want some very well thought out and accurate documentation on usage and cost basis to show the IRS if they came to visit.

As far as the laptop, it is a "listed item" (ie subject to abuse as far as personal use vs. business use). If you use it for business AND personal use it can be a problem. If your company buys it and you use it strictly for the company then it is not a problem.

If you don't want to pay a CPA then just get the tax publications for Sch. C and depreciation. They can be somewhat complex but if you get a worksheet and go through the instructions step by step (with a highlighter if needed) you can generally work it out. Also, to give credit where credit is due the IRS has one of the best government run sites on the internet and has for years. You can find every answer, publication, and form there.

Good luck guys.

 

[Wingnut]

thanks Carey ... sorry, wasn't looking for free advice .. just clarification of what you were saying.
Yeah, I'm sure that the laptop is something they'd have to consider "suspect" ... but siunce I have 9 personal computers and 5 laptops (albeit some are starting to show their age a bit) I'm sure I'll have no problem showing exclusive use.
Pay a CPA? No offence intended, but the only time I did that is the only time I was ever audited.
Thanks again for the clarification.

regards
wingnut

 

[PaulT]

Yeah, but you can add up ALL of the things that are unreimbursed company expenses and deduct the portion of that total that exceeds 2%. It isn't meant to be a yardstick for each individual expense.

 

[PaulT]

Carey,

<font color=red>you can deduct 179 expenses up to the maximum of business income - for that business.</font color=red>

This is not true. As Cowboydoc stated <font color=blue>...the limit of your deduction is limited to the TOTAL net income and losses for ALL trades and businesses you actively conducted throughout the year. Income includes section 1231 gains or losses, interest from working capital on your business, and wages, salaries, or tips as an employee.</font color=blue>

What that means in practical terms is:
IF you run a business (that is, not disqualified as a hobby business as defined elsewhere in IRS guidelines)
AND it qualifies (not all businesses qualify, but specific farming businesses do, including nurseries, tree farms, horse farms and grape vinyards)
AND you buy some equipment for that business
Then you may EXPENSE that equipment up to a maximum of $24000 (for tax year 2001).

That is all the code says. If that legitimate expense happens to generate a loss, and you have other sources of income (a day job, lets say, whose income is represented by a w-2 statement), then your tax liability is offset by your share of the loss generated by the business. If it is an S-corp, or sole proprietorship, (or maybe LLC, not sure), then the loss applies DIRECTLY AND IN FULL to your 1040 tax return (assuming you did your business tax return correctly). This does not apply if it is a C corp. For that the loss stays within the company, and you "take the hit" in your owners equity, effectively "limiting" its use to the C corp. But I would argue that doesn't apply here, since no one who had competent advisors would be operating a small scale company as a C-corp. If you are operating a sufficiently large concern to merit c-corp status, you should not be asking for your tax advice here/w3tcompact/icons/blush.gif

Of course, with all of that said, you shouldn't take the loss if this was one of the years you needed to show a profit to the IRS to qualify as a "business". You can always take the expense in the form of depreciation - a non-cash expense that doens't affect your status with the IRS as a "non-hobby business". For that determination, I believe the guidline states "operating profit", which is before non-cash expenses like depreciation and amortization/w3tcompact/icons/wink.gif

(Note to CareyB: The IRS does have a definition of a "hobby business". It was described earlier in this thread, and it is used to DISqualify folks from these tax breaks. You are correct that no "partial" breaks exist for hobby business owners, but they DO define a hobby business in the code.)

Make sure you all utilize the tax code to its fullest. After all, its your IRS!!!/w3tcompact/icons/wink.gif

 

[cowboydoc]

Yes Paul you are correct about a "hobby business". If you make money at your hobby you must declare this income. However, you can deduct expenses for that business but they cannot be more than the profit.

In Wingnut's case then where he doesn't have a legitimate business with the mini's then if he does sell a mini and doesn't do it on "cash" terms he can report the income and then deduct any expenses for that income.

Most people don't mess with this as it's much easier just to take cash and put it in your pocket and not even bother with reporting it. I have alot of friends in horses, training, and cattle that do this. They just pocket the cash and never worry about the tax part of it.

 

[PaulT]

At the risk of splitting hairs, I think what you describe (a small "hobby" business that makes some money and incurs some expenses) is NOT a hobby business to the IRS, and therefore the expenses are legitimate and NOT restricted to only ofsetting that businesses expenses. The point of the IRS definition is to DISQUALIFY illegitimate hobbies from taking business expenses. Once they determine yours is a hobby, you cannot deduct your expenses (but you also don't have any income to report, either). The only condition a business must meet to avoid being classed as a hobby is that it must make an operating profit in 3 out of 5 years. This means that active, cash income (or accrued income if thats how you count it) must exceed active, cash expenses (again, or accrued if you account for it that way). End of story. You only need to make $1 to satisfy this criterion. Therefore, if you have a little business that makes money, you DONT have a hobby business, and you can expense ALL legitimate expenses, even if it results in a loss for the company (as long as you don't do this 3 years in a row!). The best situation for ongoing businesses like these is to make an operating porfit, and then have depreciation expense (non-cash) that generates a loss on paper. There are limitations on how much of this paper loss you can apply to your ordinary income per year, but you still get a nice benefit. Its somewhat of a grey area during an audit, and it is best if you have some means of proving your business, like a business plan. A field full of christmas trees works pretty well, too, to prove you are operating a tree farm!!

Yes, I've been through all of this with a fine tooth comb, since this year marks the first return I will file that really takes advantage of all of this. I hope I havn't left ONE CENT on the table that is available to me legitimatley through the tax code.

 

[TerryinMD]

Since I'm the one that started this thread, I guess it's time to let you guys know how things have went/are going.... /w3tcompact/icons/smile.gif

A lot of information has been shared which really helped me understand a business plan and depreciation. Thank you, Thank you, Thank you!! /w3tcompact/icons/smile.gif/w3tcompact/icons/smile.gif

With this basic understanding, a little research, and TaxCut, I was able to get throught my taxes over the past few weekends. I'd work on them, set them aside, and then revisit to make sure I was doing the right things. I used a mixture of 179 and normal depreciation. I just couldn't justify writing everything off against the gross receipts we had this year. I do not expect to purchase a lot of equipment this year and needed to hold back on the depreciation to help with next years tax season. The net was that we are getting back some of our hard earned money from last year!! /w3tcompact/icons/smile.gif/w3tcompact/icons/smile.gif/w3tcompact/icons/smile.gif

Terry

 

[Wingnut]

True ... but if I start getting up towards $2500 in non-reimbursed expenses ... I'm going to start wondering what I'm doing ...

I did the math and tossed the deduction for the laptop ... ended up not affecting the total.

Now to sell a horse so I can use some of the $28,000 in deductions patiently sitting there .....

 

[LazyK]

Excuse me. Could somebody give me directions to the John Deere "Hobby Store?"

 

[LazyK]

Doc...I would appreciate seeing a business plan for a horse operation. We've evolved Lazy K Stables from a 2-3 horse boarding operation in Alaska to the present business here in Washington providing facilities for lease to individuals, trainers, and all manner of horse organizations. As a corporation, my wife(President) and I(CEO) have never executed a formalized business plan. At our next executive staff meeting, I would like to present a motion to execute a business plan on a 5-year operational forcast so we at least establish a base-line measurement of estimate vs actual. Examples of other business plans would help me flesh out the frameworkof a realistic and dynamic tool for operating intelligently and avoiding any unnecessary Imperialinterrogations. My FAX: 253-857-2358...Thank You.

 

[cowboydoc]

Lazy K,
As I'm sure you know my business plan has alot of personal info. that I sure wouldn't want as public knowledge. We've got corporate stuff on their and personal id things, etc. I would sure be willing to fax you over the outline that I used though. Or you can order a book that has a number of examples in it from amazon. It's called Starting and Running Your Own Horse Business by Mary Ashby. It's got a great outline and step by step directions on how to write out your own business plan as well. If you have Q's while you're doing it I would sure help you with that as well. Hope you understand about not sending my personal one though.

 

[TerryinMD]

All -

Here is a site which may be able to help also... <A target="_blank" HREF=http://www.planware.org/>Business Planning</A>

Terry

 

[LazyK]

Doc...thank you for your reponse. You gave me the lead on a horse-specific publication which I will review. A related outline and format is all I'm looking for, not anything proprietary. Sorry for mylack of precision in wording my inquiry. I appreciate your patience and thoughtfulness.

 

[Anonymous Poster]

I may be able to offer some help to a lot of you. I've worked in the tax area for the last 17 years. It would be impossible to answer all of your tax questions via posting, so I'm going to refer you to the IRS web page. Here you can download publications that will answer all of the questions I've seen posted. Here are a few to get you started:

Publication 334 - Discusses taxes for small businesses (including depreciation and the section 179 expense)
Publication 535 - Discusses business expenses that are deductible, including a discussion of the "hobby loss" rules.
Publication 583 - Discusses starting a business and record keeping
Publication 225 - This is a guide for farmers

The IRS web page is at http://www.irs.gov.

I don't blame most of you for wanting to do your own taxes, but there are cases where a good CPA can be invaluable and may actually save you money by finding deduction that you do not know about or by mitigating your audit risk by presenting deductions in an appropriate manner.

Hope the helps.

 

[TerryinMD]

Mark,

Shameless self-promotion.... /w3tcompact/icons/wink.gif/w3tcompact/icons/laugh.gif

Hey, thanks for the specifics about the IRS publications.

Terry

 

[Anonymous Poster]

Terry,

I'm sure you were just joking, but seriously, there was no self-promotion intended. I don't even work in public practice anymore. During the years when I did practice as a CPA I found many previously filed returns that, if prepared correctly, would have resulted in much lower taxes due. No offense intended, but the postings above are evidence that a lot of people are preparing their own returns without fully understanding the tax laws.

Thanks, Mark B.

 

[TerryinMD]

Mark,

I was just joking about the self-promotion..... /w3tcompact/icons/smile.gif

Yes, I do believe that most of the reponders do their own taxes. Seems like a lot of the TBNers are confident with their own work and are very self-relient, I being one of them.

You are probably very correct in missing some the deductables. However, I feel as though I reduced mine enough to feel comfortable with my choice. I've contemplated using an accountant. May choose that course next year to see how close we come. If this were a full time business, I would highly consider it. The business, in it's current state, is small enough for us to manage with COTS applications.

Terry