Retroactively deducting a business expense?
December 10, 2013 1:16 AM Subscribe
I've recently started working on a couple of software projects that I hope will generate income in 2014. I'd like to form an LLC, but I'll probably end up doing that closer to completion since it's so expensive. Because my old laptop just wasn't up to snuff for development work anymore, I decided to purchase a new laptop a few weeks ago. Now I'm worried that I may have missed out on a sizable tax deduction. Assuming I can't take the laptop off my taxes in 2013 (no LLC, no revenue), is there any way I'll be able to deduct a purchase made in 2013 as a business expense in 2014?
Response by poster: Thing is, I still have 30 days to return it if I change my mind. And it's a pretty expensive piece of hardware (out of necessity), so I'd like to figure this out before the deadline passes.
posted by archagon at 3:29 AM on December 10, 2013
posted by archagon at 3:29 AM on December 10, 2013
Your business already exists right now, as a sole proprietorship. All an LLC will get you is liability protection. From a tax perspective, if you are the sole owner of the LLC, unless you elect to have the LLC treated as a corporation, it will be a disregarded entity.
You can deduct business expenses on Sch. C. of your personal return. As long as you have profit for this business (in an LLC or not) within the next 3 years, you shouldn't run into hobby loss rules.
Speak to a CPA or attorney to get specific advice, especially on your state tax situation, as it may be different.
posted by melissasaurus at 3:50 AM on December 10, 2013 [6 favorites]
You can deduct business expenses on Sch. C. of your personal return. As long as you have profit for this business (in an LLC or not) within the next 3 years, you shouldn't run into hobby loss rules.
Speak to a CPA or attorney to get specific advice, especially on your state tax situation, as it may be different.
posted by melissasaurus at 3:50 AM on December 10, 2013 [6 favorites]
If you had no revenue in 2013, then why are you worried about a tax deduction?
You do not have to have revenue from the business to deduct that business' expense. As Melissa said, you are in business already, preparing for the time when you will engage in transactions in that business.
posted by yclipse at 4:12 AM on December 10, 2013
You do not have to have revenue from the business to deduct that business' expense. As Melissa said, you are in business already, preparing for the time when you will engage in transactions in that business.
posted by yclipse at 4:12 AM on December 10, 2013
Also, you could normally accelerate depreciation for items like this to deduct the full amount in the year of purchase (Sect. 179 deduction). However, this accelerated deduction cannot create a loss. Any amount disallowed is generally carried forward to the following year.
This is all assuming that the computer is truly business property.
posted by melissasaurus at 4:23 AM on December 10, 2013 [1 favorite]
This is all assuming that the computer is truly business property.
posted by melissasaurus at 4:23 AM on December 10, 2013 [1 favorite]
seconding melissasaurus. corporate form doesn't matter, the activity does. if you were conducting business, whether in an LLC or as a sole prop, your expenses are deductible. (subject to other any other limitations)
posted by jpe at 4:33 AM on December 10, 2013
posted by jpe at 4:33 AM on December 10, 2013
In addition to the stuff above—yes, your computer is an expense against your income this year—in some cases expenses can be carried over into the following tax year, for instance when your expenses have exceeded your revenue. That is something for an accountant to deal with; don't try that on Turbotax. :)
posted by RJ Reynolds at 6:25 AM on December 10, 2013
posted by RJ Reynolds at 6:25 AM on December 10, 2013
The reason OP can use a deduction is that sole proprietor income/loss affects personal income tax, and presumably OP had wage income or the like to pay tax on.
IANACPA, but in my opinion you have conducted business this year; you just haven't made a sale. I think the deduction is morally correct; whether it would withstand an audit might be a good question for a CPA, and you should really consult one of those before starting a business anyway. I think it would just be a by-the-way question as you figure out how to do things for 2014, and my guess is he or she would simply tell you to put it on your schedule C.
posted by randomkeystrike at 6:50 AM on December 10, 2013
IANACPA, but in my opinion you have conducted business this year; you just haven't made a sale. I think the deduction is morally correct; whether it would withstand an audit might be a good question for a CPA, and you should really consult one of those before starting a business anyway. I think it would just be a by-the-way question as you figure out how to do things for 2014, and my guess is he or she would simply tell you to put it on your schedule C.
posted by randomkeystrike at 6:50 AM on December 10, 2013
Do you have other income? Business losses on schedule C can be deducted against your regular income, subject to certain limitations. You can't do this forever; the IRS distinguishes between businesses and hobbies and if you're always losing money, sorry, that's a hobby. If you start up in November or December and don't actually get paid by clients or have actual sales until January, that's totally normal, they get that. But you'll want a good accountant through this whole process anyway, so go find someone now.
posted by Sequence at 7:29 AM on December 10, 2013
posted by Sequence at 7:29 AM on December 10, 2013
Oh, also, there *are* limitations on how much you're going to be able to deduct if you're using that laptop for anything other than your new business. I.e., any other work, not just personal stuff. This is where the accountant is going to come in handy. Don't try to do your own depreciation, it never goes well.
posted by Sequence at 7:34 AM on December 10, 2013
posted by Sequence at 7:34 AM on December 10, 2013
You can deduct the cost of the computer in 2013. Or at least most of it.
Most of what has been said above about your already being in business is accurate. If you're doing work and seeking income in 2013, you're in business in 2013, even if you don't have revenue until 2014. The LLC is relevant for legal purposes, but it makes no difference for tax purposes, if you're the sole member.
The immediate deduction for property used in a trade or business (called a §179 deduction) is limited to your taxable income derived from a trade or business. This DOES NOT mean that you have to have income from your self-employed development work to take the deduction. It means that you have to have net positive income from any trade or business. That income includes your W-2 wages from a regular job. So if you're making more from your regular job than you're losing on the self-employment income, you can still deduct the computer now, subject to another limitation:
In order to take the §179 deduction for a computer, the computer must be used primarily in a trade or business. So if you're using the computer 80% for business purposes, you can deduct 80% of the cost of that computer, whether you're taking the deduction in 2013 (§179 deduction) or over time (via depreciation). If you're using the computer more than 50% for personal purposes, you can still depreciate the business-use portion, but over a much longer period of time, and the computation becomes more complicated.
I am a CPA, but I don't think you need one to take this deduction. TurboTax can probably handle it. However, if you're going to be making a significant amount of money from the business, you may want a tax professional helping you out to save you time and provide peace of mind. A CPA, however, is likely to be too expensive for what you need. Consider consulting an Enrolled Agent. EAs are regulated by the IRS, but their rates are typically much more reasonable.
posted by anapestic at 9:08 AM on December 10, 2013
Most of what has been said above about your already being in business is accurate. If you're doing work and seeking income in 2013, you're in business in 2013, even if you don't have revenue until 2014. The LLC is relevant for legal purposes, but it makes no difference for tax purposes, if you're the sole member.
The immediate deduction for property used in a trade or business (called a §179 deduction) is limited to your taxable income derived from a trade or business. This DOES NOT mean that you have to have income from your self-employed development work to take the deduction. It means that you have to have net positive income from any trade or business. That income includes your W-2 wages from a regular job. So if you're making more from your regular job than you're losing on the self-employment income, you can still deduct the computer now, subject to another limitation:
In order to take the §179 deduction for a computer, the computer must be used primarily in a trade or business. So if you're using the computer 80% for business purposes, you can deduct 80% of the cost of that computer, whether you're taking the deduction in 2013 (§179 deduction) or over time (via depreciation). If you're using the computer more than 50% for personal purposes, you can still depreciate the business-use portion, but over a much longer period of time, and the computation becomes more complicated.
I am a CPA, but I don't think you need one to take this deduction. TurboTax can probably handle it. However, if you're going to be making a significant amount of money from the business, you may want a tax professional helping you out to save you time and provide peace of mind. A CPA, however, is likely to be too expensive for what you need. Consider consulting an Enrolled Agent. EAs are regulated by the IRS, but their rates are typically much more reasonable.
posted by anapestic at 9:08 AM on December 10, 2013
Response by poster: Thank you all for the advice! I might have to consult a CPA about this, depending on how expensive it is.
One thing I've been wondering: if I haven't actually finished any projects yet, how does the IRS determine that I'm using the laptop for business and not just as a hobby? Wouldn't it be really easy to write arbitrary things off my taxes by claiming they're for some nebulous "sole proprietorship"?
Also, before I started working on my business, I was employed for part of the year. I read somewhere else on Metafilter that a business deduction had to apply to the business revenue, not to any unrelated W2 revenue. Is this correct?
posted by archagon at 1:25 PM on December 10, 2013
One thing I've been wondering: if I haven't actually finished any projects yet, how does the IRS determine that I'm using the laptop for business and not just as a hobby? Wouldn't it be really easy to write arbitrary things off my taxes by claiming they're for some nebulous "sole proprietorship"?
Also, before I started working on my business, I was employed for part of the year. I read somewhere else on Metafilter that a business deduction had to apply to the business revenue, not to any unrelated W2 revenue. Is this correct?
posted by archagon at 1:25 PM on December 10, 2013
IANACPA, but i have done a lot of business, sometimes relying on accountants and other times DIY. In DIY cases, i have always done my best to interpret the laws, rules, regs but also maintained records that document my actions and timings, so if called upon to so do, i could explain and support my decisions. I suspect more than 99% and close to 100% of these things are never reviewed, unless your numbers are substantially outliers and of great magnitude to trigger automatic review. Your transaction is not worth reviewing, amigo. Noise.
It is my obligation to most benfically interpret laws to my advantage, and i do. I also am prepared to defend my actions, but to also deal with the consequnces of being wrong. So far, no problem. In 45 years of business, the only exposure i ever had to IRS agression was dealing with FICA witholding issues i inherited from my predecessor in a family business. Since the amounts were in the 6 digit raange and he had some prior violations, i had afight on my hands, but still managed to avoid any penalties. Helped that he died. Took a year to resolve. High pressure. Much fun to win.
posted by FauxScot at 5:33 PM on December 10, 2013
It is my obligation to most benfically interpret laws to my advantage, and i do. I also am prepared to defend my actions, but to also deal with the consequnces of being wrong. So far, no problem. In 45 years of business, the only exposure i ever had to IRS agression was dealing with FICA witholding issues i inherited from my predecessor in a family business. Since the amounts were in the 6 digit raange and he had some prior violations, i had afight on my hands, but still managed to avoid any penalties. Helped that he died. Took a year to resolve. High pressure. Much fun to win.
posted by FauxScot at 5:33 PM on December 10, 2013
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There might have been better ways of acquiring the new laptop (eg lease), but that is now water under the bridge - and if you needed it, you had to have it, so don't stress over a tax deduction sometime in the future, maybe, ...
posted by GeeEmm at 2:15 AM on December 10, 2013 [1 favorite]