Depreciating an item over several years means your tax deduction for buying the item is spread over several years. The first year you are paying taxes on the money you already spent. A company I know got themselves in trouble by buying $600,000 in equipment and having to depreciate it which meant they owed a bunch of taxes and had problems paying the taxes. They leased equipment for a while after that.
I suppose depreciation could make sense if the business will not owe taxes the first year due to losses.
accsys wrote: Your CPA is correct! However, he may not have explained to you that any loss not allowed due to the business income limitation will be carryed over to future years to offset income in those years. If you read the instructions for Form 4562 you will see how this all interacts and restricts your loss to business income.
You must also realize that if you do not hold the property for the normal length of depreciation, you will be required to count the difference in the 179 deduction and what would have been normally depreciated as income.
I see that the loss can be carried over, so either way I don't have to depreciate the equipment. But if I can write it off against W2 salary then I want to do that. What the CPA says seems to conflict with the IRS publication on that.
The W-2 income that Pubication 946 is referring to is business income of the taxpayer. If you had a Partnership or S-Corp that paid you a salary and reported that salary on a W-2, you could use that as a trade or business income. A W-2 from a business in which you have no ownership interest cannot be counted as income from a trade or business. Trust your CPA or get another one you can trust - to constantly question their expertise is not a good idea. When a lay person reads the IRS pubs or forms they frequently misread them as they do not understand the tax language.
That's why I'm asking here. And I'll question anybody if I think they may not be right, I don't care if they are a CPA. I have an MPA and spent many years in law enforcement so I do know how to read laws. You may be correct in what you are saying, but Pub 946 does not clearly say this.
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belfert wrote: Depreciating an item over several years means your tax deduction for buying the item is spread over several years. The first year you are paying taxes on the money you already spent. A company I know got themselves in trouble by buying $600,000 in equipment and having to depreciate it which meant they owed a bunch of taxes and had problems paying the taxes. They leased equipment for a while after that.
I suppose depreciation could make sense if the business will not owe taxes the first year due to losses.
I understand how it works, that wasn't the question.
"For Schedule C sole proprietorships, it is actually possible to use Section 179 to create or increase a large net loss if there are other sources of income (W-2s, etc.) that result in a positive taxable income before considering the Sec. 179 deduction."
The above comes from a website of a CPA firm and this seems to agree with the way I'm reading Publication 946.
Here's the actual language from Section 179 of the revenue code:
(3) Limitation based on income from trade or business
(A) In general
The amount allowed as a deduction under subsection (a) for any taxable year (determined after the application of paragraphs (1) and (2)) shall not exceed the aggregate amount of taxable income of the taxpayer for such taxable year which is derived from the active conduct by the taxpayer of any trade or business during such taxable year."
And this is the definition of trade or business from the IRS website:
"The term trade or business generally includes any activity carried on for the production of income from selling goods or performing services. It is not limited to integrated aggregates of assets, activities, and goodwill that comprise businesses for purposes of certain other provisions of the Internal Revenue Code. Activities of producing or distributing goods or performing services from which gross income is derived do not lose their identity as trades or businesses merely because they are carried on within a larger framework of other activities that may, or may not, be related to the organization's exempt purposes."
So working as a W2 employee for somebody else that you get income from seems to me to qualify as a trade. Section 179 specifically says "active conduct of the tax payer of ANY trade or business during the taxable year."
I'm open for criticism here, those of you who said I'm wrong on this how come I'm wrong? Where does it say the W2 income has to come from a business you own? In doing Google searches I see many conflicting opinions out there mostly given on forums like this. I pointed out the one CPA website that seems to be saying the same thing I am. I saw that exact same language on other websites too. The way I'm reading this the 179 deduction cannot be used to offset income from other sources such as retirement payments, capital gains, and things of that nature, but as long as it's W2 wages or business income, regardless of the source, then you can use the 179 deduction against it.
OK, I'll try this one more time. The term trade or business generally includes any activity carried on for the production of income from selling goods or performing services. What is missing here is the words by the owner following "carried on."
Section 162(a) gives you the definition of a trade or business. Regardless of how you want to interpret a publication, Section 162 is the law as passed by Congress. As a further explanation you may want to read Section 1-179-2 of the IRS regulations, page 240 (that's about the sixth page of the linked document), right column, where it tells you that section 162 is the definition of a trade or business for purposes of the 179 deduction and also defines what "active conduct" of the business is. You will notice that in all of these references it is talking about the individual being in a trade (plumber, electrician, or other service) or business (which could be retail or otherwise) that the individual is an owner, either as a sole proprietor, partner or S-Corp owner. In no example or discussion does it define W-2 earnings from someone else's business as be in a trade or business. Those W-2 earnings are called "earned income" not "income from a trade or business."
If you hunt on the internet hard enough you will find that someone will tell you that you can do anything you wish in regards to taxes however that doesn't make it legal. The soucres I gave you are the actual law and regulations from Congress and the IRS.
When you fill out your own tax return, you can basically do anything you wish and hope the IRS doesn't catch it. It is usually much harder to find a professional that will fill out the forms incorrectly for you just because you "think" it is OK.
* This post was
edited 05/17/12 04:39pm by accsys *
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Okay well yesterday I sent my CPA an email asking for clarification on it and she checked with some other CPA's and just got back with me and said I was correct. I can offset other W2 wages with the 179 deduction. So now who should I listen to?
accsys wrote: OK, I'll try this one more time. The term trade or business generally includes any activity carried on for the production of income from selling goods or performing services. What is missing here is the words by the owner following "carried on."
Section 162(a) gives you the definition of a trade or business. Regardless of how you want to interpret a publication, Section 162 is the law as passed by Congress. As a further explanation you may want to read Section 1-179-2 of the IRS regulations, page 240 (that's about the sixth page of the linked document), right column, where it tells you that section 162 is the definition of a trade or business for purposes of the 179 deduction and also defines what "active conduct" of the business is. You will notice that in all of these references it is talking about the individual being in a trade (plumber, electrician, or other service) or business (which could be retail or otherwise) that the individual is an owner, either as a sole proprietor, partner or S-Corp owner. In no example or discussion does it define W-2 earnings from someone else's business as be in a trade or business. Those W-2 earnings are called "earned income" not "income from a trade or business."
If you hunt on the internet hard enough you will find that someone will tell you that you can do anything you wish in regards to taxes however that doesn't make it legal. The soucres I gave you are the actual law and regulations from Congress and the IRS.
When you fill out your own tax return, you can basically do anything you wish and hope the IRS doesn't catch it. It is usually much harder to find a professional that will fill out the forms incorrectly for you just because you "think" it is OK.
Thank you for the link to 1-179-2 as that clearly answers my question, but it isn't on page 6, it's on page 7.
From Page 7:
(iv) Employees. For purposes of this
section, employees are considered to be
engaged in the active conduct of the
trade or business of their employment.
Thus, wages, salaries, tips, and other
compensation (not reduced by unreimbursed
employee business expenses) derived
by a taxpayer as an employee are
included in the aggregate amount of
taxable income of the taxpayer under
paragraph (c)(1) of this section.
And paragraph (c) (1) of this section is the one that talks about the taxable income limit:
(c) Taxable income limitation—(1) In
general. The aggregate cost of section
179 property elected to be expensed
under section 179 that may be deducted
for any taxable year may not exceed
the aggregate amount of taxable income
of the taxpayer for such taxable
year that is derived from the active
conduct by the taxpayer of any trade
or business during the taxable year.
Just for giggles, I went into my tax prep package and entered a bogus return for 2011 and it appears you are right - I didn't read far enough! The W-2 wages were added to the Sch C revenue for the business income limitation on line 11 of Form 4562. I should have done that before all of this started! Now all you have to do is convince your CPA. Giving him a copy of the reg may help.
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