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3 Replies Last post: Jul 31, 2008 8:12 PM by Bridge

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New sole prop deduction

Jul 30, 2008 10:15 AM

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mango18 6 posts since
Jul 9, 2008

Hi, I started a small home business for about 5 months or so, selling and fixing computers. I've made a profit but after going over my accounting, my deductible business expenses far surpass my income from the small business. I also have a 9-to-5 job as a computer tech and rake in a decent wage.

I use about 33% of my studio apartment solely for business use, including building PCs and storage. I've run over 500 miles in business use and had a good deal of start up costs such as fees, tools and such. Its nearly the end of the year and my expenses are about $3200 while I've only made about $1300.

My question is ... am I only able to deduct the $1300 from my income taxes? Can I deduct the remainder from my taxes from my full time job? It looks like my regular income taxes are going to be at least $8k.

Should I try to minimize expenses or go ahead with a few business purchases that is in great need? If I'm able to deduct all my expenses, I am very much in need of a business computer (probably a laptop) to be able to work on my website as well as do accounting, print up quotes and invoices and offer customers more onsite repair options. The laptop would greatly increase my productivity as well as potential profits. But if I'm going to be stuck with a $1900 loss which I can't deduct (and forced to carry the loss over), I'd rather not get more in the red.

Thanks for any advice you guys can offer.

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LUCKIEST 7,939 posts since
Aug 6, 2007

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1. Re: New sole prop deduction Jul 30, 2008 10:32 AM

New sole prop deduction, Welcome Rosheda.

Great that you started your own small business. The Govt,and the IRS puts out many publications.
that can help you. Anybody in business should have an accountant.

Any loss your business has can be deducted on your personal income taxes that you file next year.

SCORE can also help you. SCORE is FREE.

Good luck, LUCKIEST

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Mogul

Bean Counter 19 posts since
Jan 25, 2008

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2. Re: New sole prop deduction Jul 30, 2008 11:46 AM

First of all..... congratulations on your new business.

Since your business is a sole prop, you will file a schedule C on your upcoming 1040. The Schedule C assumes that you are actively participating in the business. I think you would agree that you are doing all the work! So the loss is deductible as active income. Or in layman's terms against you other income including the W-2 wages.

You need to set up your assets to depreciate. However given that you are in the red this year, I would forgo the Section 179 ( deducting all the asset in one year) and depreciate the laptop over 5 years. NOt sure if your loss included the full cost of some assets or if these were just expenses.

The IRS accepts that not every business will make a profit the first year. However if you are in year 3 or 4 and still are not making any money, then you need to rethink your business. The IRS in year 5 will often audit if you have not shown a profit by then.

But because of the type of business you are in, once you have the basics, you should be able to operate more profitably.

Please make sure to keep a mileage log on those business miles. The IRS will ask if you are pulled for an audit. Keep beg and End Odometer reading for the year as well as miles to and from customers sites and the name of the customers.

You may also want to look at becoming on LLC. A single member LLC files the same as a Sole Prop but the business has limited liability. The only issue is that it may have state ramifications depending on where you are located. I would say you would want to stay a Sole Prop until you decide that this is really going to take off. No since in filing the extra paperwork for a good college try.

I commend you on breaking out!

Use the loss this year against your liability. I think you should also evaluate why you owe so much in taxes. Do you need to withhold more or was it by design?

I am available for additional questions at dawezell@verizon.net or (817) 481-3784. Ask for Wendy.

You can also respond back in the forum as well.

Hope this helps and much luck in your new endeavor.

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Mogul

Bridge 364 posts since
Jun 3, 2008

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3. Re: New sole prop deduction Jul 31, 2008 8:12 PM

Mango,

Assuming you are a sole prop. as Beancounter said, you can offset your W-2 wages with teh business loss.

Your business income/loss is pass-though to your persoanl tax return. That being said, my preference would be to take the sec, 179 deduction on the laptop - expense it all this year against your other income rather than depreciate it over 5 years.

Generally, you want to accelerate tax deductions when possible. It doe not seem the business will push you into a higher tax braket anytime soon so take the deduction now (my opinion).

You may alos want to consider a laptop cheaper than $1,900. Do you really need the bells & whistles with a computer that expensive? What type of programs will you be running? Unless it is high-end graphics, I do not expect you will get any real benefit over a new laptop that cost $500.

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