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Hello. First post on CBN. I'm a regular at TBN.
What are the tax implications of purchasing a tractor and associated equipment before a business is offically registered? I'm hoping that I didn't make a major mistake buying the machine before I registered my business with the state. I need to be able to write this machine off.....
Thanks,
Jim
Hi Jim,
You probably are going to be okay in the end (but it would have been better of course to have some advance planning) [img]/forums/images/icons/tongue.gif[/img] .
If you expect to incorporate, I think you would make the equipment part of the assets that you use to establish (pay for) your ownership of the corporate stock. It would then be depreciated as per Sec. 179 or proper schedule.
If you are a sole proprietor, you would just assume the ownership as a 1040 filer, and write off also as Sec 179 expense (max is around $100K).
You can go to the newsgroup misc.taxes.moderated, post your question there. Various tax pros answer all kinds of question gratis, like yours.
There is another "plain talk" web site at " "Tax Mama".
By all means, go to a tax professional (I like enrolled agents best, rather than CPAs).
Let us know what the tax pro sez...
Hakim,
What is an "enrolled agent" and where would they be found in the yellow pages?
BTW. I intend to go LLC, not INC.
Thanks,
Jim
I am not a lawyer or financial professional.
The following does not constitute professional
advice of any kind.
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Hi Jim,
An LLC is often a fine choice for a small business, as is a Subchapter-S Corporation. I have used all three, for various reasons.
"Choice of Entity" is actually a very important, even crucial decision. If you go to ten different tax pros, they will all probably refuse to give a definitive answer, and say "it depends." I used an e-book by a tax pro named Wayne Davies, and he concluded that for around 99% of small businesses, the Sub-S Corp is usually the best decision, TAXWISE.
I am not going to go into all of the ins and outs, but an LLC is going to pass thru all income as personal income to you.
You’ll pay self-employment tax (of around 17%) on all of your LLC earnings.
An S-Corp, on the other hand, allows most of your income above a reasonable salary, to be paid to you as “dividends†(or "return on investment") and thus avoid the SE tax. This can add up to very significant sums of money in saved taxes.
No matter what anybody tells you, or no matter what you read, sit down with the professional person who is actually going to advise you, lay out your past two years of returns, describe your anticipated next two years and perhaps most importantly, any EXIT STRATEGIES.
By that I mean, do you plan to sell your business at some point, will it to your kids, etc.? Your "choice of entity" may mean the difference in a great deal of money, possibly millions. Don't just "choose" one.
Below is some info on Enrolled Agents, plus a link to the national association, which has a listing by state of agents. Many of them are former IRS agents, and the reason I like them is, they will keep you out of harm's way with the IRS.
Another tack is, if you have a small business and do the taxes yourself, do your own return on TurboTax and take the resulting numbers & return to H&R Block or Jackson Hewitt. Pay them their $300 or so, and let them copy your data over and complete and sign the return.
Since THEY have to defend any return in tax court gratis, it is unlikely they will sign any return with overt or covert errors, etc. You must dot every i and cross every t with the IRS. It is terribly expensive to get hit with penalties and interest.
Hope this helps,
Hakim
P.S. Here is the Wayne Davies site ... all his e-books are quite good. Plus his newsletter is great this time of year, up till tax time.
Wayne Davies Tax site
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Enrolled Agents site Enrolled Agents
Enrolled Agents: The Tax Professionals
What is an Enrolled Agent?
An Enrolled Agent (EA) is an individual who has demonstrated technical competence in the field of taxation. Enrolled Agents, or EAs, can represent taxpayers before all administrative levels of the Internal Revenue Service.
What does the term "Enrolled Agent" mean?
"Enrolled" means EAs are licensed by the federal government. "Agent" means EAs are authorized to appear in place of the taxpayer at the Internal Revenue Service. Only EAs, attorneys and CPAs may represent taxpayers before the IRS. The Enrolled Agent profession dates back to 1884 when, after questionable claims had been presented for Civil War losses, Congress acted to regulate persons who represented citizens in their dealings with the Treasury Department.
How can an Enrolled Agent help me?
EAs advise, represent and prepare tax returns for individuals, partnerships, corporations, estates, trusts and any entities with tax-reporting requirements. EAs prepare millions of tax returns each year. EAs' expertise in the continually changing field of tax law enables them to effectively represent taxpayers audited by the IRS.
What are the differences between EAs and other tax
professionals?
Only Enrolled Agents are required to demonstrate to the Internal Revenue Service their competence in matters of taxation before they may represent a taxpayer before the IRS. Unlike attorneys and CPAs, who may or may not choose to specialize in taxes, all EAs specialize in taxation. EAs are the only taxpayer representatives who receive their right to practice from the United States government. (CPAs and attorneys are licensed by the states.)
How does one become an Enrolled Agent?
The EA designation is earned in one of two ways: (1) an individual must pass a difficult two-day examination administered by the IRS which covers taxation of individuals, corporations, partnerships, estates and trusts, procedures and ethics. Next, successful candidates are subjected to a rigorous back ground check conducted by the Internal Revenue Service; or (2) an individual may become an EA based on employment at the Internal Revenue Service for a minimum of five years in a job where he/she regularly applied and interpreted the provisions of the Internal Revenue Code and regulations ...
Are you going to have the business for profit, what type on entity is it going to be?
Purchasing the asset prior to registering with the state is not a problem, provided that you are not using the equipment for personal use prior to business use. Then you have a problem of fair market value verses the actual cost of the equipment for the depreciation schedule.
The first year write off should not be a problem as it is limited to the net income of the business and most businesses that are tractor related are not going to show a huge profit in its first year. Personal use of the equipment and putting it in a fair market value would preclude this additional first year write off.
Thanks Hakim.
Hi. Yes, the business is for profit. I am develping the back acres of our old farm for housing.
The tractor and associated gear is basically brand new. It has less than 50 hours on it and would be considered "new" at a dealer. However, it has been used to plow the snow off my driveway twice [img]/forums/images/icons/shocked.gif[/img] The rest of the hours (47) have been used to clear trees and remove brush and such for the development project.
Thanks!
As long as you are using it for your future development business, it should be no problem, if you are going to be seeling lots this year. If you will not be selling the lots this year, you might have to capitalize the depreciation and other operating costs and add this to the lot costs as they are sold.
However if you are using it for both personal and business purposes the purchase price would have to be allocated between the two based upon usage, ie the hour meter, unless of course you just dreamed of plowing the driveway. [img]/forums/images/icons/grin.gif[/img]
Or if plowing the driveway was for a legitimate 'business purpose', perhaps to provide access for potential buyers to have access to view the lots?
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