In 2014 I started a woodworking business as a single member LLC. The startup has been very slow and I haven't yet reported positive business income. (I have been taking measures to be able to demonstrate that I am engaged in this activity as a business activity and not mere a hobby should I ever need to substantiate that.) The losses involved are very small so far: last year was the largest at $7,000 (when I started renting shop space) while all prior years were less than half that. But I'm eager to show positive business income in 2020.
If I were to take all the deductions I'm entitled to for 2020 I would once again report a loss. So I'm looking at forgoing most of my deductions, but not all, in order to preserve positive business income. My question is: Can I defer placing into service tools and machinery purchased in 2020 to a future year so I don't lose the tax value of a deduction?
For context, here's how I handle tools and machinery. These practices were established after consulting with a CPA a few years ago.
- I purchase them with my personal funds, not with business funds. (In fact, I had already acquired a lot of them prior to starting the business when this activity was merely a hobby. So in 2014, there was a large group of items placed into service, many of which had been purchased years before.) In future years I expect this will change as my business becomes profitable, but for now this is my practice.
- I buy the vast majority of my items used (garage sales, auctions, Craigslist, etc.). I treat each year's purchases as a single asset (eg, 2018 Tools and Machines, 2019 Tools and Machines, etc.) for tax purposes. Again, we're talking relatively small potatoes.
- In 2017 I adopted a capitalization policy whereby any tool or machine purchased for $50 or less is expensed and not capitalized.
Given all that, the question can be restated more specifically: For tools and machines (ie, those that cost more than $50 and are therefore depreciable) that were purchased in 2020, can I wait until 2021 to consider them placed in service and therefore begin depreciating them then?
If so, I will claim other deductions for other purchases (eg, supplies, vehicle expenses, contract labor) that I assume can only be taken in the year in which the cost was incurred and save this one for a future, more prosperous tax year when it still has value.
