Business expenses

[Beth]

I'm hoping someone can answer what I hope is a simple question. I searched the IRS website but could not find an answer.

My husband is starting a DJ business. He purchased most of the equipment in 2007, but is still missing a few components to actually start the business. Some of the equipment purchased would be a straight business expense, while some I believe would need to be depreciated.

Would we file a Sch C with these expenses on this year's tax return, or can I put the expenses on next year's tax return - when the business would have income, even though the items were purchased in 2007 ?

[Janitor Bob]

I'm hoping someone can answer what I hope is a simple question. I searched the IRS website but could not find an answer.

My husband is starting a DJ business. He purchased most of the equipment in 2007, but is still missing a few components to actually start the business. Some of the equipment purchased would be a straight business expense, while some I believe would need to be depreciated.

Would we file a Sch C with these expenses on this year's tax return, or can I put the expenses on next year's tax return - when the business would have income, even though the items were purchased in 2007 ?

I would file a Schedule C for this year...you would have expenses, but no income for 2007...not unusual for first year in business...to help offset, just use the resulting refund and apply it to next year as estimated payment(s)

[NECPA in NEBRASKA]

Beth,

If he didn't actually start the business in 2007, the equipment should be depreciated starting in 2008 when it was put in service.

Bonnie

[jainen]

>>Would we file a Sch C<<

No, and it is not a simple question. Since he was NOT in business there is nothing to file and no deductions available for 2007. You can begin depreciation when assets are placed in service, i.e., when the business starts. Supplies and other current expenses paid before the first day of business, whether in 2007 or 2008, are generally not deductible at all. However, see a tax professional about making a formal Section 195 election for those, as well as setting up the depreciation schedules.

You should also get advice about documenting vehicle, travel, meals and entertainment expenses, as well as general business set-up issues such as separating personal and business records. Knowledgeable help is particularly important if there is a period of time before he starts pulling in big bucks, because IRS feels that music supplies and equipment could have a significant element of non-business pleasure.

[Janitor Bob]

>>Would we file a Sch C<<

No, and it is not a simple question. Since he was NOT in business there is nothing to file and no deductions available for 2007. You can begin depreciation when assets are placed in service, i.e., when the business starts. Supplies and other current expenses paid before the first day of business, whether in 2007 or 2008, are generally not deductible at all. However, see a tax professional about making a formal Section 195 election for those, as well as setting up the depreciation schedules.

You should also get advice about documenting vehicle, travel, meals and entertainment expenses, as well as general business set-up issues such as separating personal and business records. Knowledgeable help is particularly important if there is a period of time before he starts pulling in big bucks, because IRS feels that music supplies and equipment could have a significant element of non-business pleasure.

When does a business formally begin? With receipt of income or with intent? If he did everything short of actually booking an event (i.e. advertising, supplies purchased, almost all equipment purchased, market researched, LLC filing, etc) I would argue that the business existed in 2007. If all he did was start purchasing a few pieces of equipment in 2007, then I would agree that business did not constructively start until 2008.

[Beth]

It's a business that he owned and operated several years ago in another state. He had purchased the business back then from another DJ. He no longer had all the equipment needed to actually start, but has managed to puchase about 80% of everything required in the past few months. He has not formally advertised , but has discussed plans of DJing a few events this summer with some future clients. Since he has run the business before he is familiar with which documentation, etc.. to keep, we just need to check to see if anything differs for the State of Maine, since the previous business was run out of New Mexico. I'd hate to lose the deductions for what we've already purchased since it is probably a couple thousand dollars. - DJ equipment is quite expensive !!!!

Thank You all for the advice !

[Beth]

Actually my husband did do some advertising online in 2007, with the plans to buy all the needed equipment if he did get a client. Of course now we will be doing much more extensive advertising in hopes to get at least one Prom in June and maybe some summer weddings ! Since he did advertise does that mean I can file a Sch C with our return this year and claim the expenses ?

[Janitor Bob]

Actually my husband did do some advertising online in 2007, with the plans to buy all the needed equipment if he did get a client. Of course now we will be doing much more extensive advertising in hopes to get at least one Prom in June and maybe some summer weddings ! Since he did advertise does that mean I can file a Sch C with our return this year and claim the expenses ?

I personally would have no problem in filing a schedule C for 2007. The business obviously did exist in 2007...just no income received until 2008.

You would have a loss for this year....pay attention as years go by that you do not exceed the max number of years with a loss....if so, IRS will consider it a hobby and not a business.

[Beth]

Thanks so much for all the help. Don't worry about the loss, if we have that for more than a couple years, my husband won't be allowed to continue !!!!

[jainen]

>>Since he did advertise does that mean I can file a Sch C with our return this year and claim the expenses ?<<

Based on all you have said, no, he was not in business in 2007. Advertising for future clients for which he would go into business if the facts were different -- that's more in the nature of market research. Well, obviously I hold a minority opinion in this thread. Tax preparers like to push things in favor of the client, and it's often said that if you are ready to go into business, then you already ARE in business. Unfortunately, such a view is not backed by law or regulation. (Tax preparers don't always care about that particular objection, however.)

Business requires more than just an intention to find clients and put a rig together. You actually have to operate in a business-like fashion. Besides not having the necessary equipment, you say he hasn't even set up his books yet. Do you have a 2007 start date for insurance coverage, business license, RIAA royalty agreements, or other outside indications that he was truly good to go?

[Janitor Bob]

>>Since he did advertise does that mean I can file a Sch C with our return this year and claim the expenses ?<<

Based on all you have said, no, he was not in business in 2007. Advertising for future clients for which he would go into business if the facts were different -- that's more in the nature of market research. Well, obviously I hold a minority opinion in this thread. Tax preparers like to push things in favor of the client, and it's often said that if you are ready to go into business, then you already ARE in business. Unfortunately, such a view is not backed by law or regulation. (Tax preparers don't always care about that particular objection, however.)

Business requires more than just an intention to find clients and put a rig together. You actually have to operate in a business-like fashion. Besides not having the necessary equipment, you say he hasn't even set up his books yet. Do you have a 2007 start date for insurance coverage, business license, RIAA royalty agreements, or other outside indications that he was truly good to go?

Where did it say that the books had not been set up? I did not recall reading that in the postings here. I respect your opinion and not stating that I am definately correct, but I have found no printed reference that would guide me more to your opinion than mine...if you know of some citation or reference, please let me know...as always, I am trying to learn more each day and improve.

[BulldogTom]

Beth,

When a company is open for business is a facts and circumstances situation. Jainen has given you a lot of the factors that could be used to make that call. JB has done so also. Being open for business is one of those things that you know, but are not always easy to prove. Remember, you have to prove it to the IRS.

Personally, I would ask - "On what day could I have walked up to your hubby and got him out to my party the next night?". If he could not have done that in 2007, he probably was not in business yet. If I can't call him today and have him at my party tomorrow (unless he is booked somewhere else), he probably is not in business yet.

You are responsible for your own tax return. This is a place where you will have to work with your preparer (or make the call yourself if you are going to do this on your own) to make the best possible decision for you in light of your facts and circumstances.

Keep posting here, we all owe you for your help and will do our best.

If you are not comfortable with putting your tax situation in the public view, pick a couple of us whom you trust and send a personal message through this wonderful web site Eric provided. I can't speak for everyone on this board, but I would guess that we would line up to help you (or any of you ex-ATX techs helping us out).

Tom

Lodi, CA

[zeke]

If you are not comfortable with putting your tax situation in the public view, pick a couple of us whom you trust and send a personal message through this wonderful web site Eric provided. I can't speak for everyone on this board, but I would guess that we would line up to help you (or any of you ex-ATX techs helping us out).

Tom

Lodi, CA

Tom - Well said! & Thank you - you DID speak for me. Beth had to feel like a ping pong ball between Jainen & J.B.

Beth - Hang in there. These spirited discussions help keeq us sharp!

[lbbwest]

"My husband is starting a DJ business. He purchased most of the equipment in 2007, but is still missing a few components to actually start the business."

Per YOUR post, the business was NOT opened in 2007. Thus no deductibility in 2007. In my never humble opinion, I agree with Jainen. lbb

PS. Of course as always, the legal deductibility has little to do with "what you can get away with."

[jainen]

>>the books had not been set up<<

Okay, her husband might have set up the books secretly. I got the impression from the original post they hadn't quite decided what was supplies and what was depreciable assets yet. Twice Beth confirmed that they did not and could not "actually start" yet.

>>no printed reference that would guide me<<

You aren't trying. There have been plenty of cases that discuss when a business is considered to have started. A nice summary of them all is Bulldog Tom's question, "On what day could I have walked up to your hubby and got him out to my party the next night?" Print out his post, and you'll have it.

[kcjenkins]

Beth, I will just add my 2¢ by saying that I agree with Tom and Jainen on this one. Since you were clear that he did not, in 2007, have all the things he needed to actually do the job, he could NOT be 'in business' in 2007. He can deduct in 2008 both the startup expenses and depreciation, but not for 2007.

[BulldogTom]

Beth,

Even if you decide that you have not started a business, all is not lost. First, those items that have a useful business life of more than 1 year will be depreciated begining the day they are placed in service. That deduction will not be lost, just postponed.

Other costs, what we call start up costs, can be recouped with a §195 election. From your post, it seems like you might be able to get all of it through the first year expensing related to that section. If I remember, up to 5000 of start up costs can be expensed the first year of the business. The rest is capitalized and amortized over 15(?) years.

Throw in a §179 election on the assets that are purchased, and you may be able to get a deduction for all of the costs associated with starting the business in the first year.

Just a few more thoughts to consider.

Tom

Lodi, CA