(I have a CPA and I'm going to meet with him shortly to discuss this, but until then I'm asking here. Also, for simplicity I'm ignoring tax brackets and assuming a flat 25% personal income tax rate)
Let's imagine I have had 2 sources of income for the entire tax year (01 January 2016 to 31 December 2016):
- I own a rental property which generates a modest profit of a few hundred dollars a month (e.g. $1,500 revenue, $1,000 expenses, $500 profit)
- I am self-employed as a consultant which is the majority of my personal income. Say I make $10,000 in revenue a month, with $2,000 expenses, leaving $8,000 profit.
I am not subject to any state income taxes, just federal.
Rental income is not subject to self-employment taxes, so I simply take 25% of the $500 monthly profit and transfer it to my tax-savings account until my quarterly estimated tax payments are due.
The consultancy income is subject to both normal income tax (the 25%) but also the 15.3% self-employment tax. So I take 15.3% of 92.35% of my consultancy profit (of $8000) and transfer that to my tax-savings account, then I take (25 + 7.65)% of what's remaining and transfer that to my tax-savings account.
If my rental business takes a loss one year (e.g. because of a major capital expense) I understand I can either declare a net revenue of zero and carry the remainder on as a loss into the following year - but can I also apply that loss towards my consultancy income instead?
And if I do that, how does the self-employment tax come into play?
For example, if my rental business experienced a net loss of $4000 this year, but my consultancy made a profit (before taxes) of $96,000 - do I:
- Pay SET on the $96,000, then deduct $4,000 as a personal deduction, so $92,000 is subject to PIT?
- Deduct $4,000 before SET, then pay SET on $96,000 - then pay PIT?
- Something else?