I have a side business (small business) that earns under $10k a year. I want to take my earnings and re-invest them all back into the business. How much can I re-invest?

[Critter-3]

You can put every penny back into the business AFTER you have paid the income & SE taxes on the profits.  You cannot escape those taxes by keeping the money in the business.  

[VolvoGirl · Accepted solution]

If this is a Schedule C business it is a disregarded entity and it's all yours personally.  Just like another bank account.  Doesn't matter where the money comes from or goes.  It's just moving from one pocket to another.  What do you mean by "reinvest"? You just deduct any actual expenses you paid, no matter where the money came from (like from your checking account or credit card).  So you can even spend more than the income the business received.  

Here is some IRS reading material……

IRS information on Self Employment

http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Self-Employed-Individuals-Tax-Center

Pulication 334, Tax Guide for Small Business

http://www.irs.gov/pub/irs-pdf/p334.pdf

Publication 535 Business Expenses

http://www.irs.gov/pub/irs-pdf/p535.pdf

[edwardjamescoco]

Thanks for the response! I'm not exactly sure I completely follow, though. If I take money that I've earned from the business and use it to pay for business expenses that are eligible to write off, wouldn't that reduce the amount of income tax I'm paying? 

[edwardjamescoco]

@VolvoGirl     Thanks! I can see I have some reading to do . . . I'll head to those links you posted. 

By "reinvest" I basically mean use money in the same calendar year to pay for expenses which would benefit the company. Like buying a new computer, or adding other technology which would allow me to potentially make more profit the following year. Yes, this is a Schedule C business, so I think I follow what you're saying. I've done this in the past, but my expenses were basically just the things I needed to keep the business afloat. Now I'd actually like to be proactive and spend more. 

[VolvoGirl]

Of course it will.  You can write off (deduct) all expenses no matter how you pay them.  You pay tax on the Net Profit at the end of the year.  We just didn't know what you meant by re-invest the earnings.  Like if you were trying to avoid the tax.

[edwardjamescoco]

@VolvoGirl  Sorry. That first response wasn't to your message. I should have been better at tagging comments. 

I'm not trying to really avoid or dodge the tax. I just don't want to max out in expense deductions, the way you can with personal deductions. In the past I've been very timid about declaring expenses at all, and I know I can be more assertive. I want to maximize the legitimate expenses that the government allows in order to encourage small business growth. It can be a bit hard to ask detailed questions in a forum without writing a full dissertation. So I appreciate your patience and your responses!

[VolvoGirl]

No problem.  Just trying to give you lots of info. You can show a loss on Schedule C and deduct it against your other income.

But Some expenses, such as home office or section 179 depreciation can only be used to reduce your schedule C taxable income to zero, and not to create a loss. Excess deductions for these carry over to the next year.  And you have to answer yes to both questions about exclusive and regular use, not just one.  The area of your home office must be used regularly and exclusively for business to deduct it.

[Carl]

What you do with the taxable profit from your SCH C business is irrelevant. It's still taxable income in the tax year it is earned/paid.

If you use it to buy business assets that are depreciable, then it gets deducted over the class life of whatever the asset class life of the purchaesd asset is, as defined in the MACRS class life tables.

If the asset qualifies for a SEC179 deduction or Special Depreciation allowance, then you'll deal with it that way.

Just understand that depreciation is not a permanent deduction. That depreciation gets recaptured and taxed at some point - usually when you sell or otherwise dispose of that asset.