Business NOL against personal income

[PDX Overland]

Hello,

I am a long time user of turbotax online and am currently in the process of forming an LLC. I plan to purchase a business vehicle as soon as I'm up and running. My understanding is that vehicle exceeds 6000lbs GVWR and should  be eligible to be fully deducted/expensed under Section 179. This vehicle would be placed under service prior to end of 2020.

With that being said, I do not anticipate generating very much business income for 2020 (given very little time left) and fully expensing the above vehicle will likely result in a substantial NOL.

Fortunately, I have another full time job with income exceeding the theoretical NOL by a large amount. Would I be able to fully apply the NOL against my personal income? If so, would I be required to take the itemized deduction or could I still elect for the standard deduction? 

Would the NOL effectively lower my personal AGI?

Any help would be greatly appreciated!

Thank you!

[mellish7777]

Deduction doesn't matter and you would be able deduct the loss from salaries and wages and any self employment income BUT section 179 has income limitations so you cannot use the section to deduct more than the income your business generates.

[Anonymous]

if you want to have a loss from your LLC, you can take bonus depreciation which is not limited to business income.  whether you have a NOL is a different matter completely.  while your LLC may show a loss, W-2 wages are deemed business income and thus will offset part or all of the LLC loss.   in summary, a NOL is the excess of business deductions and losses over business income reduced by the excess if any of non-business income over non-business deductions. 

[PDX Overland]

Thank you for the quick reply!

I was able to do some additional reading and was hoping you could help me understand the following paragraph. 

"The Sec. 179 deduction can’t exceed the taxpayer’s aggregate net business taxable income before the Sec. 179 write-off. If you operate your business 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 may earn as an employee as additional business income. If you’re married and file a joint return, you can also count your spouse’s earnings from employment as well as any self-employment income that he or she may earn."

After reading this paragraph, are either or both of the following statements true?

1) If I form a single member LLC treated as a sole proprietorship, I could count the income earned from my other job (W2) as additional business income; thus allowing me to deduct the entire NOL even if the Sec. 179 deduction would otherwise exceed the income generated from the LLC alone?

and/or 

2) My spouse forms the single member LLC treated as a sole proprietorship and counts my income (from W2) as additional business income; thus allowing her to deduct the entire NOL even if the Sec. 179 deduction would otherwise exceed the income generated from the LLC alone?

Thank you again for all of your help!

[Hal_Al]

Simple answer: a business loss will directly lower your AGI.  That is, a business loss is totally deductible against other income.  The business gain or loss is calculated on  Schedule C and transfers to line 3 of Schedule 1 then to line 7a of form 1040. Business expenses are not itemized deductions. So, yes, you still get the standard deduction, on line 9 of form 1040,  in addition to the business deduction included  on line7a.

As others have said, the  bigger question is how much section 179 (or bonus depreciation) are you allowed. 

[AmeliesUncle]

First, you mean a "business loss", not a NOL.  In tax terms, a NOL means the final cumulative income on your ENTIRE tax return ends up being negative.  That means if your other income on your tax return is larger than your "business loss", you don't have a "NOL".

Next, do you WANT to have that business loss offset your other income?  Although that would definitely lower your income taxes this year, it is likely NOT the best long-term result.  In fact, in most cases you should be trying to do the opposite; minimize the deduction to minimize the loss.

If you use the entire expense this year, it will reduce income taxes.  But if you spread out the deduction over several years, the deduction will offset your business profit in future years, where it can reduce BOTH income tax AND self employment tax.

Obviously circumstances vary tremendously, but in many cases, the better long-term method would be to (1) NOT use Section 179, (2) elect OUT of Bonus depreciation, and maybe even (3) choose to depreciate using Straight-Line depreciation rather than accelerated (200%DB) depreciation.