Author Topic: How do write-offs work?  (Read 426 times)

StudentEngineer

  • Stubble
  • **
  • Posts: 119
How do write-offs work?
« on: July 28, 2017, 11:29:32 AM »
I've had a fitness blog for over a year now and was wondering if I could use that as a way to write off fitness based costs that I have.  I was thinking of recurring gym membership fees, fitness equipment and clothing (I do product trials and post reviews on them), as well as travel to various fitness competitions around my area.

I'm hoping to get some clarity on exactly the benefits that write-offs give.  Does it only allow you to reduce the income from that business venture, or can it be applied to other income as well?

I hear a lot of people say to start a business to write off their travel miles with the supposition that writing things off that you get them entirely free, however that sounds too good to be true.  I was thinking it would be more along the lines of reducing your taxable income, so a $1000 write-off in a 30% tax bracket is only a $300 savings.  Am I correct on this?

Further - I have little knowledge on small business so I was wondering what other advantages starting a business with my fitness blog would provide, even if it produces little to no income.  I've heard of the solo 401k's and similar accounts but those all depend on profit right? Or is revenue only good enough?

Super open ended question, but thank you for any replies!
Want a Free Stock worth $3-$150?  Sign up for Robinhood using my referral link and both you and I will get one!
http://share.robinhood.com/keenanf4

Check out my post detailing it: https://forum.mrmoneymustache.com/reader-recommendations/robinhood-trading-app/

New to saving and investing? Check out my post on the Acorns saving and Investing App!
https://forum.mrmoneymustache.com/reader-recommendations/acorns-saving-and-investing-app-for-millenials/

Want a fun side-gig? Check out https://forum.mrmoneymustache.com/reader-recommendations/make-money-with-the-jobspotter-app!/

Earn $10 when you signup for ibotta using my link! https://ibotta.com/r/bbkdwbb

CareCPA

  • Stubble
  • **
  • Posts: 233
  • Location: Northcentral PA
Re: How do write-offs work?
« Reply #1 on: July 29, 2017, 05:55:36 PM »
This is a pretty general question, but here are some pointers to get you started:

Anything directly related to your business can be written off (as long as it is "ordinary and necessary"). If it is something that is both personal and business, then you should technically figure out what % you use it for business vs personal. For example, if you make business calls and personal calls from the same phone, and 60% of your calls are business, you can write off 60% of the phone expense. Another example: some people will take their family on vacation, and "visit their rental property," and write off most of the trip. I think this is often a very aggressive tactic, but each person has their own level of risk.
A specific example for you: if you are just competing in the competitions, then you probably can't write them off. If you are using them as a marketing or network event, then there can be opportunities to write off expenses since it would be business related.

Your understanding of tax savings is correct. Many people realize they're going to end the year in a profit situation, and hurry up to spend money. They will gladly spend $5,000 to save $1,250 in taxes (assuming 25% bracket). This makes no sense if you are buying items you don't need. If you're simply pre-purchasing items you will need anyway, then it can benefit you, depending on the extent and timing. Keep in mind you're just pulling these expenses forward a year, so you may need to find even more deductions the following year.

Losses from business activities can offset other types of income for federal purposes. State treatment will vary state to state. In PA for example, no business losses can offset wage income. If you are a Schedule C, be careful how many years you show losses, or the IRS will re-characterize it as a hobby and disallow your losses.

401k contribution limits will vary depending on your type of plan, but are limited by your wage from that entity, and/or your profit depending on how your business is set up. Gross revenues do not directly impact your contribution limits.
Always happy to help with tax or accounting questions - feel free to private message me.

I am a licensed CPA in Pennsylvania. However, any tax advice I give should be considered general information and not used in the avoidance of tax. There is most likely information about your situation that I do not know, and thus you should do your own additional research.

Yes, in case it confuses you, I did change my forum name.

nara

  • Stubble
  • **
  • Posts: 118
Re: How do write-offs work?
« Reply #2 on: July 29, 2017, 07:51:47 PM »
You would first need to classify your business as a business entity with your department of state and the IRS. You will need to establish a sole proprietorship and receive a tax ID number (EIN). You will need to set up a separate bank account for the business and all your business expenses will need to come out of your business account. There should be a paper trail for everything.  Whatever you can justify as a business expense can be written off.  If you are the sole employee of your business you can open a SEP IRA or Solo 401k, however, I believe that you can only contribute income from the business to these accounts. I was warned years ago by an accountant, that the IRS generally expects a business to be generating income within 3 years. If it's more than that, it becomes a flag for audit as it is seen as a "hobby" and not a true business venture.

StudentEngineer

  • Stubble
  • **
  • Posts: 119
Re: How do write-offs work?
« Reply #3 on: July 30, 2017, 05:51:49 PM »
Thank you a bunch for all the information.  From that I don't think it would be useful for me to form a business.  Thank you!
Want a Free Stock worth $3-$150?  Sign up for Robinhood using my referral link and both you and I will get one!
http://share.robinhood.com/keenanf4

Check out my post detailing it: https://forum.mrmoneymustache.com/reader-recommendations/robinhood-trading-app/

New to saving and investing? Check out my post on the Acorns saving and Investing App!
https://forum.mrmoneymustache.com/reader-recommendations/acorns-saving-and-investing-app-for-millenials/

Want a fun side-gig? Check out https://forum.mrmoneymustache.com/reader-recommendations/make-money-with-the-jobspotter-app!/

Earn $10 when you signup for ibotta using my link! https://ibotta.com/r/bbkdwbb

Cadman

  • Stubble
  • **
  • Posts: 156
  • Age: 35
  • Location: Iowa
Re: How do write-offs work?
« Reply #4 on: July 30, 2017, 06:08:46 PM »
StudentEngineer, apologies for not being any help, but your thread title reminded me of this: https://youtu.be/XEL65gywwHQ