Since the OP is looking for financial opinions, let’s move this to IMHO.
Colibri
General Questions Moderator
That’s incorrect. As I mentioned, he is working on this full-time. He is conducting business in development, testing and marketing. There is equipment to buy, consultants to pay, a bank business account, etc. So he begins operating the moment he has been working on this full-time. There are companies that work for years doing research before they have a product and meanwhile have no sales. Having no sales doesn’t mean the business is not operating.
OK, then that really answers the question. So he is correct in tracking the business use of the home expenses (and other expenses) even if it won’t be used to his benefit until 2017. When he told me about it, I thought it might be a waste of time doing additional accounting like that, but in the end it would be worth doing. I just listened and didn’t give a comment, because I’m not a CPA.
BUT, he need to file properly every year to create the carryover to use in 2017 & subsequent.
IOW, in 2015 he files the tax return forms for home office use which show all his expenses in 2015. And at the bottom of the relevant form is a section which computes net profit and if that’s zero or less, disallows the deduction this year, but creates the record of the carryover amount for next year.
He CANNOT simply keep notes on his expenses in 2015 & 16 and just add them all in when doing his 2017 taxes. If he waits until then it’s too late unless he wants to file amended returns for the prior years.
Also, as others said above, the tax accounting for a business startup is different than from a fully operating concern. The mere fact he’s doing absolutely everything a business does, except actually selling anything, changes everything. He’s NOT an ordinary business with ordinary taxation. Yet.
Bottom line (again): He needs specific advice from a tax pro and he needs it now, not 2 years from now.
All of the below I write is for federal purposes only, states may differ.* I also assume that the business use portion of the house is contained within the house, and not a separate structure such as a guest house.
I don’t think this is exactly right, but I could be mistaken. I believe the Net Operating Loss carryforward/back is limited to 20/2 years, respectively. If you have other sources of earned income (other businesses, spouse), then losses incurred for a business can be deducted against your other income for the period as long as the business is a pass through entity (partnership, LLC, S corp) or a sole proprietorship. So it’s more than a paperwork exercise in that case.
This is also not quite correct.
I believe in 2002 the rules were changed and the gains from selling were no longer required to be split between the business and personal use - making the gain on sale of home exclusion apply (250K single/500K married jointly, with the 2 out of 5 year residency test).
This isn’t quite right either. The mortgage portion of the house is taken on the business side, rather than the personal side.
Another thing to remember, is that if part of the home is used for a business, then the basis in the home must be adjusted for any depreciation that was allowable for its business use. IRS Pub 587 page 17.The term “allowable” is what could have been taken, regardless if you took it or not. I think for most people, the gain resulting from this basis reduction would be absorbed by the sale on home exclusion, but it depends on the fact pattern of course.
Even if it is excluded form cap gains through the exclusion though, there would still be the section 1250 unrecaptured property gain. I believe this would apply to the total amount of depreciation taken over the life of the property taxed at the highest capital gain rate for the taxpayer.
I know we have some tax experts on the board so hopefully if I got any of that wrong they’ll let me know.
Not necessarily. Read IRS Code section 195. You dont get to deduct business start up costs until your business actually has product, etc available for sale. He really needs a Tax Professional.
Yesbut, many people try and take it twice. This is why Office in the home is a Red Flag.