New IRS rules for those of you that do your own tax returns.

[MikeH]

The IRS has issued new rules regarding what assets can be capitalized vs. expensed. Unfortunately, these rules are complex and will probably drive more people to have their tax returns prepared by a tax preparer... not a good answer. Basically, for small businesses, you can now expense any asset purchase (camera, lens, etc. ) that is under $500. Anything over must be capitalized. You can choose to make the $500 lower, but no higher. This is effective for 2014 returns.

I have not looked at the details yet: I've told all my affected clients that their returns will be extended and we'll sort this out in the summer. These rules have changed several times over the past 1/2 year, and the IRS is still issuing FAQs, etc., so the dust hasn't settled yet. The IRS was originally going to require ALL businesses to apply for an accounting change, which is a mind-boggling process. Only several weeks ago did they back down on this...

You need to have a "written" policy that states this. I've included a sample below.

The rules are here:
http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Tangible-Property-Final-Regulations

Also, you need to attach 2 elections to your 2014 return to reflect all this. You need to continue attaching these elections every year. I've attached a PDF of what my tax software generates.

==== Accounting Policy=============
This will confirm ABC Photography Inc.'s prior informal policy which was, and continues to be that a capital asset is a unit of property with a useful life exceeding one year and a per unit acquisition cost exceeding $500. Such capital assets will be depreciated over their useful lives.

Tangible assets with a cost not to exceed $500 are expensed in the year of purchase.

Invoices substantiating such purchases are retained for a minimum of seven years for assets expensed in the year of purchase, and for the useful life of a capital asset which is subject to depreciation over a period of years.

Date:
Signed:
==end=====

[appletree]

Thanks for sharing Mike.

I wish I understood all of this. :(
I struggled last year after buying a home to file my own taxes...for whatever reason I was really confused even using TaxAct. Years prior I had no issues. And since I purchased the home in Oct 2013...I don't even think my taxes came into full effect last year.

I was going to talk to a CPA at the end of last year I know through church, but never ended up doing it. I need to search through the business section of this forum and find out what a hobbyist should do. I have no formal business name and unsure if I should apply for one, if my expenses can be deducted or what. I mean I have invested probably 2k on printing and frames, plus all of my gear, lenses, equipment, etc. Have not made any profit.
Not sure if I should even worry about any of it or if I should actually be proactive on some of it. Perhaps since it is in the past it is all moot. I have no idea....but I bet there is a few threads lying around I might be able to make sense of.

[Paul Cunningham]

Ugh, I hate tracking capitalization/depreciation. What did they do with section 179?

[Drew Wiley]

This seems to apply to significant property improvements etc related to business expansion (to phrase it succinctly but not necessarily accurately), like a major
studio expansion you are paying to remodel. I don't see how it affects day to day expensing of supply in typical manner we've done it all along, or ordinary
equipment depreciation. But I'll study it some more. Just getting started with that annual nightmare. The current IRS Small Business Guide pretty much tells anyone
what they need to know. Start there if you're just beginning, or thinking about it.

[appletree]

The current IRS Small Business Guide pretty much tells anyone
what they need to know. Start there if you're just beginning, or thinking about it.

Cool, thank you.

[MikeH]

This seems to apply to significant property improvements etc related to business expansion (to phrase it succinctly but not necessarily accurately), like a major studio expansion you are paying to remodel. I don't see how it affects day to day expensing of supply in typical manner we've done it all along, or ordinary equipment depreciation. But I'll study it some more. Just getting started with that annual nightmare. The current IRS Small Business Guide pretty much tells anyone what they need to know. Start there if you're just beginning, or thinking about it.

Drew: These are major changes and, yes, they do affect day-to-day expensing. Without a written policy, you can't expense anything over $200. There's more details: I haven't come up to speed on it yet, and don't plan to until after April 15...

Section 179 is still there, unchanged. The difference here, is: you may find yourself capitalizing more because of the $500 limit: you would then use Sec. 179 to write all of it off in the current year.

The practical effect for small businesses is nil, UNLESS you get audited and the agent finds adjustments that go into "closed" years (3 year statute.) Then they get to move expense into a closed year and you lose the deduction... I go through very few audits, so I'm simply repeating what I've heard from other CPAs who have clients with far greater financial resources than the small businesses that I deal with...

[StoneNYC]

What is a "written policy" what does that mean?

[Paul Cunningham]

It means you have to write it down. You aren't allowed to make it up as you go.

[StoneNYC]

It means you have to write it down. You aren't allowed to make it up as you go.

So I need to plan a year in advance what I'm going to buy and pre-plan to expense it for the following year? I don't think I'm understanding that correctly.

[Paul Cunningham]

Take a piece of paper, write today's date on it and the following sentence: "expense all items of $500 or less." I think that will do the trick.

[StoneNYC]

Take a piece of paper, write today's date on it and the following sentence: "expense all items of $500 or less." I think that will do the trick.

All my expenses are well over $500 though. Is it $500 collectively or $500 total?

For example 2 boxes of 8x10 Velvia50 that I bought last year cost over $500 for the two boxes (I actually also bought two boxes of 8x10 Acros100 as well) so how do I "do it right"? That doesn't include the lenses and camera I purchase etc.

[Steve Goldstein]

I'm not an accountant... but ISTM that this rule is for durable equipment, not expendables like film and paper.

[StoneNYC]

I'm not an accountant... but ISTM that this rule is for durable equipment, not expendables like film and paper.

Ok, I bought a Chamonix 8x10 last year, and a bunch of lenses, so I'm in the $5,000 not $500 area of expenses, are you saying with this new rule I'm not going to be able to write off aany more than $500??

[EdSawyer]

You have to depreciate it over the course of its lifetime. So $5k / X number of years = $y writeoff per year.

[Ron McElroy]

Don't you have to show and income stream to be able to depreciate equipment?

[djdister]

Don't you have to show and income stream to be able to depreciate equipment?

More than that, you have to have an established business in order to depreciate capital equipment.

[Jim Becia]

All my expenses are well over $500 though. Is it $500 collectively or $500 total?

For example 2 boxes of 8x10 Velvia50 that I bought last year cost over $500 for the two boxes (I actually also bought two boxes of 8x10 Acros100 as well) so how do I "do it right"? That doesn't include the lenses and camera I purchase etc.

Stone,

First of all, always check with your accountant. I don't know if anyone here is a tax expert, but I am fairly sure (again, check with your accountant) that you can expense more than $500 for not only equipment, but for other things like film, processing, etc., only caveat with things like film, if you bought $2000 worth of film during a year, but only used $1000 of it, you can only expense the $1000, the remaining film is added to your end of year inventory. For people like me where I do art fairs, I have a beginning inventory and an ending one. Fortunately for me, my brother in law is a good accountant. But again, talk to those who know the actual rules.

[StoneNYC]

Stone,

First of all, always check with your accountant. I don't know if anyone here is a tax expert, but I am fairly sure (again, check with your accountant) that you can expense more than $500 for not only equipment, but for other things like film, processing, etc., only caveat with things like film, if you bought $2000 worth of film during a year, but only used $1000 of it, you can only expense the $1000, the remaining film is added to your end of year inventory. For people like me where I do art fairs, I have a beginning inventory and an ending one. Fortunately for me, my brother in law is a good accountant. But again, talk to those who know the actual rules.

From the language, I think the initial post was made by an accountant.

I also have an accountant who's a whiz but this means I need to go back and catalog this stuff for him more thoroughly, he normally handles MUCH higher profile clients who are not artists so I'm sure I'll need to put this all together for him, but he generally is able to get me a decent sum of money.

Anyway, thanks, ugh, stupid IRS lol!

[BrianShaw]

Very interesting. Thanks

[Rick A]

From the language, I think the initial post was made by an accountant.

I also have an accountant who's a whiz but this means I need to go back and catalog this stuff for him more thoroughly, he normally handles MUCH higher profile clients who are not artists so I'm sure I'll need to put this all together for him, but he generally is able to get me a decent sum of money.

Anyway, thanks, ugh, stupid IRS lol!

Stone, when I had my own business, I went to the office supply store every year and bought a Dome Business accounting simplified ledger. I filled it in on a weekly and monthly basis. At the end of the year, I turned it and all other pertinent info over to my accountant. When he was finished with my taxes, he called me, I went to his office and gladly handed him a check, and never worried about anything. Two things you can't do without if you run a business, a good accountant and a good attorney.

[Drew Wiley]

Well, I'm just about to enter the IRS form quagmire tonight. I always like to understand this stuff myself because there is no guarantee even a tax accountant will be able to unravel all the convoluted last-minute changes; and I've sure known of them to make terrible mistakes before. I've been audited twice. A headache. Who knows how much time and money was expended at their end; but in each case I ended up with a 200-page doument in which the very last sentence simply stated, "no tax due". They had wasted their time as well as mine. But it's always unwise to throw pebbles at hornet's nests; so when in doubt, I tend to err on the
side of caution. But I do appreciate the heads-up.

[Corran]

I get a ton of 1099's each year and file a Schedule C as a sole proprietorship.

My recording and video equipment as well as some camera gear gets deducted from my (business) income. I don't depreciate it, I just take the whole chunk off that year's income (I show very little profit accordingly).

Does this change anything? I use H&R Block software and have had no problems. There was no mention of changes in the 2014 tax code for this specifically in the software (they are generally very good at notifying the user of changes). I filled in the information as it was requested. I don't get any money "back" from my business but of course I get a sizable amount from my W2 income.

I have already filed my taxes and gotten a return so apparently I did not throw up any red flags.

[MikeH]

I'm not familiar with Block's software, although I have a CPA friend who handles financial stuff for a large Corp- so he doesn't do taxes - who uses Block's software and thinks it's much better that TurboTax...

You need to do the elections like I mentioned at the top. You need to capitalize the equipment over $500 onto a "4562." When you do this there should be some options for depreciation type (MACRS, S/L, etc.), or there might be a checkbox, for "Section 179." If you do that, the software will write it all off in the current year. Also on this screen there might be 2 checkboxes for the 263 a elections that are shown on the PDF that I attached.

Section 179 allows you to write off capital equipment in the year of purchase, but you don't show it s repairs & maintenance, or supplies. It shows as depreciation expense... Hope this isn't too much "Accountants speak..." :-)

:-) This can't be more difficult than using Scheimpflug? :-)

[BrianShaw]

... :-) This can't be more difficult than using Scheimpflug? :-)

What an interesting perspective to consider. :)

[Corran]

Yep the software does the 4562 itself and asks about depreciation type. I check the Section 179 box. I guess I'm good but still thanks for bringing this up.

[Greg Miller]

Ok, I bought a Chamonix 8x10 last year, and a bunch of lenses, so I'm in the $5,000 not $500 area of expenses, are you saying with this new rule I'm not going to be able to write off aany more than $500??

If you're going to be a business, be a business. Decide on Sole Proprieter, LLC, S-Corp, C-Corp. Register your business in your state. Get certified to collect sales tax. Charge sales tax when you make a sales Get an accountant. Decide if you will be cash based or accrual based (will determine what you can expense each year), show a profit, use software like QuickBooks or FreshBooks, Track ALL purchases. Track ALL sales. File withholding taxes with your state, pay unemployment tax to your state, get equipment insurance, get liability insurance, track you car mileage,...

Then you can ask your accountant about expensing your equipment purchases. (some of the above also applies if this is a hobby rather than a business)

[StoneNYC]

If you're going to be a business, be a business. Decide on Sole Proprieter, LLC, S-Corp, C-Corp. Register your business in your state. Get certified to collect sales tax. Charge sales tax when you make a sales Get an accountant. Decide if you will be cash based or accrual based (will determine what you can expense each year), show a profit, use software like QuickBooks or FreshBooks, Track ALL purchases. Track ALL sales. File withholding taxes with your state, pay unemployment tax to your state, get equipment insurance, get liability insurance, track you car mileage,...

Then you can ask your accountant about expensing your equipment purchases. (some of the above also applies if this is a hobby rather than a business)

You assume too much, but thanks.

[axs810]

What if you're a 1099 sole proprietor that's taken a few 1099 jobs as an assistant or lab technician? Would you need to still register a business with the state? I don't consider myself a business at this point but not really sure what 1099 really falls into...im pretty new to 1099s im used to being w2

[Greg Miller]

What if you're a 1099 sole proprietor that's taken a few 1099 jobs as an assistant or lab technician? Would you need to still register a business with the state? I don't consider myself a business at this point but not really sure what 1099 really falls into...im pretty new to 1099s im used to being w2

If you are not a business, then you have hobby income. For that you need to report your 1099 income on 1040 line 21.

[Greg Miller]

You assume too much, but thanks.

If you are a hobby (as opposed to a business), then you can only deduct expenses up to the amount of income that you have. So to deduct your $5,000 in expenses, you would need to have $5,000 in sales. And then only if your hobby has earned a profit in 3 of the past 5 years, and only your expenses that exceed 2% of your AGI (although there is an exception if you are actually trying to be a business and keeping all the records that a business would keep).

This is obviously complex enough where most people should be getting advice from an accountant before gong down this road for either a hobby or a business.

[axs810]

Thanks Greg.

I had an accountant do my taxes for 2014 but yeah I was just curious because I'd eventually like to start my own little photo biz later down the road

[StoneNYC]

If you are a hobby (as opposed to a business), then you can only deduct expenses up to the amount of income that you have. So to deduct your $5,000 in expenses, you would need to have $5,000 in sales. And then only if your hobby has earned a profit in 3 of the past 5 years, and only your expenses that exceed 2% of your AGI (although there is an exception if you are actually trying to be a business and keeping all the records that a business would keep).

This is obviously complex enough where most people should be getting advice from an accountant before gong down this road for either a hobby or a business.

Again, you assume too much, but thanks.

[axs810]

StoneNYC- I don't think Greg is assuming too much I think he is just trying to spread some info to you in response to your general question.

[Fred L]

Stone - I'd lighten up on Greg since you never mentioned, afaik, whether you were incorporated or not. He's imparting information for the greater community as well. I have friends who are incorporated and some who aren't. I think for those who aren't, it's a calculated risk.

[Jmarmck]

This is an extremely frustrating subject. Tax code is so complex that you have to pay an accountant, even for a hobby.
I would say more but politics are a no no here.

[appletree]

If you are a hobby (as opposed to a business), then you can only deduct expenses up to the amount of income that you have. So to deduct your $5,000 in expenses, you would need to have $5,000 in sales. And then only if your hobby has earned a profit in 3 of the past 5 years, and only your expenses that exceed 2% of your AGI (although there is an exception if you are actually trying to be a business and keeping all the records that a business would keep).

This is obviously complex enough where most people should be getting advice from an accountant before gong down this road for either a hobby or a business.


Stone - I'd lighten up on Greg since you never mentioned, afaik, whether you were incorporated or not. He's imparting information for the greater community as well. I have friends who are incorporated and some who aren't. I think for those who aren't, it's a calculated risk.

Thank you. This is helpful for me. My "business" is nothing official. More of a hobby that I wanted to sell prints occasionally, honestly, to just spread my work around and break even at the end of the day. My income has been $0.00. Good to know about hobby vs business. Now to see/research if I should be a business or just keep doing my own thing until I actually start moving any products.

[Fred L]

For my friends who aren't incorporated, I think the BIG risk is liability. Light stands falls over and knocks someone out ? You're personally liable if you're not incorporated so having a company take the blow is smarter. I stand to be corrected since I'm not incorporated ;)

[StoneNYC]

I'm stepping out, sorry for the offenses. Thanks for the advice.

[Shootar401]

With all this IRS crap I'm glad I'm not a business on paper.