Jon_Are

Any tax experts here?

When operating a home business, I understand what is deductible and how to compute it.

And, I understand that you may not deduct more than what you earn.

Here's my question:

If I earn, say, $10,000 on my home business, and $40,000 at my regular job...

does this mean that I can take up to $10,000 in home-business-related deductions? Or $50,000?

Thanks,

Jon

Chu Gai

My understanding is that you're limited to 10K. If your expenses are greater, they can be carried forward to offset future earnings. You also can write off the percentage of your house used in the exclusive operation of your home business too according to a 39 year straight line however if you then sell your house at a profit, you'll be subject to a 25% Fed tax on the recaptured depreciation deductions.

nolesrule

I'm not so sure that expenses can be carried over to future years for a Schedule C business. However don't forget that business-use assets must be placed on a depreciation schedule so that their cost is deducted over time. The IRS has set years for different types of assets. Office furniture is 7 years, computers 5 years. There are others as well.

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Jon_Are

So, I am allowed to deduct expenses only up to the limit of my home business, and not to the limit of what I have earned overall?

Jon

nolesrule

Disclaimer: IANAABMDI (I am not an account but my dad is). However, I am writing this with my IRS filings in front of me from 1999-2003, in which I have had both profit years and loss years to use as a reference.

You declare all your expenses, but no on your 1040. So, yes, you can have more business expenses than income.

If it is a sole proprietorship, you must use Schedule C to calculate your Profit or Loss from a Business separately from the rest of your income. You must keep all business profit/loss separate from employment income when filing, just as there are separate schedules for calculating interest income and capital gains/losses.

You must list all income and expenses related to this business on your Schedule C. If you show a loss you need to follow the Schedule C instructions for declaring a profit/loss from business on your form 1040 (see line 12).

Read the Schedule C Instructions completely. You may also be required to fill out additional forms depending on the Schedule C process.

If you show a loss on your Schedule C, assets must be depreciated and not listed as an expense, as I said before.

The most important thing, so I'll say it again:

You must use Schedule C for calculating your profit/loss for your business. Read the instructions carefully. You may be required to file a business use of home Form 8829, Schedule SE, Depretiation Form 4562 or more.

Did I emphasize using Schedule C enough? I believe you can show no more than 3 consecutive years of loss from business or the IRS will flag it as a hobby instead.

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nolesrule

One more thing...

Make sure you list everything properly, because some things must be calculated and some negative calculations are limited to zero. Also, make sure you are using the proper form for the kind of expense you have. If you bought a computer or office furniture for business use, then you need to use the form for depreciation because these are expenses where the cost must be spread over its period of use (based on IRS standards).

If all of this confuses you, get an accountant and just give him all your records (keep good records). I recommend Intuit's Quickbooks. Does most of the work. I always print out the tax reports and give them to my dad the accountant and he takes care of the forms. I'm glad I do, because he gets back more from the IRS than I would have done on my own.

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Jon_Are

I appreciate all the help - I really do - but I'm still unsure of the answer to my question, so I will simplify and re-state it:


My home business takes in $10 in income.

I spend $20 on paperclips.

In the meantime, I have earned $100 pumping gas at the local Sunoco station.

May I deduct the entire $20 worth of clips? Or just $10 of it?

Thanks,

Jon

Shayne Lebrun

Jon,

I'd suggest finding a local business tax consultant, and paying them some money to give you an answer.

Joe Schwartz

The short answer is, your home business would have a loss of $10, but you cannot deduct that loss from your regular income.

Mark Zimmer

If you have an operating business (and not a hobby, and there are specific rules relating to the difference), and you are active and not a passive investor, I think you can probably deduct some of the excess against other income. If you have $100 of business income and $200 of business expenses, you may have a Net Operating Loss (NOL) of $100. If you qualify (and there are complicated rules relating to your other deductions, and whether you have capital gains), you may be able to use the NOL in the current year, and possibly carry any excess back or forward to other tax years. There are limits on how much NOL you can apply against other income--you have to add back in personal exemptions and some deductions.

Generally, see IRS publication 536:

http://www.irs.gov/pub/irs-pdf/p536.pdf

There are other factors included if you have incorporated or formed an LLC for your business-your losses may be limited by the tax basis of your interest. This gets very complicated, very fast, so yes, see a small business tax accountant ASAP. Unfortunately, this is an area not susceptible of easy answers, but depending on what the numbers are it may well be worth your while.

So, like it or not, as is the case with so much in the law the answer is "It depends."

The foregoing is not intended to be legal advice nor the official position of any taxing authority.

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