tax issues

[Alan L.]

I understand what you mean. don't try to use a business that cant reasonably support or justify having a tractor. I'm not trying to use a fictional business to shield taxable income. I'm just trying to figure out what are some reasonable, legal ways of reducing taxable income. I,ve allways just used a standard deduction and was in the market for a tractor and through conversation put 2 &2 together. Also looking into itemizing it seems there is only so many things That seems realistic that I will qualify for, mainly mortgage intrest. No donations and no major medical. Im healthy and I don't make enough money to donate. I'm not adopting and I havent given refuge to displaced hurricane victims. My non reimbursed job related exspenses are minimal. No educational intrest payments (obviously not for accounting school). And the list goes on of things that I cant deduct for or am not intitled to a credit for. If I can start a valid business (probably in some form of construction or other specialized labor type field) Then there seems to be a whole lot of deductions that I can now take advantage of. I am assuming that I will have a large amount of exspenses for equipment and such in the begining and probably a minimal amount of business income. I'm definitley going to try to pick a business that will be profitable. I look forward to the day that I have to start worrying about paying too many taxes from the big bucks my business will make.
Also for all you accountants out there can you use your cell phone as your business phone and still recieve and make personal calls on it and write off your monthly bill.
I have about $10,000 -$20,000 worth of tools.( nail guns, saws, enclosed trailer), you know construction tools. Once I start up a business can I depreciate the worth of these tools against my income my business made in exchange for the use of these tools. If so is it replacement cost since I wouldn't have reciepts for all of them- replacement cost 20,000. or value of used tools with no reciepts worth maybe 10,000.
I pose the same question for my vehicle that I bought this year and am making payments on. If I start something up soon or more likely next year can I depreciate my truck note if I mainly use it for getting to and from for business reasons.
I will definitely be getting with a cpa when I get In from Offshore in about three weeks. Until then I 've been enjoying the insight and the corspondence. So please continue to share your wisdom.
Thanks, Oceaneering.

When you convert an asset from personal to business use you can start depreciating its value up to the original cost. However if you can't prove the original cost you might run into a problem if examined. If its pretty obviousl that the value you are using is reasonable and less than the cost, it would probably be OK, even without receipts.

You can deduct the business portion of your cell phone. Technically you would need to log your calls or analyze your statement to come up with a percentage business versus personal. You can deduct vehicle expenses to the extent of business use. Here again, its business miles divided by total miles to develop a business percentage. Or you can use the IRS per diem rate for miles driven, and deduct the business percent of the interest on top of that.

Business expenses are deductible regardless of whether you itemize or take the standard deduction. The standard deduction is in place of personal deductions like home mortgage interest, taxes, and contributions, and not in place of business deductions that you can deduct anyway, even when you use the standard deduction. The key is that you have to have a trade or business that you entered into for a profit.

IRS Circular 230 Required Notice: IRS Regulations require that I inform you that any U.S. federal tax advice contained in this communication is not intended to be used and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code or for the purpose of promoting, marketing or recommending to another party any transaction or tax-related matter.

 

[oceaneering]

When you convert an asset from personal to business use you can start depreciating its value up to the original cost. However if you can't prove the original cost you might run into a problem if examined. If its pretty obviousl that the value you are using is reasonable and less than the cost, it would probably be OK, even without receipts.

You can deduct the business portion of your cell phone. Technically you would need to log your calls or analyze your statement to come up with a percentage business versus personal. You can deduct vehicle expenses to the extent of business use. Here again, its business miles divided by total miles to develop a business percentage. Or you can use the IRS per diem rate for miles driven, and deduct the business percent of the interest on top of that.

Business expenses are deductible regardless of whether you itemize or take the standard deduction. The standard deduction is in place of personal deductions like home mortgage interest, taxes, and contributions, and not in place of business deductions that you can deduct anyway, even when you use the standard deduction. The key is that you have to have a trade or business that you entered into for a profit.

IRS Circular 230 Required Notice: IRS Regulations require that I inform you that any U.S. federal tax advice contained in this communication is not intended to be used and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code or for the purpose of promoting, marketing or recommending to another party any transaction or tax-related matter.

Ok, That really makes sense. I was under the impression that you could file a standard deduction or choose to itemize. Let me make sure I understand you. Example one :
I use standard deduction for 10,300 for married filling joint. I claim 12,800 for 4 dependents, total 23,100.
Now I figure my business into it. business made 10,000. subtract 5,000 for milage($ per mile), 500 for cell phone bills(a %), 4,500 for new equipment and 10,000 for personal assets being converted to business ( I assume now my personal assets will belong to the business).
My business just showed a loss of -10,000. I can now combine that with my 23,100 standard deduction and exemptions to subtract 33,100 from my earned income to come up with my AGI or did I missunderstand you. I do understand that I might have to depreciate certain items instead of instantly deducting them. Is there a list of items that need to be depreciated and what percentages versus items that can be written off in the first year.
Example 2:
Same business situation -10,000 loss. 12,800 worth of exemptions. now I itemize my mortgage intrest, taxes ect...totaling 11,000. now I deduct that 33,800 against my earned income and come up with a AGI.
SPeaking of deducting taxes can you explain a little bit about state tax paid affecting federal tax and federal tax affecting state tax.
Thanks for your continued explanations. I'm really soaking this stuff up.

 

[randy41]

itemized deductions are deducted after agi. a loss from a business is deducted before agi. you still choose between itemized or standard. it has nothing to do with your business profit or loss. UNLESS your business is really a hobby in which case you can deduct hobby expenses to the extent of hobby income as a miscellaneous itemized deduction subject to a 2% of AGI floor.
state income taxes are an itemized deduction on the federal return. federal taxes are not deductable (except maybe in alabama).
you dont really have to know this stuff. theres plenty of tax prep software out there to guide you (turbo tax etc).

 

[Dougster]

This is a very interesting thread for me as I was just laid-off after 18 years and will now be trying to survive financially using (among other things) the heavy duty pickup truck and compact tractor I recently bought for personal land reconstruction. I plan to get the proper state operator's license, incorporate for liability protection and start-up my small business... and I've been wondering about many of the same things.

My business will not be farming; rather, it will likely include some "yet to be determined" mix of site/landscape prep work, boat & motorcycle transport and snowplowing. The exact mix will depend as much on insurance costs, luck and opportunity as anything else.

For the CPAs: Does the SBA have anything to offer a small-time, laid-off guy like me? Or should I wait until I'm able to show a profit and want to expand?

Dougster

 

[oceaneering]

This is a very interesting thread for me as I was just laid-off after 18 years and will now be trying to survive financially using (among other things) the heavy duty pickup truck and compact tractor I recently bought for personal land reconstruction. I plan to get the proper state operator's license, incorporate for liability protection and start-up my small business... and I've been wondering about many of the same things.

My business will not be farming; rather, it will likely include some "yet to be determined" mix of site/landscape prep work, boat & motorcycle transport and snowplowing. The exact mix will depend as much on insurance costs, luck and opportunity as anything else.

For the CPAs: Does the SBA have anything to offer a small-time, laid-off guy like me? Or should I wait until I'm able to show a profit and want to expand?

Dougster

You are right Doug, this is an interesting thread. I had figured that this was helping to clear up a bunch of ideas and misconceptions for someone besides me. Thanks to Randy and Alan.
Doug maybe I will start a new thread on starting a new business. look for it

 

[Alan L.]

Ok, That really makes sense. I was under the impression that you could file a standard deduction or choose to itemize. Let me make sure I understand you. Example one :
I use standard deduction for 10,300 for married filling joint. I claim 12,800 for 4 dependents, total 23,100.
Now I figure my business into it. business made 10,000. subtract 5,000 for milage($ per mile), 500 for cell phone bills(a %), 4,500 for new equipment and 10,000 for personal assets being converted to business ( I assume now my personal assets will belong to the business).
My business just showed a loss of -10,000. I can now combine that with my 23,100 standard deduction and exemptions to subtract 33,100 from my earned income to come up with my AGI or did I missunderstand you. I do understand that I might have to depreciate certain items instead of instantly deducting them. Is there a list of items that need to be depreciated and what percentages versus items that can be written off in the first year.
Example 2:
Same business situation -10,000 loss. 12,800 worth of exemptions. now I itemize my mortgage intrest, taxes ect...totaling 11,000. now I deduct that 33,800 against my earned income and come up with a AGI.
SPeaking of deducting taxes can you explain a little bit about state tax paid affecting federal tax and federal tax affecting state tax.
Thanks for your continued explanations. I'm really soaking this stuff up.

Pretty close. As Randy pointed out, mechanically you would figure the business profit or loss and then further down your return you would either take the standard deduction or itemized deductions.

One reason you figure the business profit first is that you pay self employment tax on that in addition to income tax. Of course if its a loss there would be no SE tax.

Under section 179 you can write off tangible personal property used for business that you purchase (up to the limit) but you can't immediately write off assets you already had and converted. For these assets, you would have to spread over a period of 5 to 7 years.

I hope you are learning just enough here to know you should talk to a professional tax preparer.

 

[oceaneering]

Pretty close. As Randy pointed out, mechanically you would figure the business profit or loss and then further down your return you would either take the standard deduction or itemized deductions.

One reason you figure the business profit first is that you pay self employment tax on that in addition to income tax. Of course if its a loss there would be no SE tax.

Under section 179 you can write off tangible personal property used for business that you purchase (up to the limit) but you can't immediately write off assets you already had and converted. For these assets, you would have to spread over a period of 5 to 7 years.

I hope you are learning just enough here to know you should talk to a professional tax preparer.

Most definitely I am realizing that I need help. But I would like to share a story with you. I,m a supervisor in my line of work. I often train people. Most of the time people dont really seem that intrested in learning. Recently I had one technichian show and intrest in learning and a capacity to retain. I complimented him on his attitude. I was happy to teach someone that was happy to learn. He told me he was interested in learning how a certain machine worked because then he could think about what he could make it do. You are a cpa. For you its probably easy. For a lot of other people its difficult. The more we know about the system the more we can make the system work for us. Taxes is a topic I have taken an intrest in recently and ive asked questions to coworkers, some of whom have a part time business on the side. I,ve also looked up info on the net. sometimes it seemed pretty straight forward but not as understandable as you guys. and some of it was confussing. I,ve never dealt with a cpa so I didn't know how much help they would be in planning a business. and a lot of those co workers gave some really misleading advice. and when asked a direct question would say oh I dont know i just bring my cpa my reciepts. I didn't want to be that guy.
You guys have posted some really good info on here. Thanks

 

[Dougster]

Under section 179 you can write off tangible personal property used for business that you purchase (up to the limit) but you can't immediately write off assets you already had and converted. For these assets, you would have to spread over a period of 5 to 7 years.

What about assets bought during the same tax year that a person starts their new business? More to the point, what determines the date one actually "starts" their business? I assume most businesses actually start-up long before the door opens or advertising starts.

Part of the reason I bought a truck and tractor as big as I did (i.e., much bigger than I needed for my own personal yard work) was because I knew this lay-off would be coming someday soon. I didn't know how soon, but I knew soon. I would not have been able to finance either had I waited until I was laid-off and had no income at all. It was kind of a Catch-22 situation. Buy this equipment while still employed or not be able to buy it at all.

If I managed to screw myself tax-wise by buying too much of the necessary equipment too early, can I sell this equipment to someone for a month or two, officially start my business (as the tax laws may define) and then buy it back? Sounds like it might be worth the hassle for the accelerated depreciation... Yes?

Dougster

 

[Dougster]

You are right Doug, this is an interesting thread. I had figured that this was helping to clear up a bunch of ideas and misconceptions for someone besides me. Thanks to Randy and Alan.
Doug maybe I will start a new thread on starting a new business. look for it

I will do that! Using my new truck and tractor for income is no longer an interesting concept, option or idea. Now it is an imperative. After holding off for years on my yard reconstruction work, I finally broke down and bought my truck and tractor... and then was terminated exactly 24 hours after buying the latter. I certainly knew it was coming someday, but I never dreamed I was going to be jobless 24-hours after spending well over $40,000.00. Mama Mia!!!

So now I need business advice fast. To survive, I will have to depreciate this expensive new equipment this year while I still have sufficient taxable income to offset. Hopefully, that will recoup enough of the purchase price so I can buy the remaining necessary equipment... i.e., trailers, grapple, snowplow, boat mover et al.

One big question: Can I start off as a sole proprietorship this year so I can take the big equipment depreciation on my 2006 taxes... and incorporate next year for the liability protection I'll most certainly need for the bigger, riskier jobs & employee issues. I know it could be awfully risky for a few months, but there are certain complexities and implications concerning how I should incorporate (e.g., LLC vs. "S" corporation) and I don't want to rush it. I also won't have enough money to afford the CPAs and lawyers I will need until the first quarter of next year.

Dougster

 

[oceaneering]

I will do that! Using my new truck and tractor for income is no longer an interesting concept, option or idea. Now it is an imperative. After holding off for years on my yard reconstruction work, I finally broke down and bought my truck and tractor... and then was terminated exactly 24 hours after buying the latter. I certainly knew it was coming someday, but I never dreamed I was going to be jobless 24-hours after spending well over $40,000.00. Mama Mia!!!

So now I need business advice fast. To survive, I will have to depreciate this expensive new equipment this year while I still have sufficient taxable income to offset. Hopefully, that will recoup enough of the purchase price so I can buy the remaining necessary equipment... i.e., trailers, grapple, snowplow, boat mover et al.

One big question: Can I start off as a sole proprietorship this year so I can take the big equipment depreciation on my 2006 taxes... and incorporate next year for the liability protection I'll most certainly need for the bigger, riskier jobs & employee issues. I know it could be awfully risky for a few months, but there are certain complexities and implications concerning how I should incorporate (e.g., LLC vs. "S" corporation) and I don't want to rush it. I also won't have enough money to afford the CPAs and lawyers I will need until the first quarter of next year.

Dougster

Dougster, what a daleima. I,ve been reading up on internet about forms of business. Dose this make sense form an LLC and for liability. LLC,s can be filed like a sole p. for tax purposes as long as they have 1 owner and follow other criteria. At least that was the way I understood it. I will look at it again.