- Mark as New
- Bookmark
- Subscribe
- Subscribe to RSS Feed
- Permalink
- Report Inappropriate Content
Deductions & credits
@jakeamarkie wrote:
Thank you so much for the clarification that definitely makes a lot more sense.
Not to make things more confusing, I do have a full time job, as this would be on the side. So I do receive a W2. This doesn't change anything really does it?
In terms of deducting the cost of the drone as a start up cost, it sounds like my 2019 taxes filed in 2020, still wouldn't be able to include the drone, correct?
Your tax return will include both your W-2 wages and your self-employment on schedule C. Schedule C lists your business income and expenses, and calculates your net profit (taxable income). This flows to form 1040 where it is combined with your other taxable income, deductions and credits, and your income tax is calculated. Your net income also flows to schedule SE to calculate self-employment tax. This is about 15%, and represents both the employer half and the employee half of social security and medicare taxes. Your self-employment taxes and income taxes are added together, and that is the total tax you owe. If your tax is less than your payments and withholdings, you get a refund, if not, you owe an additional payment.
Depending on your self-employment income, you may also be required to make estimated tax payments 4 times per year. If you don't make required estimated payments, you can be assessed a late payment penalty even if you pay in full by April 15. (You can ask for a one-time waiver of the penalty the first time you are assessed a penalty.)
I want to emphasize that if you had business income in 2019, you were required to file schedule C for that income in 2019, and if you did not (because you thought you did not owe tax until you registered the business) you need to file an amended return now to calculate and pay any tax.
You have not read or understood my previous answers about your drone. Business expenses can be deducted against income. Assets (generally, equipment with a life expectancy of more than 1 year) are depreciated, not expensed. Depreciation means deducting the purchase price over the expected lifetime of the equipment. In the simplest case, if we suppose the drone has an expected life of 5 years, you would deduct 1/5 the price each year over 5 years. There are some exceptions, where you can deduct the cost of equipment in the first year rather than spreading it out. Turbotax will cover these exceptions when you add your assets to the business in Turbotax. Don't do it manually, as the formula is more complicated than I suggest in my example.
When equipment or assets are not purchased new, but converted from personal use, depreciation is based on the value at the time of conversion, rather than the purchase price. For example, if the drone cost $4000 in July 2019, but the fair market value in December 2019 was $3000, then you would deduct 1/5 of $3000 over 5 years, instead of 1/5 of $4000. Again, there may be exceptions and Turbotax will cover them if they apply to you.
Also be aware that depreciation can create taxable events for the business. Suppose you owned the drone for 6 years, so that it was fully depreciated, and had zero "book value", also known as cost basis. Then you sold it for $500 used. That becomes taxable income, because it is a recovery of your previous depreciation. (If you deduct the full value of the item as a business expense, and you then recover some of that value, you have to pay tax on it.)
You need to file an amended 2019 return to list your business on schedule C, with any expenses you paid in 2019 and income received in 2019. You will list the drone as a business asset, and you will be able to deduct a bit of its value (1/12 of the first year of depreciation, since the business was only active 1 month). Then for 2020, you will start your 2020 return using your 2019 return, and that will carry over any business assets you listed and you will get the second year of depreciation on your assets.
If you are still confused, you need to see a professional to help you understand your business taxes, or at least buy something like a Lasser's guide or similar guide book. This may also help.
