@davisyates11 wrote:
Thank you for such a detailed and quick response!
If I may seek further clarity, let's say the December capital expense is $20,000, but it doesn't arrive until mid January, and the business does not have any "activity" or "work performed" whatsoever until 2024. Would this still make the business qualify as "active" in 2023? And if so, would that mean it would have a Net Operating Loss in 2023, and that the capital needs to be depreciated over 15 years starting in 2024?
Also, if the business only lasted 3-5 years, would there be any way to ever fully deduct the cost of that asset, since it wouldn't reach 15 years of maturity?
The IRS says this, for example.
A trade or business is generally an activity carried on for a livelihood or in good faith to make a profit. The facts and circumstances of each case determine whether an activity is a trade or business. Some of the important facts and circumstances used to make this determination include:
- regularity of the activities,
- regularity of the transactions,
- production of income, and
- ongoing efforts to further the interests of your business.
You do not need to make a profit to be operating a trade or business but you do need to have a profit motive.
Suppose you want to print advertising fliers and other materials for other businesses. Just ordering the printer and paying for it is probably not enough to be in business. If you begin advertising and taking orders in December (being sure to tell your customers that there will be a delay until the printer arrives) then you would be in business because of the regularity and ongoing efforts tests, for example. But if you don't start taking orders until January, then you aren't in business until January. It can be a little fuzzy, if you are unsure, seek your own professional advice.
Also, if the business only lasted 3-5 years, would there be any way to ever fully deduct the cost of that asset, since it wouldn't reach 15 years of maturity?
Not really. If not used for business for its entire useful life, why would you get the entire value as a business expense?
Let's consider two situations.
1. You take normal depreciation, if the life is 15 years that's roughly $1300 per year (I'm aware it's a bit more complicated than that, but let's keep it simple.). After 5 years, you have depreciated roughly $7000 and the remaining cost basis is $13,000. You close the business. What do you do with the equipment? Suppose you sell it used to another business for $10,000. You have a $3000 loss (from your cost basis) that you can deduct as a business expense on that year's tax return. Or suppose you sell it for $14,000. You have a $1000 gain which is taxable business income. (Because you sold for more than you adjusted cost basis.). Or suppose you keep the business running, but the equipment has become obsolete because of changing technology and you throw it away. You can take the remaining depreciation at that time (because you have "used up" all the useful life, you can deduct the entire cost.)
2. Suppose you take section 179 or some other kind of special depreciation which allows you to depreciate the entire cost in the first year. Your cost basis is now zero. What happens when you close the business in 5 years? If you sell the equipment for $10,000, you have $10,000 of taxable business income (because more than your adjusted cost basis.) If you sell the equipment for $14,000, you have $14,000 of taxable business income (same reason). If the equipment is obsolete and you sell it to a scrap yard for $10 scrap metal, you have $10 of taxable income. (I am ignoring salvage value, again, this is an oversimplification for illustration purposes.)
Does this help?
