Expenses Question

[bbailey]

If I purchase a piece of equipment before I formally become a business, am I able to deduct that expense once I am a business as long as it was purchased in the same calendar year?

Thanks,
Ben

[Steelsun]

Definatly an acocuntant question.

I think the standard answer is "It depends" and also "Yes, but..."

[bbailey]

Ok, thats what I figured. Just thought I would try to get a general idea before asking an accountant.

[EastTxCPA]

If you convert a personal asset to a business asset you would set up the asset in the business at it's fair market value on the date it is converted.

Ex. You purchase you camera in 2004 for $2,000. In 2005 you set up a photo business and use the camera in the business. The fair market value of the camera on the date you start your business is $1,500. You can only deduct the $1,500 not the $2,000.

[Silvernic]

Wow, good to know. Thanks!

[LoungeLizard]

Originally Posted by EastTxCPA

If you convert a personal asset to a business asset you would set up the asset in the business at it's fair market value on the date it is converted.

Ex. You purchase you camera in 2004 for $2,000. In 2005 you set up a photo business and use the camera in the business. The fair market value of the camera on the date you start your business is $1,500. You can only deduct the $1,500 not the $2,000.

...what constitutes "starting" your business? Is it filing the DBA? Getting a tax ID? What if you did work for someone else but didn't have either of those?

[EastTxCPA]

Filing a DBA or getting a tax id has nothing to do with when a business starts because you don't necessarily have to have either one of them to be in business. There are a lot of issues that come into play but basically your business begins when you start "trying" to make income. That point may be when we purchase that first camera. Probably, in a lot of our cases, the issue is whether you have a business or a hobby. Or like me, just a lot of expenses going out and no income coming in.

[adam7731]

Originally Posted by EastTxCPA

Filing a DBA or getting a tax id has nothing to do with when a business starts because you don't necessarily have to have either one of them to be in business. There are a lot of issues that come into play but basically your business begins when you start "trying" to make income. That point may be when we purchase that first camera. Probably, in a lot of our cases, the issue is whether you have a business or a hobby. Or like me, just a lot of expenses going out and no income coming in.

you got 3-5 years to try and turn some kind of profit. Just as long as you are bring in money then you can say it's a business and deduct your expenses. If there is no attempt to make money then you cant deduct the expenses because its a hoppy.

Photography is one of the top proffessions to get flagged by the IRS because of the hobbist trying to say he is a business to get the dectuions.

CPA good... best money i spend every year.

[EastTxCPA]

Originally Posted by adam7731

you got 3-5 years to try and turn some kind of profit. Just as long as you are bring in money then you can say it's a business and deduct your expenses. If there is no attempt to make money then you cant deduct the expenses because its a hoppy.

Photography is one of the top proffessions to get flagged by the IRS because of the hobbist trying to say he is a business to get the dectuions.

CPA good... best money i spend every year.

The 3-5 year rule is only used to determine who has to prove whether it is a business or not. If you show a profit three out of five years then it is presumed to be a business. It still may be a hobby but the burden of proof is then on the IRS. If it does not show a profit then it is on the taxpayer to prove it is not a hobby. Below is a perfect example directly from my tax research package.

Example—Weekend Photographer

T is employed full time as a computer programmer. T is also an enthusiastic photographer who often takes pictures for a fee at weddings, birthdays, and other ceremonies. For 2000, T had revenues of $1,000 and expenses of $1,500 from his photography. T also had a small net loss from his photography in 1996, but there were small net gains in 1997, 1998, and 1999. T enjoys a rebuttable presumption that he is engaged in photography to earn a profit, and, unless the IRS can establish that he is not, he may deduct the expenses of the activity, even in excess of the related income for the taxable year.

As adam said, talk to your CPA because the rules can become very complicated regarding what is required for a business.

My photography skills are not yet at the level where I feel I can contribute there, so maybe this will compensate to some extent the knowledge I have gained from all of the fine potographers on this site.

Now, since it is tax season, I better get back to work or I may have to rely on my camera to make a living. And I like to eat way to much to go there.

[bbailey]

Thanks, lot of good info here.