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Let's say someone makes 40k at their w2 employee job. But they want to start a business, so they invest some money into equipment ($8000) the first year so they can actually start their business. Does that mean their taxable income should be less (federal/state/local). Assume $3000 in side business income.
Does that mean their taxable income would be around $40,000 + $3000 - $8000 = $35000?
No. The equipment costs are not necessarily a direct expense. Depending on the time of purchase and type of the expenditure you may need to capitalize it and depreciate it over time. For example, if you buy a computer - you'll have to depreciate it over 5 years.
Some expenditures can be expensed under Section 179 rules, but there are certain conditions to be made, including business revenue. So if your business revenue is $3K - your Sec. 179 deduction is limited to $3K even if more purchases can qualify. Not every purchase qualifies for Sec. 179 treatment, and not all the State tax rules conform to the Federal treatment.
Get a professional advice from a CPA/EA licensed in your State.
