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socrateaser
socrateaser, Lawyer
Category: Tax
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Experience:  Retired (mostly)
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I am considering starting a business ... sole proprietorship.

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I am considering starting a business ... sole proprietorship. I estimate that I will invest 20,000.00 in equipment to start up.

I am trying to understand what portion of that I will be able to deduct/depreciate given that I expect it to take some time before the business will generate any appreciable income. Since this will be, intially at least, a part-time venture and I will still have income from employment ... can I actually count these expenses against my personal income?
Hello,

If you use a "Section 179" deduction, you can expense all $20,000 in your first year of business and deduct that from your gross wages. However, in order to retain that deduction, you are generally expected to be able to generate a profit in three of every five years while in business.

If the IRS determines that you are not able to meet this test, you could be audited, and if the IRS further determines that you were not engaged in a bona fide business enterprise, but rather a hobby, or a tax shelter. If this occurs, you could find that the IRS may dissallow the original deduction entirely, as well as deductions from future years, to the extent that the deduction exceeds your income from that business.

The botXXXXX XXXXXne is that the Section 179 deduction is available. Just be certain that you are heavily invested in making this business a profitable enterprise, or you could find that Uncle Sam comes back and takes away the deduction.

Hope this helps.
Customer: replied 3 years ago.

Thank you. Could you clarify ... say for instance, I start the biz in Aug 2013, take the deduction next tax season... IRS may come back 2 or 3 years later and deny the deduction? If that should happen, will there be penalties associated?

IRS may come back 2 or 3 years later and deny the deduction?

A: That's exactly correct. The IRS generally cannot audit for deductions, farther back than three years from the date that tax return for the year under audit is filed. So, if the IRS observes that you have lost money during your first two years, then you can probably expect an audit letter during year three, with the goal of either determining that your business does not qualify for the deductions, or that you agree to extend the time in which the IRS can audit your return.

If that should happen, will there be penalties associated?

A: Yes. See this link.

Hope this helps.
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