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This is a real scenario, but I'm making it simpler so it's…

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This is a real scenario...
This is a real scenario, but I'm making it simpler so it's not too confusing. Let me know if I should clarify anything:Lost job in October 2017
Income so far is around 70K
Withdrew 40K from 401K retirement account to pay debt. I ended up with 32K in my bank account.
20% was withheld for tax purposes.═════════════════════════Gross Income for the year is 110K
Taxes were paid as an employee and 20% from 401K withdrawal
Accountant will adjust so that I pay the 10% penalty on the 401 K withdrawal and any remaining federal / state taxes based on my AGI of 110,000 (assuming there are no other deductions)✦✦✦ TWIST ✦✦✦What about IF before the year ends, I open a photography business and I register a LLC for such purposes?.I spend 12,000 in the LLC registration, 2 cameras/2 lenses and office supplies. I include these expenses under section 179 solely and for exclusive use on the photography business.✦✦✦ QUESTION ✦✦✦With no deduction, my AGI was 110K, but after the photography business, can I lower my AGI by 12,000 (The amount spent to open the business and acquire equipment) ?If this is the case, I will pay any remaining taxes based on AGI of 98K, not 110K. Therefore, spending in equipment now may be a good decision to reduce my tax liability and yet invest in a new venture.Is this how it works, or am I missing something important here?Thanks.
Submitted: 8 months ago.Category: Finance
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Answered in 2 hours by:
10/15/2017
Financial Professional: Chad EA, CFP ®, CERTIFIED FINANCIAL PLANNER TM, Professional replied 8 months ago
Chad EA, CFP ®
Chad EA, CFP ®, CERTIFIED FINANCIAL PLANNER TM, Professional
Category: Finance
Satisfied Customers: 2,502
Experience: Federally licensed IRS Enrolled Agent, Certified Financial Planner (R), MBA
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Hello,

The business deductions to start up and organize a company are definitely deductible from your gross income. on line 12 of the IRS 1040 from schedule C. This would take your income from 110,000 - your business losses and depreciation.

What you have done looks correct.

The IRS allows you to deduct $5,000 in business startup costs and $5,000 in organizational costs, but only if your total startup costs are $50,000 or less. - This is funds that were spent before the company was formed.

Let me know what your follow up questions are or if i missed anything!

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Customer reply replied 8 months ago
Thank you Chad, so to clarify:I can only deduct 10K
I need to buy the equipment first and then register the LLC ?
If I ispend 9K in equipment and 1K in registering the LLC, is this allowed? The 5K Startup cost and 5K organizational cost threw me off.Thank you for the feedback.
Financial Professional: Chad EA, CFP ®, CERTIFIED FINANCIAL PLANNER TM, Professional replied 8 months ago

You are able to deduct more, but $10K is the amount you are able to deduct for start up and organization costs. Once your business is running you will generally have additionally deductions, such as vehicle expenses, advertising.

It is helpful to look at the schedule C under expenses to see a basic overview of what type of expenses are deductible.

For example : Advertising, Car and Truck, insurance (other than health insurance) office expense, utilities.

Here is a link https://www.irs.gov/pub/irs-pdf/f1040sc.pdf

The equipment is separate from the start up cost. I have attached the publication for business expenses. The start up expense is cost that you incurred before you are in business like the formation of an LLC. Equipment is used for and during the operation of our business. Slightly different, but important to know.

https://www.irs.gov/publications/p535

You don't need to register/obtain a LLC except to limit your personal liability, which is of course recommended, but with a time crunch of a month in a half left in the year. For tax purposes a sole owned LLC is taxed the same as a sole proprietorship, same deductions and everything. You report your business income and losses mainly on schedule C

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Customer reply replied 8 months ago
Thank you Chad !
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