Established schedule c

[JT2307]

Looking for some input - schedule C only income on return, he has been in business for several years has been showing profits - in 2014 he did extensive remodeling - as a result the depreciation will wipe out any profit he has.

How does that look to the IRS - would it throw some red flags. Can't decide.

Thoughts??

[JoshinNC]

My thoughts are...

how does extensive remodeling take a profitable business and make it show a loss?

Can you explain what type of business this is and what type of remodeling?

[Nashville]

Agree with Josh

You can govern the amount of depreciation chargeable to the specific year. For one option, try alternate MACRS lives to lower depreciation.

Surely you can't be using s.179 to create a loss, are you? To begin with, if you have that much you must defer the remainder of the s.179 write-off to succeeding years. Secondly, even if you were allowed, it is miserably poor strategy since the depreciation would be better put to use in profitable years. Thirdly, I'm not sure s.179 applies to building improvements.

You might also evaluate how much of the remodeling constitutes improvements. Moving partitions, and simple re-arrangement of walls usually do not add value and can be chargeable to building repairs/arrangements as an expense.

To try find ways to minimize this large depreciation amount, and see what happens.

[JT2307]

convenience store

how does extensive remodeling take a profitable business and make it show a loss?

Can you explain what type of business this is and what type of remodeling?

It is a convenience store - install new coolers and cases and shelving - along with a new roof and parking lot.

Of course I wouldn't take the section 179 - and most likely opt to SL depreciation.

[Roland Slugg]

If a profitable small business suddenly has a loss because its T&E expenses increase from $5,000 to $50,000, that might get the IRS's attention. But if it suddenly reports a loss because, say, $200k of new equipment and other improvements were added, thus increasing depreciation, that is not likely to trigger an audit. Even if the IRS computers flag the return when it's processed, the person who reviews it will almost certainly NOT select it for audit.

Regarding how to handle the depreciation for all the new equipment and improvements, I would suggest that you try to spread it out over a little longer time period than "normal." Consider using SL rates, not taking any §179 deduction (which would only apply to the coolers and other equipment anyway), and using the ADS lives for some or all the new assets.

Since the Schedule C represents the T/P's only income, it would be a good idea to try to avoid having that schedule show a loss. If it did, most or all of that loss would yield no tax benefit, as the T/P has his standard or itemized deductions for that, as well as his personal exemption(s). NOLs for individuals are very tax inefficient and should be avoided whenever possible via sound tax planning. An additional cost to a Schedule C loss that's easy to overlook is the effect on the owner's SE tax. A Schedule C loss in one year can never be used to offset his self-employment income in another year. Every year stands on its own for SE tax purposes, and an NOL carryback or carryover doesn't reduce SE income in the carryback or carryover years.

[JT2307]

Thanks

Thanks for all the great input! As always

[DaveO]

Electing out of Bonus for the property may be enough to get the depreciation down. I agree with not letting the standard deduction and personal exemption go to waste.

[taxea]

I rarely, if ever, 179 items because the benefit to the TP is not that great. Input the equipment with normal depreciation and the improvements as you normally would. I see no need to change the method of depreciation on any of the items. If it still creates an NOL that you can usefully carry back, do so and let the remainder carry forward.