# ugh, tax help needed - how does Section 179 work?



## BSApparel (Nov 6, 2007)

Hi all, I'm trying to figure out exactly how tax deductions in general work, and specifically Section 179. I've read the IRS documents and these two threads:

http://www.t-shirtforums.com/business-finance/t33674.html
http://www.t-shirtforums.com/general-t-shirt-selling-discussion/t9216.html


I'm still confused though, does deduction mean that you just don't pay taxes on those items, or that the income tax you pay actually covers the cost of the items?

Might be a simple question, I just can't find a simple answer anywhere.

Thanks!
Aaron.


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## rrc62 (Jun 2, 2007)

The cost of the equipment comes off the top of your gross income. Over simplified, if you make $100,000 gross and you buy a $20,000 machine, your taxable income becomes $80,000.


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## BSApparel (Nov 6, 2007)

That's pretty much what I needed to know, thanks!

So what happens if your gross income is less than your expenditures? Let's say your equipment costs are still 20,000 but you only make 10,000 your first year. Can you still deduct the first 10,000 of your equipment expenses and have a taxable income of $0?


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## rrc62 (Jun 2, 2007)

Yes. That's the idea. Pay yourself, your employees, buy equipment, etc, etc and at the end of the year show as little profit as possible. That's how people in big business can own nice cars and corporate jets and pay no taxes. It's all a business expense.


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## BSApparel (Nov 6, 2007)

Amazing, thanks. Not sure I'm able to subtract my employees' pay in terms of reporting income, because everything is on credit card, but the equipment expenses will help alot.


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## rrc62 (Jun 2, 2007)

If you pay employees, you can deduct that. Assuming you're paying them under the table, to claim it, you should technically issue a 1099 for each employee that is paid more than $600.


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## binki (Jul 16, 2006)

To get the most bang for your buck you may want to only use part of your 179 deduction to get your tax rate to the minimum. If you are a sole prop you don't want to have $0 income, just enough so you pay the least amount in taxes. 

Also, you will first follow the MCARS depreciation schedule (normally 5 years but check with your accountant) so you will take 1/5 or 20% as a deduction the first year. You then have up to the remaining 80% to take on S179 in the first year. If your tax rate is 35% you might only want to take enough to get you down to the 15% or 10% rate. After that you would then take the remaining amount over the next 4 years. 

Also, the equipment only needs to be new to you, not new as in brand-new-never-used. Finally, you cannot self deal. So you cannot take your personal car and sell it to your business and depreciate it. 

As I have said many times, check with your CPA on this. Having a working knowledge about your taxes is required to be in business, doing them is not. We pay to have our taxes done each year and it has saved me countless hours in screwing them up, er doing them myself. I can now devote my time to better uses like posting here and learning how to digitize for embroidery!


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## binki (Jul 16, 2006)

one more thing. you do not need to pay for the equipement in the tax year to get the deduction. you only need to put it into service.


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## BSApparel (Nov 6, 2007)

I'm definitely going to have to talk to my CPA about this, there's alot of information that I want to make sure I get right. At least I have a better idea of what to expect though, thanks alot for the help.


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## TeddyRocky (Mar 23, 2007)

rrc62 said:


> Yes. That's the idea. Pay yourself, your employees, buy equipment, etc, etc and at the end of the year show as little profit as possible. That's how people in big business can own nice cars and corporate jets and pay no taxes. It's all a business expense.


I have a sole prop/LLC without any employees but my fiance helps out at the shop and doesn't have any other line of work. So how do we figure out how much to pay ourselves (or more so myself) so that it minimizes taxable income? This is the first year in business, and I have no clue. Any other tips? Perhaps writing my fiance as a contractor and paying her too?

- At this point, we've been taking some money here and there but never really had a set amount each month/week. What do you suggest we do?


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## binki (Jul 16, 2006)

Well, first of all you should start a new post rather than hijack one. 

Then you are either a Sole Prop or LLC, not both. In either case however the income you have on the LLC will flow through to your personal taxes. The money that you have been taking out is a draw against that income. If your fiance is not part of the business structure or listed as a partner then you need to be either paying her as a W2 or issue a 1099. You should have this all set up before you do this rather than after the fact. 

You will need to pay not only income tax but FICA and Medicare taxes. You also need to see if you should be sending in quarterly estimated payments. 

I would suggest you find an accountant or CPA to help with your taxes.


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## binki (Jul 16, 2006)

BSApparel said:


> Amazing, thanks. Not sure I'm able to subtract my employees' pay in terms of reporting income, because everything is on credit card, but the equipment expenses will help alot.


If you have employees you should be withholding payroll taxes and be buying unemployment insurance. You can really get wacked by government agencies if you have employees and are not paying them properly and more important, giving the government their cut.


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## TeddyRocky (Mar 23, 2007)

binki said:


> Well, first of all you should start a new post rather than hijack one.
> 
> Then you are either a Sole Prop or LLC, not both. In either case however the income you have on the LLC will flow through to your personal taxes. The money that you have been taking out is a draw against that income. If your fiance is not part of the business structure or listed as a partner then you need to be either paying her as a W2 or issue a 1099. You should have this all set up before you do this rather than after the fact.
> 
> ...


Thanks for the help. Didn't think I was "hijacking" the thread, as somebody insisted on "paying yourself, employees"... etc.


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## binki (Jul 16, 2006)

np, you just might get more answers to your particular question if you create a new thread.


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## karlking85 (Sep 26, 2007)

rrc62 said:


> If you pay employees, you can deduct that. Assuming you're paying them under the table, to claim it, you should technically issue a 1099 for each employee that is paid more than $600.


 
I wouldn't suggest it, because the IRS is becoming more and more specific over the differences between an employee and an independant contractor. If you 1099 them, and the government decides that they are actually an employee, you could face some heavy fines, plus the portion of social security and medicare you SHOULD have been withholding from them the whole time.


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## binki (Jul 16, 2006)

Employee or Contractor is very clear here: http://www.irs.gov/pub/irs-pdf/p15a.pdf


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