Robert <malakitoatwork[at]hotmail.com> wrote:

- quote -

Yes.

- quote -

MACRS, sure. 7 year is a catchall for property not
otherwise shown in Pub 946. So it should work.

Also see Pub 946 on Special 50% Depreciation allowance. If
there will be a gain, and ideally a gain over $433, then the
special 50% deprec iaiton allowance is claimed. In fact,
you have to specifically elect out of the special
depreciation allowance (Section 168(k)(2)) if you do not
want to claim it. And even if you take the 50% allowance
also look into first year expensing allowed under section
179.

__
Art Kamlet ArtKamlet [at] AOL.com Columbus OH K2PZH

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malakitoatwork[at]hotmail.com (Robert) writes:

- quote -

From an *accounting* standpoint, those are reasonable
questions. However, tax law often doesn't line up with
accounting, and tax law says draws you take from your
company are ignored for tax purposes, since for a sole
proprietorship the company is *you* and the company's profit
or loss gets directly reported on your return.

As an aside, did you know that companies often (quite
legitimately) keep two sets of books (if not more)? One set
of books follows GAAP accounting standards and presents a
more realistic view of how the company is doing. The other
set follows tax law and computes the numbers as the IRS
requires. An example of a difference would be depreciation
-- the IRS depreciation schedules are generally more
accelerated than economically realistic depreciation
schedules would be.

- quote -

I haven't checked your original post to see what the items
are, but what you should do is read IRS Pub 946 (the one on
depreciation) and see which lifetime class the items fall
into and depreciate them accordingly.

--
Rich Carreiro rlcarr[at]animato.arlington.ma.us

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Rich Carreiro <rlcarr[at]animato.arlington.ma.us> wrote:
- quote -

Thanks for the reply.

Being a amateur accountant (i.e., not really knowing what I
am doing), I was thinking that we could treat money
transferred back from the business checking account to our
personal checking account as either "salary", on which we
would do withholding and soc sec/medicare taxes, etc. and do
on a regular basis, or as "return of investment capital",
which we would consider as repayment of the money we are
initially providing to the business for startup costs.

The only reason I could come up with for paying the salary
would be to qualify her for any salary-based income tax
benefits, such as social security credits or IRA
contributions. As it turns out, neither of these are
important since she will qualify for more SS based on 1/2 my
record than on her own record, and we can do spousal IRA
contributions.

I must have misread the $1400 somewhere.

Thanks again,

Robert

P.S., I did find the answers to my other questions over at
irs.gov. Here's what I think they are, and please correct me
if I am wrong:

1. She can use the cash method of accounting because she
will make less than $1M in gross sales.

2. She must depreciate the items because they have a useful
life longer than 1 year. So far I think I will use MACRS on
a 7 year schedule.

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Robert <malakitoatwork[at]hotmail.com> wrote:

- quote -

Cash is OK.

- quote -

She cannot draw a salary from her sole proprietorship.
That's a no-no.

If she has net schedule C income of over $433 then she is
subject to SE tax and files Schedule SE.

- quote -

Depreciation rules are found in IRS Publication 946.

If the property is not contained there, it has a 7 year
life.

If you want to take advantage of Section 179 first year
expense rules, you shoul dknow that you cannot use Section
179 to bring her earned income below zero. In practice, it
is not a good tax decision to use Section 179 to bring net
schedule C income below $433.

That's because if hse does not take section 179 to go below
net Schedule C inc ome of $433, then next year when she
makes more than $433, she will still have depreciation
expense available to her to reduce SE tax.

__
Art Kamlet ArtKamlet [at] AOL.com Columbus OH K2PZH

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malakitoatwork[at]hotmail.com (Robert) writes:

- quote -

[snip]

- quote -

Sole proprietors don't draw a salary. It's the nature
of being a sole proprietor. It all goes through Sched C.
SE tax kicks in one there's at least $400 of Sched C profit.

--
Rich Carreiro rlcarr[at]animato.arlington.ma.us

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My wife is starting a small business and as the one who will
be keeping the books I have some tax/accounting questions.

1. Gross sales from the business would certainly be no more
than $10,000 per year. It will be a sole proprietorship.
The business will have inventory. Can I use the cash method
of accounting under one of the exceptions to the inventory
rule?

2. SE tax. What is the threshold for paying SE tax if she
draws a salary? I've seen both $400 per year and $1400 per
year. Does the answer change if she doesn't draw a salary
and the net income flows through Schedule C?

3. She will be buying equipment which will be used to
manufacture the finished goods. I know I can depreciate
them over their useful life, but I'd rather expense them
(easier on me as an amateur accountant). Where do I find the
IRS rules on when I can expense vs. when I must depreciate?
If it helps, the equipment will cost around $1,000, and the
useful life might be 10 or 15 years.

Thanks!!!

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