Taxes, small business and FAFSA

[naturemn]

Hello! I am new here, but recognize some names from a long ago forum. I have some questions about small business deductions and some about the Simplified Needs Test for FAFSA. Our first child is graduating this spring and looking at engineering.

Not sure where to start, but I sell online and have been claiming my income for the last few years even though it is quite minimal. I have had a small profit those years, but this year, it looks I may be in the negative. Also, we would really like to upgrade our computer(2002 Dell) and printer(inkjet to a laser type). There is the history, I think.

Questions
1. I have seen a "Simplified Needs Test" for the FAFSA mentioned here and there. My understanding is if you meet the criteria you do not need to fill out the asset portion of the FAFSA. We are very close to the income criteria. We planned to make the purchases this year, but that would put me even more in the red for my business. If my negative income from my business is what puts us below the income criteria for the SNT, would that be a red flag to the IRS? This isn't just something we are making up to loose money. I am sure you can imagine the virtual memory issues we have with our 2002 Dell with all the photos and listing and uploading. It is very time consuming. A faster computer should help my bottom line, in that I could list so much faster. Secondly, I print all my shipping labels and we go through a lot of ink. I think switching to a laserjet would be wise due to that.

2. How do you claim computer deductions, etc for a computer that is not exclusively used for business, but is mostly used for it. I am a stay at home mom and it is used mostly during the day for business reasons (although, I do have background stuff running while I am working sometimes).

3. We do not claim a home office...we need every inch of our home for living purposes(6 people). I have read that you can claim storage space though and that does not have to be used exclusively for business like a home office does. Our biggest headache with my business is storage. The inventory and shipping boxes take up a lot of room.....really too much room in our home. How does that deduction work? We store inventory in our living room, bedroom and recently an outbuilding(we live on an old farm place). We store shipping boxes in our front porch.

4. Does my loss of profit deduct from my husbands wages on the 1040 to get the AGI? In other words, can all types of deductions put your business into the negative or can you only deduct to a $0 profit point? IYKWIM?

If we meet the criteria for the SNT, it would be beneficial for us, no lie. We are a family of 6 barely making it, but my husband inherited some farm land from his grandparents. We have pretty much nothing in retirement accounts at all, real estate is all we have. When it comes to FAFSA you can have all kinds of money in an IRA, but not real estate. We are cash poor. We don't have extra money to put into IRA's. Selling the land doesn't make much sense due to capital gains and the fact we do get a rent check for the cropland each year. Plus, we are co-owners with my BIL and it gets complicated. There are also many laws in place to make sure that you can't sell just a few acres. They are protecting farmland from being developed.

Any help and insight you could lend would be great! Thank you in advance!

[4jacks]

I can't really answer any of your questions, but welcome to the boards, hopefully our tax expert logs in and helps you out.

[clydewolf]

Naturemn,

Welcome to the forums.
It sounds like you are always busy.

1. - It sounds like you know quite a bit about the SNT requirements.
The IRS does not look at your FAFSA, so there would be no red flags to the IRS from the FAFSA.
Although it is too late to help with college expenses for your oldest child, you may want to take a look at this web site:
http://www.savingforcollege.com/

2. - I would not advise taking a business deduction for a computer that is not exclusively used for business.
But when you have your new computer for business, you could use your current computer for your personal computer stuff.
Another idea regarding your current computer, you could add additional RAM (about $30) and a new larger hard drive (about $100). That would help increase the speed of your current computer. Give this task to one of your teenagers.

3. - You are right regarding the home office. It must be used exclusively for the business.
Page 4 of IRS Pub 535, Business Expenses discusses the deductability of space used for storing, supplies and products, etc.

4. - You determine your profit or loss from the business on Schedule C (Instructions - http://www.irs.gov/pub/irs-pdf/i1040sc.pdf. On Schedule C, Part II, Line 13 Depreciation and Section 179 Expense, you would record depreciation for your computer. These amounts are determined on Form 4562 (Instructions - http://www.irs.gov/pub/irs-pdf/i4562.pdf.
These instructions have the depreciation tables that you can use, and discusses how you can take a Section 179 deduction for your new equipment if you want to do that.

When your business reports a loss on Schedule C, that negative number is carried to your 1040 line 12 where it is combined with your other income (or losses). These items are combined together to determine you Gross Income. Then there are adjustments to income, to arrive at your Adjusted Gross Income. Next Personal Exemptions are subtracted, then Standard or Itemized Deductions to arrive at your Taxable Income.

Some IRS Pubs that you may want to look into:
- Pub 535, Business Expenses: http://www.irs.gov/pub/irs-pdf/p535.pdf
- Pub 551, Basis of Assets: http://www.irs.gov/pub/irs-pdf/p551.pdf
- Pub 946, How to Depreciate Property: http://www.irs.gov/pub/irs-pdf/p946.pdf

[naturemn]

Thank you so much for your reply. Our current computer was maxed out at 1 GB for RAM. It started with 256mb. We did end up getting a computer through Dell outlet. I am not sure about claiming it or not, I guess I can ask at tax time(which is coming all too soon!). Our old computer's Word program was not working, etc and my children need a place to work on homework, too, so making this one exclusively for business would be very difficult....not to mention my husband.

My son has applied to the colleges now and is applying for scholarships. I guess I will have to see how the FAFSA directs us when we fill it out. My eBay business will have a loss this year, but I have some business plans in place to hopefully turn that around this next year. The loss will most likely bring our AGI under $50K.