Most jurisdictions will cap the depreciable value at the amount you initially paid for it, but the rules on depreciation still give you a lot of leeway to move losses and profits around intertemporally. Also, there are still some other parameters you can tinker with, such as the assumed salvage value (the remaining value of the asset at the end of its lifespan).
I might be misunderstanding you - but my mother owned a two family house. For reasons I never completely understood, it was financially better for her to charge my sister rent for one apartment ,report the rent as income and deduct half of the expenses ( including depreciation. ) But one of the parts I couldn’t understand was that she could depreciate the house even if it was worth much more than she paid for it. Apparently, you had to somehow separate the value of the building from the land and you could only depreciate the building - but even that didn’t make sense to me because you can depreciate the house over 27 years even though 100 year old houses are really common around here.
Who was it who said “we don’t write the tax laws, we just take advantage of them?”
I am not an expert, but I believe that the IRS (should they even care to show an interest) expects a company to either make a profit from time to time or have a reasonable expectation of making a profit. I think it’s called a “hobby loss” business if it doesn’t. This has been a concern of mine for the last 10+ years because that’s exactly what I’m trying to do…make just enough money so I can spend it all on justifiable expenses. Fortunately, I’m able to pay myself a small amount at the end of each year, but the vast majority goes to expenses no third-party employer would approve.
Please correct me if I’m wrong – this is far from my area of expertise:
An unprofitable company might have carried over several years of losses that it cannot use. A profitable company can acquire them and use the other’s losses against their own profits. There are many restrictions; for example you cannot acquire a company solely for their losses.
The same logic applies to acquiring assets and their associated depreciation schedules.
Presumably the deductions are valued differently by the profitable and unprofitable companies since they are only useful for one of them.
My dad had a couple of Cessnas, a 172 and a 182. He put them on leaseback at the local FBO. The idea was that he could own his airplanes, and reduce his income tax because of the losses. He did have losses on the Skyhawk, but the Skylane turned a profit. But he still had his planes.
Well, yes, but- if it is something that no sane person would run as a hobby, they arent as rigid on that. Still, decades of losses will raise red flags.
IRS considers a Schedule C profit in 3 of the last 5 years to be “safe harbor” proof that you are in fact in a profitmaking business.
Which leads to the presumption that anything less than that is at least potentially not a true business, but rather a hobby you’re hoping to subsidize with illegal tax deductions.
The farther below the “3 of last 5” you fall, the more likely you are to a) attract attention, and b) be found to not be running a real business with intent to profit.
I know a fellow who runs a martial arts dojo. His revenue fluctuates from year to year, based on the popularity of the arts. But he also hates paying taxes. He leases a “company car” for the dojo, which he as President of the company can use as part of his compensation package.
How nice that car is varies from year to year, based on how profitable the dojo is that year, so he can avoid paying too much tax in the good years.
The cost of the “company car” can certainly be a deduction on the business’s tax return. Whether that’s a separate corporate return, an 1120S return, or a sole proprietor Schedule C as part of the owner’s 1040.
The transportation value of the “company car” needs to be reported as imputed income on his personal return. I have a sneaking suspicion he “forgets” that part.
There’s lots of different kinds of tax code businesses according to the IRS. The most relevant here is probably the “sole proprietorship” where a person or married couple may or may not have a W-2 paying day job and other income, but also has a business that generates income or loss that then gets reflected on the proprietor(s) tax returns. Other businesses include S-corporations, C-corporations which have their own income but pay 1 or more owners a “reasonable” share of income (there’s also LLCs, which don’t have any tax benefits or recognized by the IRS despite online videos suggesting otherwise. These businesses can be LLC or not.).
There’s a split between what you can do and what’s wise to do. Stuff like running a hobby business, or having a home office are perfectly legal but can be strong bait for things like getting audited. Your office space could be perfectly justifiable but you still may need to deal with the stress of an audit with higher chance.
“Write offs” are theoretically a fraction of the actual money you lost. If you work a standard W-2 job and on the side run an unprofitable business, you may write off expenses greater than your profit, but can only deduct $3000 from your W-2 income. Anything beyond that is not lost but can be carried forward to subsequent years. If you run 2 or more businesses, one that is currently unprofitable may offset the other that is more viable.
I had a side consulting business that only generated several thousand dollars in a good year. One year I had a job in December that involved flying out of town and staying in a hotel. I didn’t get paid for my time and reimbursed for my expenses until January. I took a big (for me) paper loss in that year and TurboTax (not knowing about the payment coming later) flagged it as audit bait but the audit never happened. The next year was my most profitable ever as a result.