Business expenses vs. qualified business expense

[SparkysDad8842]

For a small business, how can we calculate which scenario leads to paying the least amount of federal income tax:

A) taking all of our business expenses as deductions; 

or

B) having a higher qualified business deduction?

HELP! (thanks)

[KrisD15]

You report your business expenses. 

The program computes the Qualified Business Deduction. 

You don't choose between the two, they are not options, they are separate deductions. 

After you enter your expenses/business deductions the program figures the 20% that is the Qualified Business Deduction (QBI).  

You are not allowed to NOT report expenses in order to boost the QBI. 

[Carl]

Huh? Believe it or not, the IRS says you are "required" to deduct all of your business expenses. The only difference I see between your A and B, is the wording. You can't have A without B, and vice versa.

[Rick19744]

@Carl the difference between the two and the ultimate question was whether they can forgo deductions, which would in turn increase income and potentially provide a larger QBI deduction.

As was already noted, deductions are to be taken in the year incurred based on your method of accounting.

[SparkysDad8842]

Thank you.  I did not know that the IRS requires a business to deduct all of its expenses.  Seems counter intuitive, as some may operate their business in such a way as to keep expenses to a minimum, while others might believe (rightly or wrongly) that if they incur greater expenses that may lead to a more profitable business.  Sounds like it may penalize businesses that operate on a shoestring. 

Just to clarify, the business in question is a start up individually owned LLC, which will file a schedule C to a 1040 for a married couple filing jointly.  Does this change anything?  Thanks again for your help.

[Carl]

ust to clarify, the business in question is a start up individually owned LLC, which will file a schedule C to a 1040 for a married couple filing jointly. Does this change anything?

Actually, the way you worded the above kinda muddied the waters a bit more. But I 'think" I know what you mean.

I'm sure you're aware that a sole proprietorship or single member LLC can only have one owner. I assume that's what you have and will therefore report the income on SCH C with you as the sole owner, on your jointly filed tax return.

If both you and your wife are owners of the business, that changes things and it also matters if you live in a community property state.

On a side note, A SCH C business will not report any business income/expenses until the first year the business is "open for business". So if you were not open for business in 2019, you will not file a SCH C with your 2019 tax return at all.

Now it's highly probable that you incurred expenses in 2019 in the process of getting ready to open. Those expenses incurred prior to being "open for businses" are start up expenses. Start up expenses are claimed as such on the SCH C that is filed in the first year the business is actually open for business. It *does* *not* *matter* in what tax year those startup expenses were incurred either. It is not uncommon for some business to have 3 years give or take, of start up expenses prior to being open for business.

The way it works with startup expenses is that in the first year you can deduct a maximum of $5000 of start up expenses. Anything over that is amortized (not capitalized) and deducted (not depreciated) over the next 15 years. 

But keep in mind that while $5000 is the max you can deduct in the first year of business, it makes no since to do so if you don't have $5000 of *taxable* business income to deduct it from. So if you open your business in Dec of the tax year and after all is said and done you only have $1000 of taxable profit, then it only makes sense to claim $1000 in that first year so your first year's tax on the business income will be ZERO. Then the remaining balance of start up expenses are amortized and deducted over the next 15 years.