tax issues

[Alan L.]

I understand what you mean. don't try to use a business that cant reasonably support or justify having a tractor. I'm not trying to use a fictional business to shield taxable income. I'm just trying to figure out what are some reasonable, legal ways of reducing taxable income. I,ve allways just used a standard deduction and was in the market for a tractor and through conversation put 2 &2 together. Also looking into itemizing it seems there is only so many things That seems realistic that I will qualify for, mainly mortgage intrest. No donations and no major medical. Im healthy and I don't make enough money to donate. I'm not adopting and I havent given refuge to displaced hurricane victims. My non reimbursed job related exspenses are minimal. No educational intrest payments (obviously not for accounting school). And the list goes on of things that I cant deduct for or am not intitled to a credit for. If I can start a valid business (probably in some form of construction or other specialized labor type field) Then there seems to be a whole lot of deductions that I can now take advantage of. I am assuming that I will have a large amount of exspenses for equipment and such in the begining and probably a minimal amount of business income. I'm definitley going to try to pick a business that will be profitable. I look forward to the day that I have to start worrying about paying too many taxes from the big bucks my business will make.
Also for all you accountants out there can you use your cell phone as your business phone and still recieve and make personal calls on it and write off your monthly bill.
I have about $10,000 -$20,000 worth of tools.( nail guns, saws, enclosed trailer), you know construction tools. Once I start up a business can I depreciate the worth of these tools against my income my business made in exchange for the use of these tools. If so is it replacement cost since I wouldn't have reciepts for all of them- replacement cost 20,000. or value of used tools with no reciepts worth maybe 10,000.
I pose the same question for my vehicle that I bought this year and am making payments on. If I start something up soon or more likely next year can I depreciate my truck note if I mainly use it for getting to and from for business reasons.
I will definitely be getting with a cpa when I get In from Offshore in about three weeks. Until then I 've been enjoying the insight and the corspondence. So please continue to share your wisdom.
Thanks, Oceaneering.

When you convert an asset from personal to business use you can start depreciating its value up to the original cost. However if you can't prove the original cost you might run into a problem if examined. If its pretty obviousl that the value you are using is reasonable and less than the cost, it would probably be OK, even without receipts.

You can deduct the business portion of your cell phone. Technically you would need to log your calls or analyze your statement to come up with a percentage business versus personal. You can deduct vehicle expenses to the extent of business use. Here again, its business miles divided by total miles to develop a business percentage. Or you can use the IRS per diem rate for miles driven, and deduct the business percent of the interest on top of that.

Business expenses are deductible regardless of whether you itemize or take the standard deduction. The standard deduction is in place of personal deductions like home mortgage interest, taxes, and contributions, and not in place of business deductions that you can deduct anyway, even when you use the standard deduction. The key is that you have to have a trade or business that you entered into for a profit.

IRS Circular 230 Required Notice: IRS Regulations require that I inform you that any U.S. federal tax advice contained in this communication is not intended to be used and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code or for the purpose of promoting, marketing or recommending to another party any transaction or tax-related matter.

 

[oceaneering]

When you convert an asset from personal to business use you can start depreciating its value up to the original cost. However if you can't prove the original cost you might run into a problem if examined. If its pretty obviousl that the value you are using is reasonable and less than the cost, it would probably be OK, even without receipts.

You can deduct the business portion of your cell phone. Technically you would need to log your calls or analyze your statement to come up with a percentage business versus personal. You can deduct vehicle expenses to the extent of business use. Here again, its business miles divided by total miles to develop a business percentage. Or you can use the IRS per diem rate for miles driven, and deduct the business percent of the interest on top of that.

Business expenses are deductible regardless of whether you itemize or take the standard deduction. The standard deduction is in place of personal deductions like home mortgage interest, taxes, and contributions, and not in place of business deductions that you can deduct anyway, even when you use the standard deduction. The key is that you have to have a trade or business that you entered into for a profit.

IRS Circular 230 Required Notice: IRS Regulations require that I inform you that any U.S. federal tax advice contained in this communication is not intended to be used and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code or for the purpose of promoting, marketing or recommending to another party any transaction or tax-related matter.

Ok, That really makes sense. I was under the impression that you could file a standard deduction or choose to itemize. Let me make sure I understand you. Example one :
I use standard deduction for 10,300 for married filling joint. I claim 12,800 for 4 dependents, total 23,100.
Now I figure my business into it. business made 10,000. subtract 5,000 for milage($ per mile), 500 for cell phone bills(a %), 4,500 for new equipment and 10,000 for personal assets being converted to business ( I assume now my personal assets will belong to the business).
My business just showed a loss of -10,000. I can now combine that with my 23,100 standard deduction and exemptions to subtract 33,100 from my earned income to come up with my AGI or did I missunderstand you. I do understand that I might have to depreciate certain items instead of instantly deducting them. Is there a list of items that need to be depreciated and what percentages versus items that can be written off in the first year.
Example 2:
Same business situation -10,000 loss. 12,800 worth of exemptions. now I itemize my mortgage intrest, taxes ect...totaling 11,000. now I deduct that 33,800 against my earned income and come up with a AGI.
SPeaking of deducting taxes can you explain a little bit about state tax paid affecting federal tax and federal tax affecting state tax.
Thanks for your continued explanations. I'm really soaking this stuff up.

 

[randy41]

itemized deductions are deducted after agi. a loss from a business is deducted before agi. you still choose between itemized or standard. it has nothing to do with your business profit or loss. UNLESS your business is really a hobby in which case you can deduct hobby expenses to the extent of hobby income as a miscellaneous itemized deduction subject to a 2% of AGI floor.
state income taxes are an itemized deduction on the federal return. federal taxes are not deductable (except maybe in alabama).
you dont really have to know this stuff. theres plenty of tax prep software out there to guide you (turbo tax etc).

 

[Dougster]

This is a very interesting thread for me as I was just laid-off after 18 years and will now be trying to survive financially using (among other things) the heavy duty pickup truck and compact tractor I recently bought for personal land reconstruction. I plan to get the proper state operator's license, incorporate for liability protection and start-up my small business... and I've been wondering about many of the same things.

My business will not be farming; rather, it will likely include some "yet to be determined" mix of site/landscape prep work, boat & motorcycle transport and snowplowing. The exact mix will depend as much on insurance costs, luck and opportunity as anything else.

For the CPAs: Does the SBA have anything to offer a small-time, laid-off guy like me? Or should I wait until I'm able to show a profit and want to expand?

Dougster

 

[oceaneering]

This is a very interesting thread for me as I was just laid-off after 18 years and will now be trying to survive financially using (among other things) the heavy duty pickup truck and compact tractor I recently bought for personal land reconstruction. I plan to get the proper state operator's license, incorporate for liability protection and start-up my small business... and I've been wondering about many of the same things.

My business will not be farming; rather, it will likely include some "yet to be determined" mix of site/landscape prep work, boat & motorcycle transport and snowplowing. The exact mix will depend as much on insurance costs, luck and opportunity as anything else.

For the CPAs: Does the SBA have anything to offer a small-time, laid-off guy like me? Or should I wait until I'm able to show a profit and want to expand?

Dougster

You are right Doug, this is an interesting thread. I had figured that this was helping to clear up a bunch of ideas and misconceptions for someone besides me. Thanks to Randy and Alan.
Doug maybe I will start a new thread on starting a new business. look for it

 

[Alan L.]

Ok, That really makes sense. I was under the impression that you could file a standard deduction or choose to itemize. Let me make sure I understand you. Example one :
I use standard deduction for 10,300 for married filling joint. I claim 12,800 for 4 dependents, total 23,100.
Now I figure my business into it. business made 10,000. subtract 5,000 for milage($ per mile), 500 for cell phone bills(a %), 4,500 for new equipment and 10,000 for personal assets being converted to business ( I assume now my personal assets will belong to the business).
My business just showed a loss of -10,000. I can now combine that with my 23,100 standard deduction and exemptions to subtract 33,100 from my earned income to come up with my AGI or did I missunderstand you. I do understand that I might have to depreciate certain items instead of instantly deducting them. Is there a list of items that need to be depreciated and what percentages versus items that can be written off in the first year.
Example 2:
Same business situation -10,000 loss. 12,800 worth of exemptions. now I itemize my mortgage intrest, taxes ect...totaling 11,000. now I deduct that 33,800 against my earned income and come up with a AGI.
SPeaking of deducting taxes can you explain a little bit about state tax paid affecting federal tax and federal tax affecting state tax.
Thanks for your continued explanations. I'm really soaking this stuff up.

Pretty close. As Randy pointed out, mechanically you would figure the business profit or loss and then further down your return you would either take the standard deduction or itemized deductions.

One reason you figure the business profit first is that you pay self employment tax on that in addition to income tax. Of course if its a loss there would be no SE tax.

Under section 179 you can write off tangible personal property used for business that you purchase (up to the limit) but you can't immediately write off assets you already had and converted. For these assets, you would have to spread over a period of 5 to 7 years.

I hope you are learning just enough here to know you should talk to a professional tax preparer.

 

[oceaneering]

Pretty close. As Randy pointed out, mechanically you would figure the business profit or loss and then further down your return you would either take the standard deduction or itemized deductions.

One reason you figure the business profit first is that you pay self employment tax on that in addition to income tax. Of course if its a loss there would be no SE tax.

Under section 179 you can write off tangible personal property used for business that you purchase (up to the limit) but you can't immediately write off assets you already had and converted. For these assets, you would have to spread over a period of 5 to 7 years.

I hope you are learning just enough here to know you should talk to a professional tax preparer.

Most definitely I am realizing that I need help. But I would like to share a story with you. I,m a supervisor in my line of work. I often train people. Most of the time people dont really seem that intrested in learning. Recently I had one technichian show and intrest in learning and a capacity to retain. I complimented him on his attitude. I was happy to teach someone that was happy to learn. He told me he was interested in learning how a certain machine worked because then he could think about what he could make it do. You are a cpa. For you its probably easy. For a lot of other people its difficult. The more we know about the system the more we can make the system work for us. Taxes is a topic I have taken an intrest in recently and ive asked questions to coworkers, some of whom have a part time business on the side. I,ve also looked up info on the net. sometimes it seemed pretty straight forward but not as understandable as you guys. and some of it was confussing. I,ve never dealt with a cpa so I didn't know how much help they would be in planning a business. and a lot of those co workers gave some really misleading advice. and when asked a direct question would say oh I dont know i just bring my cpa my reciepts. I didn't want to be that guy.
You guys have posted some really good info on here. Thanks

 

[Dougster]

Under section 179 you can write off tangible personal property used for business that you purchase (up to the limit) but you can't immediately write off assets you already had and converted. For these assets, you would have to spread over a period of 5 to 7 years.

What about assets bought during the same tax year that a person starts their new business? More to the point, what determines the date one actually "starts" their business? I assume most businesses actually start-up long before the door opens or advertising starts.

Part of the reason I bought a truck and tractor as big as I did (i.e., much bigger than I needed for my own personal yard work) was because I knew this lay-off would be coming someday soon. I didn't know how soon, but I knew soon. I would not have been able to finance either had I waited until I was laid-off and had no income at all. It was kind of a Catch-22 situation. Buy this equipment while still employed or not be able to buy it at all.

If I managed to screw myself tax-wise by buying too much of the necessary equipment too early, can I sell this equipment to someone for a month or two, officially start my business (as the tax laws may define) and then buy it back? Sounds like it might be worth the hassle for the accelerated depreciation... Yes?

Dougster

 

[Dougster]

You are right Doug, this is an interesting thread. I had figured that this was helping to clear up a bunch of ideas and misconceptions for someone besides me. Thanks to Randy and Alan.
Doug maybe I will start a new thread on starting a new business. look for it

I will do that! Using my new truck and tractor for income is no longer an interesting concept, option or idea. Now it is an imperative. After holding off for years on my yard reconstruction work, I finally broke down and bought my truck and tractor... and then was terminated exactly 24 hours after buying the latter. I certainly knew it was coming someday, but I never dreamed I was going to be jobless 24-hours after spending well over $40,000.00. Mama Mia!!!

So now I need business advice fast. To survive, I will have to depreciate this expensive new equipment this year while I still have sufficient taxable income to offset. Hopefully, that will recoup enough of the purchase price so I can buy the remaining necessary equipment... i.e., trailers, grapple, snowplow, boat mover et al.

One big question: Can I start off as a sole proprietorship this year so I can take the big equipment depreciation on my 2006 taxes... and incorporate next year for the liability protection I'll most certainly need for the bigger, riskier jobs & employee issues. I know it could be awfully risky for a few months, but there are certain complexities and implications concerning how I should incorporate (e.g., LLC vs. "S" corporation) and I don't want to rush it. I also won't have enough money to afford the CPAs and lawyers I will need until the first quarter of next year.

Dougster

 

[oceaneering]

I will do that! Using my new truck and tractor for income is no longer an interesting concept, option or idea. Now it is an imperative. After holding off for years on my yard reconstruction work, I finally broke down and bought my truck and tractor... and then was terminated exactly 24 hours after buying the latter. I certainly knew it was coming someday, but I never dreamed I was going to be jobless 24-hours after spending well over $40,000.00. Mama Mia!!!

So now I need business advice fast. To survive, I will have to depreciate this expensive new equipment this year while I still have sufficient taxable income to offset. Hopefully, that will recoup enough of the purchase price so I can buy the remaining necessary equipment... i.e., trailers, grapple, snowplow, boat mover et al.

One big question: Can I start off as a sole proprietorship this year so I can take the big equipment depreciation on my 2006 taxes... and incorporate next year for the liability protection I'll most certainly need for the bigger, riskier jobs & employee issues. I know it could be awfully risky for a few months, but there are certain complexities and implications concerning how I should incorporate (e.g., LLC vs. "S" corporation) and I don't want to rush it. I also won't have enough money to afford the CPAs and lawyers I will need until the first quarter of next year.

Dougster

Dougster, what a daleima. I,ve been reading up on internet about forms of business. Dose this make sense form an LLC and for liability. LLC,s can be filed like a sole p. for tax purposes as long as they have 1 owner and follow other criteria. At least that was the way I understood it. I will look at it again.

 

[randy41]

one of the requirements for a 179 deduction to be taken is a profit...you can use your w-2 from a completely different job when figuring your profit. you cant use other income such as interest and dividends to do that. If you file a joint return your spouses w-2 or business income can be included too. But her business loss is also included.
i do not advocate setting up a fictional situation to generate tax savings.
also be aware that depreciating or taking a 179 deduction reduces the basis of the asset and can trigger taxable income in the future if the asset is sold.
i cannot stress the importance of getting advice from a CPA who will also be doing your tax return and who charges you money.

 

[Dougster]

Dougster, what a dilemma. I've been reading up on internet about forms of business. Does this make sense form an LLC and for liability. LLC's can be filed like a sole p. for tax purposes as long as they have 1 owner and follow other criteria. At least that was the way I understood it. I will look at it again.

The problem for me is that I currently live in the People's Republic of Taxachusetts where you apparently need at least two people to start an LLC. One person... like me alone... I can't do it by myself.

So much for that "preferred" option... unless I want to burden my girlfriend or the old folks or one of my kids with a bunch of complicated tax return BS. Looks like I am stuck with the "S" corporation option for now.

Dougster

 

[randy41]

go read my post undder the starting a business thread doug

 

[Dougster]

one of the requirements for a 179 deduction to be taken is a profit...you can use your w-2 from a completely different job when figuring your profit. you can't use other income such as interest and dividends to do that. If you file a joint return your spouse's w-2 or business income can be included too. But her business loss is also included. I do not advocate setting up a fictional situation to generate tax savings. Also be aware that depreciating or taking a 179 deduction reduces the basis of the asset and can trigger taxable income in the future if the asset is sold. I cannot stress the importance of getting advice from a CPA who will also be doing your tax return and who charges you money.

Thanks Randy. I know you are right about getting a CPA involved as soon as possible, but when there isn't enough income right now to pay the mortgage, COBRA costs, truck loan et al... and still put food on the table... well, what can I say?

In regard to the "fictional situation"... I wouldn't describe it as a fictional situation at all. My intent is crystal clear and this will be a very real business. It has to be now that I am laid-off. I have no other options. If I made a mistake buying my truck and tractor a few weeks before opening my door... I am only trying to rectify that mistake. I can't imagine the IRS... as nasty as they might be... would not understand me taking steps to fix an inadvertant and unintentional error.

Then again, I still believe in the Easter Bunny!

Dougster

 

[California]

To survive, I will have to depreciate this expensive new equipment this year while I still have sufficient taxable income to offset.

You probably need to gather proof to show that you began organizing the business prior to making the purchases, if you wish to depreciate the full cost you paid. Otherwise you will probably be required to start depreciation from the lower value of used equipment, maybe its tradein value, on the day you place it in service.

I don't know if you can depreciate inherited tools since the cost to you was zero.

Get these points verified by a CPA, in fact verify all the advice you see in this thread, before you rely on it!

If I made a mistake buying my truck and tractor a few weeks before opening my door... I am only trying to rectify that mistake. I can't imagine the IRS... as nasty as they might be... would not understand me taking steps to fix an inadvertant and unintentional error.

Then again, I still believe in the Easter Bunny!

I used to audit time&materials costs claimed for Change Orders on huge public works contracts. The auditor has no authority to interpret intent, he simply verifies that claimed costs are allowable under the applicable standard. There is no Easter Bunny standard.

 

[Dougster]

You probably need to gather proof to show that you began organizing the business prior to making the purchases, if you wish to depreciate the full cost you paid.

That would be no problem at all. This layoff... and my business-based survival plans... have been in the works for over one year. I have plenty of records to prove it.

Otherwise you will probably be required to start depreciation from the lower value of used equipment, maybe its trade-in value, on the day you place it in service.

Holy Cow! Neither the truck nor the tractor have been used more than a few hours since purchased in late-August.

I don't know if you can depreciate inherited tools since the cost to you was zero.

Nothing I have was inherited. Not a single bolt. It was all purchased equipment.

There is no Easter Bunny standard.

Damnation! There goes another one of my core beliefs. Is nothing sacred anymore???

Dougster

 

[Alan L.]

Whew. There's alot of stuff on here. I won't attempt to address all of it.

If you inherit an asset, its basis is the value on the date of death. Say you inherit a piece of equpment worth $10,000 when grandpa died. You place the equipment into service when it is worth $8000. You can depreciate the business portion of the $8000 over several years, but you can't take a 179 deduction on it (deduct it all at once).

Randy made a good point in that, if you take 179 and write off all of the cost of an asset you would have to give back some of the tax savings later if you convert the asset back to personal use or sell it.

There are many areas of the tax law that are very simple and you don't need a CPA. If you operate any kind of business or rentals you really need one. There are many ways you can screw it up. You can get a free meeting, lay out your problems, get a little free advice, and a good idea what the work will cost.

There is no one "best" entity structure that everyone should use. It takes a careful study of your situation to advise you in this area, and it can be affected by the states you operate in.

I have been at it for 29 years and I have to do research every day. There is just too much to remember, and it changes almost every year.

 

[California]

I have been at it for 29 years and I have to do research every day. There is just too much to remember, and it changes almost every year.

Dougster and oceaneering, listen to Alan L. Go see a CPA.

You need that expertise on your side now, not after it is too late.

Tax law is complex and it doesn't follow the rules of logic. You can't just think through 'what would be the right thing to do' and expect to get by.

 

[DavesTractor]

.... Im healthy and I don't make enough money to donate. I'm not adopting and I havent given refuge to displaced hurricane victims. ....
Thanks, Oceaneering.

This may be off point, but it is from your post. Nobody ever makes enough to donate, there are always places to spend all your money, no matter how much you make, or how little. It's a great thing to give to charity, religious or non-religous. The odd thing is that the more generous a person is, the more he seems to make...not the other way around. From a tax standpoint, when you start itemizing, you can deduct even a real modest charitable contribution. I'd encourage it if you can. OK, off my soapbox now, and no offense meant to anyone that has seriously fallen on hard times and can't help others, that just means that others should be helping you at this time in your life. It's a give and take.

 

[Dougster]

Dougster and oceaneering, listen to Alan L. Go see a CPA. You need that expertise on your side now, not after it is too late. Tax law is complex and it doesn't follow the rules of logic. You can't just think through 'what would be the right thing to do' and expect to get by.

I know you guys are right. Believe me, I do. Once the shock of this lay-off wears off and the emotional/financial dust settles, I will be doing exactly that. I don't know how I will afford it, but I will. As you guys point out... I don't really have much choice. As good as I thought my pre-lay-off survival planning was, I may have messed up by buying so much expensive equipment before officially starting my business and not after. I felt pressured to buy while I was still officially employed and still able to float a loan. If there is a price to pay for that timing error, I have no one to blame but myself. But let's be clear here: This is going to be a very real attempt at running a very real business and I am not trying to cheat or scam anyone... especially not the IRS!

No matter how long you see a lay-off coming at you and you try to plan well for it, it is still a shock when the termination letter arrives. Ironically, based on recent company developments, I started to think I would last into the first quarter of next year. I didn't. And lucky me: My company just put into effect in August tough new (reduced) severance provisions... and guess who gets to be the first in the company to try them on for size.

Dougster