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Message
Schedule C with no income?
Posted on 11/30/16 at 4:48 pm
Posted on 11/30/16 at 4:48 pm
My live-in life partner has decided to start a side business next year (think Etsy). She is looking to start purchasing equipment and supplies, which will probably run into the thousands of dollars. However, I think there is a 0% chance she will actually show any income before the end of the year. Is that going to prevent us from taking credit for the startup costs on a Schedule C?
I do vaguely remember a multi-factor test the IRS uses to determine if something is a "hobby" as opposed to a genuine business, but the question is more whether there is a strict black/white rule that you can't claim expenses if you have $0 in income. If so it might be worth it to wait until January 1st to make any major purchases.
I do vaguely remember a multi-factor test the IRS uses to determine if something is a "hobby" as opposed to a genuine business, but the question is more whether there is a strict black/white rule that you can't claim expenses if you have $0 in income. If so it might be worth it to wait until January 1st to make any major purchases.
3
Posted on 11/30/16 at 6:01 pm to Cold Cous Cous
Not a cpa but I think you can show 2 years of losses before a business is considered a "hobby" if it's not profitable. Has she set up an LLC?
Posted on 11/30/16 at 6:48 pm to Cold Cous Cous
Definitely set up an LLC first if she hasn't already. The hobby rule is 2 out of 5 years. She can show a loss every year, but she'll have to show that "it's a real business" to avoid it being classified as a hobby. I would just wait the extra month if she's not going to to have an sales or anything by the end of the year, but if she can show its a business before the end of the year (creating a website or having or product on an etsy type site) then I believe she can go ahead with the the schedule C.
I am not yet a CPA so take the info FWIW.
I am not yet a CPA so take the info FWIW.
Posted on 12/1/16 at 6:09 am to Cold Cous Cous
Two things:
1. Capital expenditures for equipment over $500 need to be capitalized and depreciated, beginning on when said fixed assets are placed into service. Purchase date (this year) and date placed into service (would be next year according to your post) would preclude any deductions for same this year.
2. If by supplies you are referencing inventory items or supplies to make inventory items for sale, then you have to capitalize same and deduct cost of item sold as each item is sold, which means you will need to use the accrual method of accounting.
Just an FYI, it would be advisable to set up a "flow through" entity for the business (ie: Partnership, LLC or S-Corp) for liability purposes and to get the business off of the personal tax return. Schedule C businesses are the most audited type of business entity.
Additionally, the most important thing you can do is to get professional tax advice in advance of opening a business.
1. Capital expenditures for equipment over $500 need to be capitalized and depreciated, beginning on when said fixed assets are placed into service. Purchase date (this year) and date placed into service (would be next year according to your post) would preclude any deductions for same this year.
2. If by supplies you are referencing inventory items or supplies to make inventory items for sale, then you have to capitalize same and deduct cost of item sold as each item is sold, which means you will need to use the accrual method of accounting.
Just an FYI, it would be advisable to set up a "flow through" entity for the business (ie: Partnership, LLC or S-Corp) for liability purposes and to get the business off of the personal tax return. Schedule C businesses are the most audited type of business entity.
Additionally, the most important thing you can do is to get professional tax advice in advance of opening a business.
Posted on 12/1/16 at 12:33 pm to Boudreaux in SF
quote:
Capital expenditures for equipment over $500 need to be capitalized and depreciated, beginning on when said fixed assets are placed into service. Purchase date (this year) and date placed into service (would be next year according to your post) would preclude any deductions for same this year.
Just FYI, for 2016, the safe harbor is raised from $500 to $2500.
The bigger issue, hinted at by Boudreaux, is when are you "in business"? Once you are "in business", you can take deductions of otherwise-deductible items. Before that date, anything you spend has to be capitalized. You can potentially deduct some of it on the day you are "in business" and if there is excess, amortize it over time.
quote:This is true, just want to clarify that they can still use cash method for all non-inventory items.
If by supplies you are referencing inventory items or supplies to make inventory items for sale, then you have to capitalize same and deduct cost of item sold as each item is sold, which means you will need to use the accrual method of accounting.
quote:
Just an FYI, it would be advisable to set up a "flow through" entity for the business (ie: Partnership, LLC or S-Corp) for liability purposes and to get the business off of the personal tax return. Schedule C businesses are the most audited type of business entity.
First off, an LLC can be taxed as Sch C, C Corp, S Corp, or partnership (the latter if there are two or more members). If it was a small simple business with one owner, I would absolutely reccomend an LLC filing Sch C. The cost of compliance of a seperate entity would not be worth it.
Posted on 12/1/16 at 3:07 pm to LSUFanHouston
quote:
Just FYI, for 2016, the safe harbor is raised from $500 to $2500.
I knew that changes were made, but, the majority of the past year has been tied up as an "expert" witness in a very complicated court case that just got settled and I am way behind on my reading. Going to make for a fun holiday season.
Posted on 12/2/16 at 9:34 am to Boudreaux in SF
quote:
I knew that changes were made, but, the majority of the past year has been tied up as an "expert" witness in a very complicated court case that just got settled and I am way behind on my reading. Going to make for a fun holiday season.
Well thankfully there haven't been a lot of major changes this year - election years tend to tamp things down. You did see about the due date changes - Partnerships now due Mar 15, C Corps Apr 15, plus some different extended dates
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