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Does anyone know if I will owe any taxes for my small business if I can write off every cent? My business is based in the United States.

I started a small web design business this year and anticipate the business to bring in around $4,000 this year. In just getting off the ground, I'll be purchasing some computer equipment that will equal and most likely exceed that amount.

So for simplicity's sake, let's say I make $4,000 through my business this year. If I purchase computer equipment for the business totaling $4,500, would I owe any taxes this year as my expenses for the business would exceed my business' income?

Thank you for any guidance!

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In the US tax system, you cannot "write-off" capital assets. You have to depreciate them, with very specific exceptions. So while you may be purchasing $4500 of equipment, your deduction may be significantly less. For example, computers are depreciated over the period of 5 years, so if you bought a $1000 computer - you write off $200/year until it is completely depreciated, not $1000 at once.

There are exceptions however, for example - IRC Sec. 179 is one of them. But you should talk to a tax adviser (EA/CPA licensed in your State) about whether it is applicable to the specific expense you want to "write off" and to what extent.

Also, keep in mind that State laws may not conform to the Federal IRC. While you may be able to use Sec. 179 or other exceptions and deduct your expenses on your Federal return, you may end up with a whole different set of deductions on your State return.

And last but not least: equipment that you depreciated or otherwise "wrote off" that is later sold - is income to you, since depreciation/deduction reduces basis.

Ah, and keep in mind - the IRS frowns upon Schedule C business that consistently show losses. If you have losses for more than 3 in the last 5 years - your business may be classified as "hobby", and deductions may be disallowed.

But the bottom line is that yes, it is possible to end up with 0 tax liability with business income offset by business deductions. However, not for prolonged periods of time (not for years consistently, but first year may fly).

Again - you should talk to a licensed tax adviser (EA/CPA licensed in your State). It is well worth the money. Do not rely on answers on free Internet forums as a tax advice - it is not.

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  • so you're saying if a spouse's MLM business doesn't start to show a profit after 3 years you should cut it off for tax purposes?
    – user12515
    Jun 10, 2014 at 19:42
  • If I buy $1000 computer, the first year it's an asset so not a loss? Correct? If I sell the computer in the same year, it's now income of $1000, and will get taxed on it. Would I still get the $200 a year loss for deprecation? Or did I simply get screwed? If I do get the $200 a year, what's stopping you from buying 100 computers on a loss year, and reselling them immediately to get you close to making money (but not actually), and then enjoy $20000 tax credit/yr for the next 5 years when you're making money?
    – Cruncher
    Jun 10, 2014 at 20:30
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    @Cruncher if you deduct the asset and then sell it - your deducted amount becomes your income at recapture rates (not capital gains). You cannot continue depreciating asset you've sold, obviously.
    – littleadv
    Jun 10, 2014 at 21:02
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    @Cruncher First, you likely cannot sell a used computer for the same amount you bought it for. Second, if you sell it, there are specific accounting rules that deal with any amount you sold it for that are over or under the value that is shown on your books, which would likely include depreciation.
    – JAGAnalyst
    Jun 12, 2014 at 19:19
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    So if you spend $100, depreciate 1 year at $20, you have asset worth $80 "book value" and $20 accumulated depreciation. So if you can somehow sell a year later for $100 with no operating or overhead expense, you made $20 over "book" value of $80. No way around that math :) But in point of fact computer values often fall even faster than that.
    – JAGAnalyst
    Jun 12, 2014 at 20:40

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