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This seems like a "too good to be true" tax dodge in the USA milieu.

Is it correct?

  • Sally is a graphic designer married with a typical family. She gets $100,000 in 2017 as 1099 income.

  • She buys a Graphics Monitor in 2017 for $1000. We'll say, it is genuinely and absolutely a true and honest deductible expense for her work/clients. (She bought it for "a particular job" so the entire amount is deductible at once.)

  • She files her taxes. She gets the "standard deduction" of $12,700. So it's completely pointless itemizing deductions.

  • In short she gets $12,700 deductions.

She goes back in time and tries this:

  • She has an S-Corp (or LLC as an S-Corp). It is paid the $100,000 in 2017.

  • The monitor is a deduction, a cost, for the S-Corp. Which thus profits $99,000 in 2017.

  • Sally gets $99,000 income, and takes the standard deduction of $12,700.

  • In short she gets $13,700 "deductions".

This appears to be an absolutely correct way to save 1000- in taxable income.

Any deductions (more precisely: "costs") totaling under 12700 in situation "A" are totally wasted; in situation "B" you get them.

It seems too good to be true - am I correct?

Just a clarification for any future googlers, in fact I am not correct. IE, there is no advantage, you "get" the $1000 either way. HartCO explains it below!

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    Business expenses (deductions) offset business income, nothing to do with itemized deductions.
    – Hart CO
    Mar 27, 2018 at 21:26
  • OK - so in "A", Sally can NOT in any way take advantage of the $1000 - is that correct? Teach me
    – Fattie
    Mar 27, 2018 at 21:28
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    I think what Hart means is that business expenses are deducted separately from personal expenses, so one can deduct business expenses and take the full standard deduction.
    – D Stanley
    Mar 27, 2018 at 22:39

2 Answers 2

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Business expenses (deductions) offset business income, so no matter which type of pass-through business entity she is using (Sole proprietorship,LLC,S-Corp,Partnership), the expenses will offset her business revenue. She's taxed on the profit from her business, not the revenue.

In both cases, she only has $99,000 in business income reported in the income section of the 1040, and nothing further down on her tax return changes that. The only tax-disadvantage she faces filing as a sole-proprietor (example 1) is that she might pay more self-employment tax than if she has an S-Corp.

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  • Wait - in the first example, Sally's not using any sort of business entity - right?
    – Fattie
    Mar 27, 2018 at 23:07
  • I get it: even if you just file individually with no "corp" aspect at all - you still "first" calculate any business costs. OK! So in short my example was completely wrong, that's the answer. Awesome!!!
    – Fattie
    Mar 27, 2018 at 23:48
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    @Fattie Yeah the default is 'sole-proprietorship' if you have 1099 income.
    – Hart CO
    Mar 28, 2018 at 0:07
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It goes on Schedule C, which is business profit/loss, and has no impact on itemized deductions.

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