Tax Write Off?

[jeff9329]

Grant:

All your expenses including new cameras/equipment can be taken as a Section 179 deduction and expensed on Schedule C, "Profit or Loss From Business (Sole Proprietorship)" on line 13. Part V also allows first year business owners to list up to $5,000 of business start up costs as a deductable expense in addition to other expenses. So these costs are expenses that reduce your gross income and thereby reduce tax liability. Im not sure what you are talking about on the standard deduction. I guess you are talking about Schedule A line 20-26 itemized tax deductions. I don't see how that has any bearing on expenses, plus Schedule A itemized deducions are already subject to the 2% AGI gross limitation and the AGI maximum 3% reduction.

You are correct that Sole Proprietors do take a hit on the self employeement (SE) tax at 15.3% of net. However, like I said before, for a startup with most income going towards expenses (equipment), this is a non-issue. Plus during marginal post-startup years, it is not too bad as you can deduct half of your SE tax in figuring your adjusted gross income. This deduction only affects your income tax. It does not affect either your net earnings from self-employment or your SE tax. Plus, only the first $102,000 of your combined net earnings is subject to any combination of the 12.4% social security part of SE tax.

Bottom line, you have to have an accountant/tax professional do your taxes even at the startup business level.

Jeff, If you deduct as a sole proprietor, you must have enough in deductions to get beyond the threshold of standard personal deduction or it is pointless. If you own a house, and pay interest, and invest some equipment, then this might work if you made very little from your business. But if you are making even small amounts of money from the business then you are losing money; here is why. As a corp or LLC you can take the standard personal deduction AND the expense and investment deductions AND the loss (if any) from your business. It works better if you begin to make some $ and especially when you begin to pay yourself. An S corp doesn't pay income tax, you forward that gain or loss onto your personal return. Your corporation must pay you a reasonable wage and anything beyond that can be taken as a dividend. You don't pay social security (payroll tax) on a dividend, only income tax, so you are saving 16% tax on everything taken as a dividend. If you pay yourself $15/ hr as a cam operator, and take a $10,000 dividend at the end of the year, then you have already saved $1600. As a sole proprietor, you pay social security on all your income from the business.....you get to pay the extra 16% on all of it.

This is pretty different on a C corp, since C corps do pay income tax. C corps are much more complicated and offer few advantages for a small operator until you are making lots of money (we all hope). C corps can carry money forward from year to year, but they also pay income tax, so you can end up paying tax twice if you delay taking all the gain in one year. But they can also carry a loss forward at the corporate level, so over time, with larger investments, it is better. It is also better if you have investors and more shareholders.

Accountants.....I pay one to do my corporate returns. For the $400/year he charges me, I don't have to spend my time learning tax code and keeping up with changes. I can make more with that time doing what I do well, and paying him for what he does well.

Best Regards,
Grant

This advice is worth what you paid for it.

 

[ZazaCast]

Bottom line, you have to have an accountant/tax professional do your taxes even at the startup business level.

Thank You Jeff!:happy:

 

[jeff9329]

One other very important thing I forgot to mention is to have your local accountant/tax pro advise on the business setup beforehand. The attorney will not know about all the tax implications.

In Fairfax County VA for example, if you form any type of corporation the state corporation commission will notify the locality of your existence and automatic business property tax assessments will begin if you dont clearly specify the business property and they can also determine from the state tax return what they think your business property is. That's probably a worst case/worst locality scenario, but I learned the starting of a seemingly small business can have lots of big implications.