There are related questions, but haven't seen one that truly answers mine. I am a W-2 earner from a typical corporate job in telecom. My husband is a stay at home father who is now starting a new business now that the kids are older. He will not make any income this year as he is just starting it (and it's already October). He's acquiring assets, materials, etc. We happen to need a new car and he wants to purchase a truck so that he can use it for his business.
Assume:
My taxable income is $100,000
My husband creates a sole proprietorship for his business - Income year 1 is $0
Although I have a primary job where I earn income elsewhere, I also help fairly significantly with his new business. Assume we split the business 50/50. He does the labor, I do the marketing, books, etc.
We file a joint tax return with itemization
We purchase a $50,000 truck in both of our names primarily for use with his business but will also have some personal use (say, 75% business and 25% personal use). The truck does not meet the test for exceeding the $25,000 Section 179 limit because the truck bed size is less than 6 feet.
Can the $25,000 Section 179 deduction (or some portion of it) be applied against my W-2 earnings from a completely separate job even though the business to which it is being used earned $0? If only a portion, how much would it be?
Thanks!
Yes, the Section 179 can offset your W-2 wages. Only the business percentage can be use for Section 179, but all of the Section 179 that is allowable (the business percentage) can offset your W-2 wages.
There are several "howevers":
https://www.irs.gov/publications/p463/ch04.html#en_US_2015_publink100034025
Thanks TaxGuyBill...very helpful! After I sent my question I realized that Section 179 may not be the best option so we will definitely take a look. Just wanted to know if that was an option or not. His business will be open by the end of the year....we just don't expect to have much income. Also, the truck will likely exceed 6K pounds...but the one he wants has a bed length of 5'7" If we go standard depreciation would that typically be over 5 years? So....$50K / 5 years life of asset = $10K x 75% business usage = $7,500 depreciation (roughly). We don't have to further multiply that by 50% due to my 50% ownership, do we? Again, we file jointly.
"The total [section 179] cost you can deduct each year after you apply the dollar limit is limited to the taxable income from the active conduct of any trade or business during the year."
"Any cost not deductible in one year under section 179 because of this limit can be carried to the next year."
Reference: <a rel="nofollow" target="_blank" href="https://www.irs.gov/publications/p946/ch02.html#en_US_2013_publink1000299339">https://www.irs.gov/publications/p946/ch02.html#en_US_2013_publink1000299339</a>
Thanks Hal_Al....I had seen that on the IRS site. My confusion was whether my w-2 job (salary earned completely separate from my husband's business) is considered "active conduct of any trade or business." Or whether that comment was relative to my earnings for, say, related to pulling a salary from his business as an employee or something.
@Hal_Al A W-2 job is considered a trade or business, so Section 179 can offset that. If you want the reference, I can look for it.
Yes, it is over 5 years. Well, sort of 6 years because the first and last year count as a half year.
The 'default' is to use the 200%DB depreciation method. That shifts it to a larger depreciation deduction in the early years, and a smaller deduction in later years. You do have the option to depreciate it using "Straight-Line" deprecation, which would match your numbers you cited.
If you are both part of the business, it is either a Partnership (which is a completely separate tax return and may be more complicated) or a "Qualified Joint Venture" (in the event you run the business under an LLC, let us know that and let us know what State you live in). A Qualified Joint Venture would file TWO Schedule Cs, one for each of you.
Hypothetically, you would BOTH claim and depreciate 50% of the vehicle (or whatever your ownership percentage is), so 50% of it would be on BOTH Schedule Cs. However, for simplicity, you may decide to put 100% of it on ONE of the Schedule C's, and shift some of the other deductions to the other Schedule C to equalize them.
Thanks! I was hoping to avoid a separate tax return and just include it in our joint return. Can he be a single member LLC without me as a part owner and still have his initial business losses/depreciation apply to my W-2 earnings? We'd eventually like to go down the LLC path to limit our liability. But not clear on whether we can still do that on a joint return. We have a meeting scheduled soon with a local small business volunteer organization to help us with some of these initial questions. Just trying to get our bearings before we start putting money out.
"Can he be a single member LLC without me as a part owner and still have his initial business losses/depreciation apply to my W-2 earnings?"
Yes.
If you were added to the LLC, a multi-member LLC would need to file a Partnership return, which is a completely separate (and more complex) tax return. The exception to that is if you live in a Community Property State, in which case you could still file as a Qualified Joint Venture.
Although a LLC can protect you, most people mess up the protection my mixing personal stuff with the LLC. Another option is to just have a good Liability Insurance policy.
Great....thanks very much to both of you! I'm sure I'll be asking more questions soon!
I am also starting a business at the end of this year and plan to buy the equipment (computers) in the coming days. I have W-2 income for the year and my wife has W-2 income for the year. We file jointly and I plan to create a sole member LLC for this new business (in Indiana). I need to get my 2021 AGI reduced as well to qualify for a state education voucher for my children for private school in 2022. Our AGI is estimated to be around $164k, but I need it down to about $147k to qualify. The equipment I am buying for my business will be about $30k. Assuming I follow the rules, etc...The 179 deduction will reduce the AGI on our Joint Return to $134k, correct?
If so, can I expense $20k this year (Reduce to$144k AGI) and take the remaining $10k for 179 in 2022?
Thanks for your help!
Brad
I am also starting a business at the end of this year and plan to buy the equipment (computers) in the coming days. I have W-2 income for the year and my wife has W-2 income for the year. We file jointly and I plan to create a sole member LLC for this new business (in Indiana). I need to get my 2021 AGI reduced as well to qualify for a state education voucher for my children for private school in 2022. Our AGI is estimated to be around $164k, but I need it down to about $147k to qualify. The equipment I am buying for my business will be about $30k. Assuming I follow the rules, etc...The 179 deduction will reduce the AGI on our Joint Return to $134k, correct?
If so, can I expense $20k this year (Reduce to$144k AGI) and take the remaining $10k for 179 in 2022?
Thanks for your help!
Brad
The 179 deduction CANNOT bring your Sch C income below zero so it will not help you with what you are trying to accomplish however you can use the current BONUS Depreciation option instead and take some of the cost basis this year and save some for future years when you have income to negate.
If you are new to being self employed, are not incorporated or in a partnership and are acting as your own bookkeeper and tax preparer you need to get educated .... READ about depreciation below ...
If you have net self employment income of $400 or more you have to file a schedule C in your personal 1040 return for self employment business income. You may get a 1099-NEC for some of your income but you need to report all your income. So you need to keep your own good records. Here is some reading material……
IRS information on Self Employment….
http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Self-Employed-Individuals-Tax-Center
Publication 334, Tax Guide for Small Business
http://www.irs.gov/pub/irs-pdf/p334.pdf
Publication 535 Business Expenses
http://www.irs.gov/pub/irs-pdf/p535.pdf
Home Office Expenses … Business Use of the Home
https://www.irs.gov/businesses/small-businesses-self-employed/home-office-deduction
https://www.irs.gov/pub/irs-pdf/p587.pdf
Publication 946 … Depreciation
https://www.irs.gov/pub/irs-pdf/p946.pdf
There is also QuickBooks Self Employment bundle you can check out which includes one Turbo Tax Self Employed return and will help you keep up in your bookkeeping all year along with calculating the estimated payments needed ....
http://quickbooks.intuit.com/self-employed
Self Employment tax (Scheduled SE) is generated if a person has $400 or more of net profit from self-employment on Schedule C. You pay 15.3% for 2017 SE tax on 92.35% of your Net Profit greater than $400. The 15.3% self employed SE Tax is to pay both the employer part and employee part of Social Security and Medicare. So you get social security credit for it when you retire. You do get to take off the 50% ER portion of the SE tax as an adjustment on line 27 of the 1040. The SE tax is already included in your tax due or reduced your refund. It is on the 1040 line 57. The SE tax is in addition to your regular income tax on the net profit.
PAYING ESTIMATES
For SE self employment tax - if you have a net profit (after expenses) of $400 or more you will pay 15.3% for 2017 SE Tax on 92.35% of your net profit in addition to your regular income tax on it. So if you have other income like W2 income your extra business income might put you into a higher tax bracket.
You must make quarterly estimated tax payments for the current tax year (or next year) if both of the following apply:
- 1. You expect to owe at least $1,000 in tax for the current tax year, after subtracting your withholding and credits.
- 2. You expect your withholding and credits to be less than the smaller of:
90% of the tax to be shown on your current year’s tax return, or
100% of the tax shown on your prior year’s tax return. (Your prior year tax return must cover all 12 months.)
To prepare estimates for next year, You can just type W4 in the search box at the top of your return , click on Find. Then Click on Jump To and it will take you to the estimated tax payments section. Say no to changing your W-4 and the next screen will start the estimated taxes section.
OR Go to….
Federal Taxes or Personal (H&B version)
Other Tax Situations
Other Tax Forms
Form W-4 and Estimated Taxes - Click the Start or Update button
You’re considered self-employed—even if it’s just something you do on the side, like drive for Uber, babysit, or blog.
Your taxes are handled differently than when you’re an employee of a company.
As a self-employed individual you:
Get started by entering your income from self-employment. We’ll handle the rest, from creating the forms you need to reviewing work-related expenses that can help reduce your taxes.
I agree with @TaxGuyBill wages count as business income for purposes of section 179 so while your schedule C may show a loss you include wages reported on the return as part of business income offset by any schedule C loss.
here is what form 4562 says about business income for individuals for purposes of IRC sec 179. as stated 179 is limited to business income.
Individuals. Enter the smaller of line 5 or the total taxable income from any trade or business you actively
conducted, computed without regard to any section 179 expense deduction, the deduction for one-half of
self-employment taxes under section 164(f), or any net operating loss deduction. Also, include all wages,
salaries, tips, and other compensation you earned as an employee (from Form 1040, line 1). Do not reduce this amount by unreimbursed employee business expenses. If you are married filing a joint return, combine the total taxable incomes for you and your spouse.
IRC REG 1.179-2
(c) Taxable income limitation -
(1) In general. The aggregate cost of section 179 property elected to be expensed under section 179 that may be deducted for any taxable year may not exceed the aggregate amount of taxable income of the taxpayer for such taxable year that is derived from the active conduct by the taxpayer of any trade or business during the taxable year. For purposes of section 179(b)(3) and this paragraph (c), the aggregate amount of taxable income derived from the active conduct by an individual, a partnership, or an S corporation of any trade or business is computed by aggregating the net income (or loss) from all of the trades or businesses actively conducted by the individual, partnership, or S corporation during the taxable year. Items of income that are derived from the active conduct of a trade or business include section 1231 gains (or losses) from the trade or business and interest from working capital of the trade or business. Taxable income derived from the active conduct of a trade or business is computed without regard to the deduction allowable under section 179, any section 164(f) deduction, any net operating loss carryback or carryforward, and deductions suspended under any section of the Code. See paragraph (c)(6) of this section for rules on determining whether a taxpayer is engaged in the active conduct of a trade or business for this purpose.
IRC REG 1.179-2(c)(6)
(iv) Employees. For purposes of this section, employees are considered to be engaged in the active conduct of the trade or business of their employment. Thus, wages, salaries, tips, and other compensation (not reduced by unreimbursed employee business expenses) derived by a taxpayer as an employee are included in the aggregate amount of taxable income of the taxpayer under paragraph (c)(1) of this section.
however, regardless of 179 or 168(k) the business must have commenced in 2021 to take the deduction.
@Mike9241 If I'm understanding your post correctly, what I mentioned in the above posts can be accomplished if done correctly where my business expenses as a sole member LLC for the year can reduce my overall AGI on my joint tax return even though I haven't turned any revenue in 2021?
revenue isn't required for the SMLLC but its operations must have commenced. in and of itself there have been numerous rulings and court cases as to when business commenced. in addition, in order to take section 179 (but not 168(k) you need enough business income (before the 179 deduction) to cover it. if you have less the balance becomes a carryover to the next year
say w-2's total $25K the SMLLC loses $19k no other business income, you could take 179 on every asset acquisition that qualifies but you would only get a current year deduction for $6k
when does a business start? case study
Whether the activities constituted the carrying on of a business is determined by the facts and circumstances. The Tax Court found a taxpayer fully intended to start a business with a profit intent and spent substantial time and money. But, it held taxpayer's activities in 2010 were not proof of actually beginning business operations.
the taxpayer claimed business expenses with no income on 2010 U.S. Individual Income Tax Return, Schedule C. IRS disallowed the “business loss” saying the taxpayer did not carry on a business within the meaning and requirements of the tax laws. IRS pointed out the taxpayer did not formally advertise the business to the general public and did not do anything to try to find paying clients. IRS said the taxpayer did not establish the business was actually functioning in 2010 and the taxpayer's activities were not enough to prove the taxpayer was “in business”. The Tax Court upheld the IRS finding and the business loss claimed was not allowed.
@Mike9241 Thanks for that information. Just to clarify...How did you determine the $6k deduction of AGI?
In my situation I am setting up a crypto mining business that I should have some slight income before the end of the year depending how quickly I can set it up. For the sake of argument let's say I made $200 for the year. The computer equipment will cost me about $31k. My 2021 AGI from W-2s, etc. will be roughly $164k. I was hoping to write-off a portion or all of the equipment to get my AGI to around $145k for the year... Is this possible or how is the write-off calculated in my situation (example provided above)?
Thanks!
@Mike9241 In addition to my other post...Does it change the answer if I just go with a sole proprietorship instead of a SMLLC for 2021?...I'm assuming this is how this example would also work...assume hypothetical (not 100% real data):
$30k computers for 179 expense
$165k AGI from mine and my wife's W2s for our primary jobs
**Business started in time before the end of 2021; meeting all startup guidelines
**Revenue of $500 for this last month of the year
I could technically expense the $30k to bring down my AGI to $135k on my 1040?
If so, Could I expense $20k in 2021 and remaining $10k in 2022?
Not looking for advice I just want to be sure I understand the concepts....Thanks for your time in advance!
no you can't. if you take 179 on $30K of computers and your business income is more than $30K (in your case it is) you must take all of the 179 the first year. however, you can elect not to take 179 on the entire cost. then you must elect out of special depreciation 168 (k) (by law, generally special depreciation is 100% of the cost of qualifying assets reduced by any 179 taken unless you elect 50% or elect out completely. so if you take $20K of 179 then 168(k) becomes $10k. total depreciation the first year $30K. if you took $0 of 179 then 168(k) the first year would be $30K.
assuming you don't want the entire $30k deduction for 2021, when doing your return elect out of 168(k) special depreciation. you can play around with the 179 amount to get to the AGI you want. what cost you don't take 179 and/or 168(k) on the first year is depreciated over the next 5 years.
see pub 946 tables starting on page 71. computers use the 5-year column,
@Mike9241 Thank you so much Mike! This makes sense. Thanks for your time in responding!
@Mike9241 you said, "if you take 179 on $30K of computers and your business income is more than $30K (in your case it is)" but @Brad4iu said his business income was only 400$
His W-2 wages were well in excess of 30K but not the Schedule C income from mining.
Reading this entire thread has me confused. Can someone Section 179 assets, thus creating a net loss for their Schedule C, BUT THEN leverage their W-2 Income Taxes to pay overall less Taxes for the year? Reinforcing that the W-2 Wages have absolutely no relation to the Schedule C(in @Brad4iu cases his crypto mining).
Yes, you can leverage other income against the 179 deduction taken for the year as long as your Adjusted Gross Income (AGI) does not reduce to zero. This is a little known caveat in the tax law that makes no sense because there is no relationship between Schedule C income and other income but no one has ever said the tax code is completely logical.
To give you an additional FYI, if your AGI was $20,000 for the year before you put in 179 deduction, you would only be able to claim $20,000 of the deduction and then depreciate the remainder over a five-year period.