Tax Law (Questions About Taxes)/Income as Business income; Section 179
I recently read in a Nolo book (Home Business Tax Deductions
Keep What You Earn, Stephen Fishman, J.D., November 2012, 9th Edition) that a sole proprietor's non-business income under Federal tax law is still seen as business income. However, I cannot find that reference in the tax code.
Furthermore, is that the case for all pass-thru business entities e.g. Single-member LLC?
This is a major question because having income, say in a year such as 2011, decides whether someone can use special deductions under Section 179 in the tax code.
If you can help clarify this, that would be great.
Your business income is calculated on schedule C, attached to your 1040 personal tax return. Your salary or wage that you receive from your employer is NOT calculated on your schedule C. Having not read that book I can't direct you to where the miscommunication is.
The 179 deduction is a "business" deduction, but can only be written off against Business Profit.
If the business was not profitable, showing a net taxable revenue on your schedule C you cannot take any 179. And your 179 is limited to whatever your net taxable profit is for the year.
I think you already understood that. So it seems to be Mr. Fishman inability to communicate that has caused you the concern.
If the book was attempting to say that you might want to shift some expenses that could be considered either business or personal to the personal side so that the business might show a profit that could be sued for this special deduction. . .
But there are few deductions that can easily shift.
Let me now go to the "little bit of knowledge. . ." part of the discussion.
As you try to manage the tax burden you can drastically increase the likelihood of Audit. Taking questionable deductions, deductions that you aren't absolutely certain that you specifically qualify for is that little bit of knowledge.
Doing business as a Sole Proprietorship increases the IRS scrutiny of your tax return 11x on average.
If you fail to make a profit in your sole proprietorship 1 out of 3 years and 2 out of 5 years, the IRS can reclassify your "business" as a Hobby and disallow all of your past deductions for all past years.
Managing taxes as a Sole Prop is not tax advantageous. You will be paying taxes for your business at the highest possible levels.
If you have gotten over the hump and are now profitable, then you may want to consider changing your business structure.