Question

Dan is Single, Age 47 and has a new business on 1/15/2018, he provides service for a summer camp for children.

Dan's 2018 transactions related to business:

Income    $100,000

Mortgage Interest 8,000

Property Taxes 3,000

Utilities    5,000

Supplies    7,000

Telephone fees 2,000

Estimated Federal Tax
Payments    15,000

Dan Purchased a commercial building on 2/1/2018 for $300,000 in which (building=80% of the cost and land= 30% of the cost).
Dan also purchased a computer for his business on 2/15/2018 for $2000. Dan does not take section 179 deduction or bonus depreciation.

Question 1) are the business expense deductions FOR AGI or FROM AGI ?
Question 2) List any non deductible expenses
Question 3) If Dan Sells the computer on 9/20/19 for $600, what is his gain of loss?

Answer 1

1. Deduction for AGI are above the line deductions can be claimed even if taxpayer does not itemize deduction.Deductions must be connected directly to business activity as per Schedule C. Thus business expense related deductions will be FOR AGI.

2. The tax bill is not deductible from your federal business tax return. Some states may allow you to deduct a portion of your federal tax bill, but not all. You may deduct state and local sales taxes from on your personal tax return, but not for your business. Thus in the given scenario Estimated Federal Tax Payments of 15,000 will be non deductible.

3. According to IRS Computers and peripheral equipment are classified as 5-year property and must be depreciated over that time span using IRS Form 4. Thus every year depreciation would be $400 per year.

Thus as per straight line method same is as under:

Amount of Depreciation = (Cost of Asset – Net Residual Value) / Useful Life thus dep would be $200-2018, $400-2019, $200-2020. Thus total dep will be $800. Thus there would be loss of $600 on sale.

*Convention period is taken as mid year in above calculation.