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Lane
Lane, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 3701
Experience:  Providing Financial & Tax advice since 1986
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I have a day job and a side dba job.... Daytime truck driver

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I have a day job and a side dba job.... Daytime truck driver for a company self employed welder on the side... I've been putting money from my truck driving job back into the welding business supplies equipment, travel for sales and doing estimates.... I keep personal expenses separate but since the money came from truck driving and not the welding can I still have write offs... I'm in a plan of building a new shop and buying machining equipment and repairing welding machines, to prepare to go full time in maybe two years ...the truck driving money is great to help put all this together.... My question is just cuz I'm not making any money welding but putting my personal money into it does that disqualify me to write off anything?
Submitted: 9 months ago.
Category: Tax
Expert:  Lane replied 9 months ago.

Lane :

No, not at all,. Unless you've incorporated or separated he business into to different taxable entities, (two different tax ID numbers, for example) you're fine here...

Lane :

Woops, sorry I just saw that you said truck driver for a company.... QUESTION: do they pay you W-2 wages... or are you an independent contractor for them, wigh a 1099 at the end of the year

Customer: W2 as a truck driver
Lane :

Again, my apologies I misread the question, thinking that you were a contractor (1099, rather than w-2)

Lane :

OK, that IS a little different

Lane :

What kind of loss are you showing on the side business, and do you think you'll get it to profitable?

Lane :

I see the 2 year piece now

Lane :

Isee you're tyuping I'll wait

Lane :

Still don't see ya coming in .. the answer (the way you're framing it ) is no, you aren't disqualified from writing off some things ... FIrst here's how the IRS puts it:

Lane :

Use Schedule C (Form 1040) to report income or loss from a business you operated or a profession you practiced as a sole proprietor. An activity qualifies as a business if your primary purpose for engaging in the activity is for income or profit and you are involved in the activity with continuity and regularity. For example, a sporadic activity or a hobby does not qualify as a business

Customer: I used to be a full time welder self employed then in 08 and 09 things slowed so jumped in a truck but in 2012 grossed 102k great money to rebuild the self employed business into a machine shop/ welding shop... Been building a shop and rebuilding aging equipment, bought used truck for work truck only, but in 2012 I spent probably 10k to 15k into equipment down all year no welding...
Lane :

OK, let me get something for you .. there IS a way to get the benefit... (maybe not all up front) ... just a sec

Lane :

Have you been doing a schedule C for the Welding co?

Customer: This year I've spent over 20k on shop and equipment with no time to do any welding on schedule to have shop and equipment active before Christmas ... I've done some traveling to sale, and advertise my work so maybe next year... I can get some steady work and plan is in two years to be full time and out of the truck driving...
Lane :

OK, when you do a schedule C - the income statement for your business - which is also a tax return attachment that will flow to your regular 1040 on line 12 (business income or loss), your business losses DO offset that w-2 wage income that comes in on the top of your 1040, line 7

Customer: 2008-2011 no only w2 2012 money was good trying to put it back together.... Still have dba filed... Still on extension for 2012 fed. Taxes... Looking to see if I can do the schedule c for 2012 with no business income due to repairs
Lane :

Sure, you can and should, but you won't be able to write of ALL of the equipment purchases, as if they were an operating loss, you'll need to depreciate those over th life of the equipment

Lane :

regular maintenance, rent or lease for space, office costs, thos oare the things that will coum out a an operating loss that WILL end up reducing mthe W-2 income on the personal return

Lane :

so, the effest IS that they are a deduction

Customer: Well I say equipment... More like tools, the welding machine has already been depreciated but e rebuild was 4500 e rest were tools, and materials to prepare for the shop dirt landscaping for cement...
Lane :

Here it is: You must depreciate tools expected to last longer than 1 year over their useful life. You can usually depreciate tools over a 7-year recovery period. These tools also qualify for a Section 179 expense deduction. Under Section 179, you can expense the full cost of a tool the year you place it in service. The deduction is limited to the amount of your self-employed income

Lane :

SO you see the write it all off in one year can only be used to offset your business income

Lane :

But you CAN do a year's worth of depreciation on everything, along with other legit expenses

Customer: The truck will be depreciated... That's all for 2012... No take that back live in a camper/rv in 2012 that will have the home office deductions..... So just because I had no 1099 income I can still deduct... And this year also might end up the same... With more personal income spent on the business... Will that not be flagged.. I,m hoping my 2014 taxes will show profit...
Lane :

Nope, you really should sit down with a CPA on this but the botXXXXX XXXXXne is this ... (1) Some things like improvement to property have to be capitalized (added to your investment - basis - in the investment... which WILL cut down on the taxable gain later when you sell it) ... (2) you can create a legitimate business loss that will flow to line 12 and offset w-2 wage income with legit expenses on the schedule C, (correct depreciation on equip., rent, utilities, other office costs, etc)

Lane :

But this all sounds very real, so to be tax compliant you SHOULD do the schedule C and start doing the business as a part of your taxes

Lane :

It's only when you do it for 2 to three years in a row, and they don't any income ever coming in that they start to look hard at it

Lane :

MOST businesse aren't profitable right off the bat

Lane :

Still with me?

Customer: 102k truck driving 20k withdrawn for fed. Withholding... Spent 10k+ on rebuilding...all in 2012... Just schedule c all tools, depreciate truck and rv partially home office, 2013- 90k with about 18k+ withholding 20-30k in shop and large equipment purchases... No 1099 income still ... Depreciate equip and property
Customer: yes..
Lane :

ok

Lane :

sounds like you've got your arms around it pretty well ... ever use turbotax?

Lane :

I see your typing I'll wait

Customer: what happens I do all this and 2014 bust again which I will cease funding stick to the truck driving... I'd like to maintain some expense write offs... I do a lot of consulting on mechanic work and constructing work... Is there a business in that direction...
Lane :

OH yeah ... the GOOD thing about having everything under YOU SS# XXXXX XXXXX you can basically operate all these things an departments/divisions of the same company (and it IS all very related)

Customer: So I can travel and give estimates and still try to sell and advertise as maybe a consulting role...
Lane :

You can do different schedule C's and have them all flow into the same return ... but honestly, if you do it all as one schedule C XYZ services, whatever income is there cna be offset with whatever expenses are there

Lane :

YOu bet

Lane :

Eventually what you'll want to do is set up an LLC (to protect your assets, etc) BUT ...

Lane :

even then, as long as it's what's called a single member LLC, you still do a schedule C and run everything therough your 1040, for tax pruposes

Lane :

But again, all of these things can be different "divisions of the LLC, especially as related as they are ... somne day when you get enough assets and income coming into more than one of the operations, THEN you may want to set them up as different businesses, so creditor or lawsuits of one can't come after one of the toerh businesses

Lane :

for now, you'll get more tax advantage and show some income quicker, by running it all through one company

Customer: ...one more quick side note a friend set up his full time welding as an s-corp....only gross <50k a year... Any better benefit to that over llc
Lane :

Not for your situation, in my opinion ... the LLC does the same thing as far as liability protection goes ... an LLC is a hybrid (has the liability protection of a corporation with the flexibility of a partnership) ... that's one of the reasons the LLC is the fastest growing business entity ... BUT... the S-corp can save you on self employment taxes ahd that starts to be a benefit at around 50k

Lane :

that's because, when you are an s-corp... you pay your self a reasonable salary .... (and your company pays 1/2/of the fica and you pay the other half... just like with your w-2 now) BUT

Lane :

since you ARE the company there's no difference.... the difference ons in that amount of profit IOVER your salary ... you can take that out a an S-Corp without ANY social security taxes, because that's characterized as a dividend

Lane :

sorry for the typos ... basically, that amount of profits (over and above the salary you have to pay yourself in the S-Corp) has no social security tax attached to it

Lane :

... in the S-Crop, but otherwise it can be more cumbersome,,, have to do a separate tax return for the busines then a k-a to take that to the 1040, article of incorporation, supposed to have board of directors, etc and mintes of meeting is you do it right ... the LLC is much simpler AND you can bring in other perople and share thins ANY way you want... like a partnership... in the S-Corp if you own 50% of the sahres you get 50% of the profits and 50% of the losses, no matter what

Customer: So once I become fully self employed... Will the s corp be beneficial.... Over 50k... ... What about my 2012 100k w2 would that be mixed in or only 1099 income with an s corp
Lane :

So really it all depends on the situation ... right no, until you really start throwing some income the LLC does everything AND you can the file a 2553 form and elect to be taxed as an S-corp later, anyway

Lane :

what will happen there is the S-Corp has to do it's own return (the salary you pay yourself will be and expense on the S-corps 1120 form (very much like the schedule C, its loss still flow to the 1040) so from a tax standpoint... until you have some real profits (over and above what your taking out for yourself) the s-corp only adds a lot more administration

Lane :

AND IRS says you HAVE to pay yourself a reasonable salary in an S-Corp... you can't call it all dividends just to get out of paying social security taxes

Lane :

so, again, until you get very profitable over and above that salary level there's not a lot of benefit

Customer: Is there a percentage.. What do they call reasonable..
Lane :

Nope that's always been the hard part they DO NOT establish that... what they'll do if they audit is look at what other people in the same industry, with the same duties, same responsibility, etc would be getting as a salary if they were an employee

Lane :

Fro Journal of accountancy: The IRS has the authority to reclassify dividends, distributions, or payments to the shareholder-employee, including loan repayments, as compensation if it deems compensation inadequate or unreasonable. The courts have held that the question of reasonable compensation is one of fact, determined on a case-by-case basis.

Customer: So 100k. salary of 25k div. of 60k leave rest in business?
Customer: hehe nice controlling loophole for the govt...
Lane :

You've got the idea ... BUT remember that a (1) sole proprietorship, (2) LLC, (3) s-corp are all passthroughs, (4) partnerships are ALL passthroughs... meaning they will tax you on PROFITS (and on any wages, so that part's kind of a wash) .... It's only in a CCorp (which pays its own taxes at it's own rates) that you can leave it in the business for purposes of avoiding taxes

Lane :

You can still leave money in the business ACCOUNTS in a pass-through (this will actually increase your basis and allow for more write-offs down the road) BUT they'll tax PROFITS over and above expenses either way in the pass-throughs

Lane :

NOW, very quickly

Lane :

IF you DO choose a C-Corp ... the old, standard C-corp what happens is (1) Everything is taxed as income (corporate income at corporate rates) ... (2) ...

Lane :

No capital gains treatment for sales of assets... no losses against person income ... AND once the company has paid it's own taxes... i you decide to pay your self a dividen of that profit youpay taxes on it again (DOUBLE TAXATION on that part) ... your salary would still be an expense of the corporation so only taxed once at the personal level (W-2) BUT it's only when you WANT to leave money in for reinvestment, new product decelopment, etc... tahte the C-corp starts to be adventageous

Lane :

I ALL really depends on what you're trying to do ...BUT one more thing and Ill shut up

Lane :

IF you set up the LLC, in TX, you can always ELECT through a special for 2553 (for S-corp) and 8832 (for C-Corp) to be taxed differently, once that starts to make sense

Customer: Plus all the perks of business cars and travel expenses,and medical...etc..
Lane :

:) you'been doing some research!

Lane :

Yes, fringe benefits

Lane :

YOu CAN really maximize what you puul out tax free in THAT way

Lane :

Although MANY of those things are still deductible for self employeds.. usiness travel.. self employed heal insurance through you schedule A... but yes, certain things lik busines ness pf a company car and others can only be done in the C-Corp

Customer: Keep telling myself to go to school but with so many resources online and books... Can't see spending the time of having to be in class when I could be out getting the real world experience and making money... I really appreciate your help and advice... Actually relieved some weight off my chest... Just gettin back into it all slowly trying to build up a great shop, before I jump in full scale...
Lane :

We've covered some good ground here.. a good place to start ... IF you'd like to ask for me again, just say "For Lane Only" at the beginning of your next question ... at some point you'll get out of the planning phase and the best use of YOU time will be doing what you do ... there was a guy named Peter Drucker, sort of a Business GURU (showing my age here), but he said... do one thing ... do it well ... and do a hell of a lot OF it

Lane :

Sounds like between the consulting, the welding company and having that real-world experienc in the trusk n(plus I'm betting there's some future business there with THAT company ... ti sound like you're goin down that road

Customer: Possibly lot of oil field work... Just the truck setup for one truck is 250k but the returns are astronomical....
Customer: thanks again I'll be sure to ask for you... May refer a buddy to you too... Thanks again for your time....
Lane :

Yep.. takes money to ...

Lane, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 3701
Experience: Providing Financial & Tax advice since 1986
Lane and 6 other Tax Specialists are ready to help you
Expert:  Lane replied 9 months ago.

Thanks for the Rating Skeeter.

I'm in GA here ... had a friend growing up we called skeeter.

Listen there's talk of being able to offer more here than just chatting back and forth... I'll let you know if that every comes to be .

Thanks again, and good luck with it all, sounds good.

Lane

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