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Tax-Scholar
Tax-Scholar, CPA
Category: Tax
Satisfied Customers: 89
Experience:  Helping customers comply with and plan for income taxes
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Last January I bought a small business. Over this last year,

Customer Question

Last January I bought a small business. Over this last year, I have paid no taxes, took a huge loss over the last 12 months. I have made large purchases to improve future business profitability. Between subcontractors, business expenses ( fuel, material, advertisement, labor, and shop rent) I am currently $30,000 out of pocket. I took no pay over the last 12 months for myself. Is there a chance I will get any type of return this year?
Submitted: 5 years ago.
Category: Tax
Expert:  Tax-Scholar replied 5 years ago.

Tax-Scholar :

Thanks for using Just Answers. My goal is to provide the same expert advice I give my local clients but for a fraction of the fee.

Tax-Scholar :

The first requirement to receive a refund is to have paid money into the system.

Tax-Scholar :

It sounds like your improvements could qualify for bonus depreciation

Tax-Scholar :

I don't think Section 179 will work since it is limited to business income (which is a loss)

JACUSTOMER-o7bwz0mg- : Such as. Is that something I can use as a deduction for 2012?
Tax-Scholar :

You would deduct the expense in the year they relate. For fixed assets this the date placed in service. However the loss can carryforward or back.

Tax-Scholar :

If the 2011 activitiy creates a Net Operating Loss you could carry this back 2 years and claim a refund on IRS Form 1045.

JACUSTOMER-o7bwz0mg- : Even if the company was owned by a different person for those 2 previous years?
Tax-Scholar :

How is the company organized?

Tax-Scholar :

LLC, S Corp, Corp ...

JACUSTOMER-o7bwz0mg- : Sole P
Tax-Scholar :

Then yes you can still carryback

Tax-Scholar :

Did you pay taxes in the last 2 years?

JACUSTOMER-o7bwz0mg- : Yes , personal taxes. Company filed a loss for the last 3 years.
Tax-Scholar :

Do you know how to calculate taxable income for 2011. That will be the first step to getting the Net Operating Loss.

JACUSTOMER-o7bwz0mg- : Not %100
Tax-Scholar :

Well since it is the first year you owned the place you might want to work with someone.

Tax-Scholar :

Here is a guide the IRS made for starting a business www.irs.gov/pub/irs-pdf/p583.pdf

JACUSTOMER-o7bwz0mg- : I agree, so your saying that I can go back on my last 2 years of my personal taxes and use that as payable tax, take my company losses and use both to possibly receive a refund?
Tax-Scholar :

Yes that is correct see this form www.irs.gov/pub/irs-pdf/f1045.pdf

Tax-Scholar :

What type of business is it?

JACUSTOMER-o7bwz0mg- : Construction
Tax-Scholar :

Construction has unique options with respect to their method of accounting that need to be established. I think working with a CPA would be a good idea especially if you want to file Form 1045 which can be confusing also.

Tax-Scholar :

What type of improvements did you make. They might be considered capital expenditures and need to be depreciated over 39 years.

JACUSTOMER-o7bwz0mg- : I made a large shop improvement, installed a evac ventilation system, I purchased company vehicles, purchased a great deal of new equipment.
Tax-Scholar :

The new equipment would qualify for 100% bonus depreciation. The vehicles would too if they are over 6,000 GVWR.

Tax-Scholar :

Do you own the shop or rent? If the shop is subject to a lease then the ventilation system would likely qualify as well.

Tax-Scholar :

To qualify for bonus the property must be new. Were the cars used?

JACUSTOMER-o7bwz0mg- : One was new. I do rent my shop
Tax-Scholar :

Well then the shop improvements would qualify as leasehold improvements can all be deducted in year 1 in leu of depreciation over a number of years. THe improvemens can't be structural and need to be to the interior of the building.

JACUSTOMER-o7bwz0mg- : So with the qualifications, what benefit would this be if the company paind no taxes this year?
Tax-Scholar :

It would help your cash flow and increase the NOL that can be carried back.

Tax-Scholar :

This would give a bigger refund.

Tax-Scholar :

However in future years you wouldn't have any depreciation and would owe more money then so it is a trade off.

JACUSTOMER-o7bwz0mg- : Perfect, it was always the plan to dump a pile of money into the business the first year with knowlage of the potential loss, to the extent it was was not expected. I was just wondering if it was possible to regain some of it back even with not paying any type of taxes over the year.
Tax-Scholar :

Good luck with the construction business. Keep me in mind if anything else comes up.

JACUSTOMER-o7bwz0mg- : I will thank you for your time and expertise!
Tax-Scholar :

Thanks.