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Hey all, As some of you know, I recently purchased a small CNC machine for making banduras and in the process, I got quotes from a lot of manufacturers so got on a lot of mailing lists. I recently received an e-mail from one of them explaining about how IRS section 179 in 2011 allows small business to fully depreciate equipment purchased this year in full rather than a standard 4 to 7 year depreciation.

More info is here: http://www.section179.org/index.html (scroll down to see the window).

I'd like to use that deduction (or possibly the cary forward thing) if at all possible. my current situation is that I have a day job completely unrelated to luthiery but I have gotten an EIN for my "business". I only expect to make a few hundred bucks this year with my "business" but I believe I should still be able to use the deduction no?

Anyone have any experience with this? Seems like this could help out a lot of us if we could.

This also has me thinking, I really need to upgrade my dust collector and was considering buying one of those combo 12" planer jointer things to save space but I was going to put that off for a while - I may reconsider if it would help me out this year.

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http://www.birkonium.com CNC Products for Luthiers
http://banduramaker.blogspot.com

I'd recommend talking to a good accountant. There's alot of deductions you can probably take, even with your day job.....but a mistake now could cost you a BUNCH in the future due to penalities and interest.

Basically, it's my understanding that, for a hobby you can only claim expenses up to the income generated by the hobby, but you can't claim a loss. Gambling winnings would fall into this catagory.
If you are running a business of making Banduras (or anything else) for profit you can claim all business related expenses. You don't need to actually make a profit, but show the intent to make a profit. These expenses, and income are filed on a schedule C. Having a day job (or not) doesn't matter.

Added: I'm pretty sure an EIN isn't necessary if you don't have employees. I don't have an EIN, but I don't have empolyees.

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I didn't mean to say it, but I meant what I said.
http://www.brackettinstruments.com/

For those who don't know, EIN means Federal Employer Identification Number. And having one will not double, triple, or quadruple your paperwork. When I got mine (to permanently hire a previously unpaid apprentice), my paperwork increased TENFOLD!

So, yes - ask your book keeper!
Further to that, my book keeper was worth every penny I ever paid her. She kept me on the straight and level businesswise, and saved my butt a bunch of times.

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"Act your age, not your shoe size" - Prince

When you file your normal taxes, you will also fill out the schedule C "profit or loss from business" form, in addition to the section 179 form to deduct your CNC. You can fill this out even if you recieve a w-2 from your regular job (if you have one), as long as you received business income from operating a business, regardless of whether you profited, so long as you show a profit rather than a loss in 3 of the past 5 years of operating a business, once you've been in business 5 years, otherwise the IRS considers your "business" a hobby, so that you can lose money for your first 3 years in business, but after that you must show a profit, even if it is only a dollar. (sorry for the run-on).
You can own as many businesses as you want, and fill out a schedule c for each one, and have as many w-2's as you can work.
So, if you made $200, but spent $50,000 starting your business, you have lost $49,800 and your taxable income from your main job is reduced by $49,800, because your AGI is reduced by that amount, so the IRS considers that acceptable, since you are using your main job to supplement your business until it gets off the ground, as long as you have a genuine profit motive, and are not using your hobby as a tax shelter. If your taxeable income goes down into the negatives, you can only reduce your taxable income to zero, but you can carry over the rest to the next year. This happens when people spend all their money on their business, as well as some of their savings.
So you will have to fill out schedule c, and fill out the section 179 form and include it in your business expenses, so long as you actually receive at least $.01 in income from a legitimate customer.

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Old growth, shmold growth!

Unless you made a big enough profit for the 179 on an expensive piece of equipment to really help you, you might find it's better to depreciate it over some years. You get a larger write off in the first year anyway.

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Waddy

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Also... be very careful about understanding the difference between a "Credit" and a "Debit"....

Depreciation is counted as Income.... on the "Credit" side of the balance sheet.... It's a way to offset the "Debit" associated with the purchase of capital equipment over time so that the balance sheet adds up properly...

You get to write down the purchase of the Capital equipment against your income to reduce your "Profit" in the year you buy it.. but you must "Depreciate" it back as income for several years subsequent depending on it's schedule of economic life....

As you might imagine - this might actually turn out to be useful when you need some "Profit" to show your company actually makes some money on those 2 of 5 years....

Thanks

That was the reason for my question but it seems per guitar whisperer that since I'm a sole proprietor, I can mix my day job and side business income so, counting my day job pay - expenses for luthiery, I'm still rather profitable. Therefore, the full deduction this year makes sense I think.

Not counting the expense of machines, I think that it actually won't be too difficult to show a profit with just a few projects e.g. fretboards at $20 - $30 a pop. Now, the magnitude of that profit will probably only be rather low

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http://www.birkonium.com CNC Products for Luthiers
http://banduramaker.blogspot.com

You don't have to show profit, just income, which is what I think you meant, for the first three years.
If you show a loss, your AGI is adjusted downward, before taxes are figured. A loss is simply when our expenses are more than your income. Your expenses can be greater than your income when you either
1)Borrow money from your bank or investors as startup
or
2)Use your own money from your day job to purchase equipment or whatever for your business. You are not actually mixing your day job and business income per say, as the tax forms account for them separately, but if your business shows a loss, your AGI is adjusted downward to compensate since you had to use your other income source to keep your business running.
As long as you can demonstrate a profit motive (different from actual profit), which it sounds like you can, the government figures you will either become profitable and pay taxes on the profit, or you will convert to a hobby. They don't back tax you.
BTW you can also deduct vehicle mileage, business travel expense, business use of a portion of your home, a portion of your electricity bill, a whole bunch of stuff.

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Old growth, shmold growth!

As long as you fill out schedule c and include it with your tax, and put the appropriate amounts in the appropriate spots you'll be fine.
Obviously if you start a corporation, things change, but as a sole proprietorship, you don't have to "loan" your business anything.

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Old growth, shmold growth!

As long as you fill out schedule c and include it with your tax, and put the appropriate amounts in the appropriate spots you'll be fine.
Obviously if you start a corporation, things change, but as a sole proprietorship, you don't have to "loan" your business anything.
Call the IRS, they'll tell you.

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Old growth, shmold growth!

Concerning the profit for 3 years out of 5 rule, also known as the hobby rule. My understanding is that this is not a law but a general rule. As such it raises a flag with the IRS and may invite an audit. However, if you can show that you are operating a serious business, i.e. business plan, insurance, good bookkeeping, marketing strategy, etc, then you are still OK. I believe Amazon went well over 5 years without generating a profit, but then again they were not a sole proprietorship.

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Randy Muth
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I don't think that is correct. I think that deductions on your Schedule C can only be applied to the income you list on your Schedule C, not against income you get from a salary from another job. Best to check with an accountant on that. I hope I am incorrect as I have been filing Schedule Cs for part time income for several years.

Jim

all things considered, from what you are describing, I would NOT use the 179 deduction...it will be more useful in the long run to depreciate it and take advantage of being able to deduct it in future years when you might be making a profit...for this year the deduction amount will most likely give you a negative profit anyway, so why waste it all now?

as others have suggested, it would be best to talk to a tax advisor(s)...they certainly don't know everything so I suggest talking to more than one...I distinctly remember the time I got into an argument with my old boss about vehicle deductions, in specific the fact that a truck with a GVWR above a certain amount had no limits on deduction...turns out his tax man was ignorant of the facts and had to refile the guy's forms for free to take advantage of the deduction amount he had lost...

as a note I did small business schedule C for about 15 years, so while I refuse to be considered an authority on the subject of 179 deductions, I am certainly not totally ignorant of the whole scenario of business deductions...for any business you can deduct any and all expenses related to that endeavor, such as cell phone, office use, garage use of house for shop, internet expenses, computer expenses, electricity and utilities, etc, etc, etc....

unless things have changed, the IRS pretty much ignores business losses for the first couple of years, but after that they expect to see some sort of profit otherwise they are likely to consider it a hobby and audit you!

It IS correct. It's how the tax code is set up. If you have a business and are supplementing it with your regular job, your AGI is adjusted down to compensate, and you pay taxes on a lower bracket.

Check with the IRS, they answer anonymous questions that don't spark audits. There are certain triggers for audits that increase your chances of an audit, but don't guarantee you will be audited, but questions aren't triggers.

The IRS would rather you file your taxes correctly rather than go through the expense of auditing you. If they DO audit you, they will most likely send you a letter asking for verifications. This has happened to me twice, in both cases THEY corrected their paperowrk to match mine.

I've also spent a lot of time on the phone with them.

But don't take my word for it, ask them yourself.

As far as the 3-5 rule, I started showing profit in my third year, so I neverhad to worry about it.

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Old growth, shmold growth!

Hi Andy, just a couple of thoughts. i don't know who much $ a CNC machine is but if you borrowed the money the interest you are paying is deductible over the term of the loan. If you take the full deduction the 1st year then you are taxed on the principal amount paid back each year. Also if or when you go to sell the asset then you pay taxes on the amount you sell it for ( I believe at ordinary income rates not capital gains)

phew. I'm think I'm starting to feel thixotropic.

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"Preoccupation with an effect gives it power and enhances the error"
from "Your Owner's Manual" by Burt Hotchkiss.