W-2 and short term crypto gains, and a single member LLC started end of year: can I use the combined income to fund my business and reduce tax liability with Section 179?

[lieiti]

So here is my situation:

1) I have income from two sources only: my W-2 and my Crypto capital gains (short term). This totals about $230k for 2021.

2) I have been wanting to start an LLC for vehicle sharing / rentals, and finally have the funds to do so with the 2021 income. So I created, in TX, a single member LLC in Dec. in order to purchase vehicles and offer them up for rental on Turo, HyreCar, etc.

3) I am a Head of Household with 3 dependents under my roof. Tax bracket of 35%.

Questions:

A) How are my crypto capital gains taxed? Is it considered “ordinary income” like my W-2 and are both income sources combined and taxed as one? Or does the IRS consider them separate?

B) Can my crypto capital gains be used to purchase LLC business vehicles utilizing section 179 and/or bonus depreciation to start my rental business and also reduce my tax liability?

C) Theoretically, if I buy two vehicles totaling 100k under my LLC with that income, will this drop my taxable income to $130k? And therefore my tax bracket to 24%?

Thank you. If you need any more information, please let me know.

[Carl]

A) How are my crypto capital gains taxed? Is it considered “ordinary income” like my W-2 and are both income sources combined and taxed as one? Or does the IRS consider them separate?

It's taxed as a short term gain if held less than a year, or long term gain if held more than a year.

B) Can my crypto capital gains be used to purchase LLC business vehicles utilizing section 179 and/or bonus depreciation to start my rental business and also reduce my tax liability?

You can use the money for anything you want. It doesn't change the way it's taxed per (A) above.

C) Theoretically, if I buy two vehicles totaling 100k under my LLC with that income, will this drop my taxable income to $130k? And therefore my tax bracket to 24%?

There's nothing "theoretical" about it really. You're talking about a car rental business here if I understand your post correctly. Vehicles and anything else you purchase for the purpose of using it to produce income, is a business asset. It gets treated as such too. Business assets are entered in the Business Assets section and depreciated over time. For vehicles, they depreciate over 5 years.

I'm not sure, but I don't think SEC179 will be of much help in your specific case. If I recall, you can only claim against the business income. So if you have a $40K SEC179 deduction but don't have at least $40K of business income to claim it against, then SEC179 may be a moot point. (More below)

Also keep in mind that when it comes to depreciation of assets, that depreciation has to be recaptured at some point, and you will pay taxes on the recaptured amount in the tax year of recapture. It's usually the tax year you sell or otherwise dispose of the asset.  But for vehicles, it can be a bit more involved since that's an asset that actually loses value over time. (Unlike real estate which tends to gain value over time.)

Now for the SEC179 stuff on vehicles you plan to purchase and then lease them out. Take a look at IRS Publication 946 at https://www.irs.gov/pub/irs-prior/p946--2019.pdf on page 17 for what property does not qualify for SEC179.  Second column  on that page under "Leased Property". Since I'm not "exactly" clear on your business model, I can't be sure if it applies to you or not.

The primary thing to remember when it comes to business assets, is that in general, what you deduct from taxable income today, will sometimes cost you more in taxes later. You can't rob from Peter without paying Paul at some point. 🙂

[Mike9241]

it also should be noted that an unincorporated entity in the business of renting personal property is subject to self-employment tax on the net income.  

[lieiti]

Thanks for the reply. 

I read this, would like to verify if true or not:

"...your Section 179 deduction cannot exceed your aggregate net business taxable income (calculated before the Section 179 write-off). HOWEVER, if you operate as a sole proprietorship, or as a single-member LLC treated as a sole proprietorship for tax purposes, you can count any wages that you earn as an employee as additional business income. If you are married and file jointly, you can also count your spouse’s earnings from employment as well as any self-employment income that he or she may earn. These loopholes reduce the odds that you’ll be hurt by the net business income limitation."

Source: https://www.marketwatch.com/story/heres-a-way-for-small-business-to-save-on-taxes-buy-a-heavy-suv-or...

This was published in 2016 so wondering if this has changed or not.

This would work well for me, as then I could purchase $40k-ish vehicles and take $40k off of my taxable income, saving me about $15k on the cost of each vehicle to start my business.

How can this be verified? Can a CPA knowledgeable on these matters chime in here please? Thanks.

[lieiti]

Thanks for the reply. It would be the property of the business, the LLC would purchase and own it. Would that make a difference?

[Carl]

Would that make a difference?

No. Since the IRS considers your LLC to be a disregarded entity, it makes no difference.