Reduce depreciation to show profit on Sch C?

[kamckinley]

I have a client that started a quilting business last year. The equipment she purchased was approx $8,000, so the depreciation deduction alone (assuming 7-year life) is higher than her income from the business.

She wants to reduce the depreciation so that she shows a profit on her Sch C. What is the best way to do that? Reduce the business percentage, override the depreciation with a lower amount for the current year, other?

Seems like if I reduce the business percentage, that could reduce the total amount of depreciation she is able to take on the machine, whereas if I force a lower amount the unused depreciation will carryforward to future years. Is that even allowable (forcing a lower depreciation amount)?

Any suggestions greatly appreciated. Thanks!

[Super Mom]

I have a client that started a quilting business last year. The equipment she purchased was approx $8,000, so the depreciation deduction alone (assuming 7-year life) is higher than her income from the business.

She wants to reduce the depreciation so that she shows a profit on her Sch C. What is the best way to do that? Reduce the business percentage, override the depreciation with a lower amount for the current year, other?

Seems like if I reduce the business percentage, that could reduce the total amount of depreciation she is able to take on the machine, whereas if I force a lower amount the unused depreciation will carryforward to future years. Is that even allowable (forcing a lower depreciation amount)?

Any suggestions greatly appreciated. Thanks!

Why does she want to show a profit? Most new business lose money for a few years. This isn't an EIC is it? If so, be VERY careful!

[kamckinley]

No, this isn't an EIC return. She's just nervous that if she shows a loss for the first 2-3 years she will be audited, and with the cost of the machine, the full MACRS depreciation is definitely giving her a loss.

I talked to another colleague and they suggested switching from MACRS to SL depreciation. This would give her a small profit each year. From research it looks like no IRS approval is needed to switch to SL, so I think that's the route we are going to go.

Thanks!

[Gary2]

Switching to S/L depreciation is a common approach, particularly when businesses are first starting out. It's easier to explain the depreciation numbers to people just starting out, they're optimistic so they like the idea of postponing for the deduction for when they're actually making a profit, it's a perfectly honest and legal way to meet the 3 of 5 guideline, and you don't have to worry about 179 recapture when they close the business the next year.

[Golden Rocket]

A Smorgasboard of Elections

Actually, there are any number of ways to reduce depreciation if it is in the first year. If she bought it late in the year, she can rear-end the election to deduct a smaller amount, and there are alternate lives in the MACRS, plus you can always reduce down to 100% of SL.

I think she has the right to these elections even if she is a candidate for EIC. What she CAN'T do is ignore ordinary deductions and refuse to deduct normal items just to invoke or maximize EIC.

[kamckinley]

Switching to S/L depreciation is a common approach, particularly when businesses are first starting out. It's easier to explain the depreciation numbers to people just starting out, they're optimistic so they like the idea of postponing for the deduction for when they're actually making a profit, it's a perfectly honest and legal way to meet the 3 of 5 guideline, and you don't have to worry about 179 recapture when they close the business the next year.

Great, thank you! I think this is the best solution for this client, so I appreciate the help.

Also, just to confirm this is NOT an EIC client, she just wants to avoid being reclassified as a hobby and expects to have losses for the first few years. Thanks again!

[Roland Slugg]

Easiest thing to do would be to use the ADS instead of the GDS ... 10 (or maybe 12) years, SL method.