Any Tax Preparers? Depreciation and Sec. 169 on Sawmill

[texican]

I've been wanting to get a bandsaw mill for ten years. A local, ten miles away, had one, and he'd work with me on halfsies, and discounted cutting (I made him a lot of gifted wood). However, he was past getting old, and finally found a buyer and sold out. So, there's no bandsaw mill for 30 miles around here.

My question... If my tax liability to the IRS is around 5K, and a mill cost 5K or 15K, will the Section 169 100% depreciation rules, take that cost of the mill off of my tax liability, or off my gross income, and thereby only incrementally reduce my tax liability.

Example... 40K gross income, the 15K mill would reduce the gross income to 25K and then I pay taxes on that?

Or, would the "X" amount of taxes I pay, say 5K, be reduced to zero, with a 15K deduction.

I've tried figuring it out on the IRS sites, to no avail. I know how to build just about anything, or fix any problem... but fathoming the depths of the IRS groupthink is beyond me. Year before last, I got audited, redid a form, sent a check for the diff, and they ended up sending me back 500. Last year, thought I was getting a refund, and ended up getting audited and having to send them an extra 200 donation for the IRS favorite charity, themselves. I know, I know, I'm going to have to get a sit down with a tax person........ I just need to know if I'm thinking way too wrong before I go in. I like to know my 'hold cards' before putting down my money.

I can justify the mill purchase, as I have around 5K board feet of lumber I need cut for myself (flooring and roof rafters on new house) which would cost >2K. Have several neighbors with a backlog of sawlogs, with no one to cut them. IF I could get a large chunk of my tax liability reduced or eliminated, it's 'drive down to the local dealer and get 'er tomorrow'

If you take the 100% depreciation this year, are you SOL on future write offs? Would I be better off to take 100% depreciation this year, or extending the depreciations over several years. I don't know if my income next year will be as much as this year. If I take the 100% this year, and make good money next year, could always make another large investment purchase (larger tractor or a bobcat).

Depending on the tax implications, I could get a larger mill.

I've also checked the prices of used mills, and they apparently keep their value well. Craigslist has some used mills that are ~15 years old, and the prices are 75% of what they paid for them. So, I could saw all the wood I'll ever need, and sell it if I needed to bail out, or upgrade.

thanks!

[rambler]

Will you be using this mill for a business, or just for your personal use?

Then you get intot he business expense, vs hobby expense issues of the IRS....

Just wanting to clarify that part, which you didn't ask about.....

I Let a farm tax CPA do my taxes, the $400 I spend on him is some of the best money I spend on my business. He figures out the best use of such deductions, sometimes 179 (isn't is, instead of 169????) and sometimes depreciated over the life of the machine. So while I do it, I can't accurately answer your question!

--->Paul

[oneokie]

Originally Posted by texican

If you take the 100% depreciation this year, are you SOL on future write offs?

Yes, as far as depreciation. You could deduct expenses.

Would I be better off to take 100% depreciation this year, or extending the depreciations over several years. I don't know if my income next year will be as much as this year. If I take the 100% this year, and make good money next year, could always make another large investment purchase (larger tractor or a bobcat). thanks!

Ditto to what rambler said. Talk to a good CPA, they are worth every penny they charge. If you do custom sawing for the neighbors, and keep track of income and expenses, to my thinking, that would be a business venture. Talk to a CPA.

[TnAndy]

It's a section 179.

You can deduct all of that amount in a single year. It will reduce your gross income by that much, so yes, if you earn 40, your gross will drop to 25k if the mill costs 15k.

Be aware that you will have to file a Schedule C for self employed income as well, or you can't take the deduction. You need to actually BE running a business, however small, with the INTENT to make a profit. You don't ever have to actually make a profit, but it's up to you to prove your intent if they question it. Get "personal use" completely out of your vocabulary....or they are gonna hit you for a percentage of everything involved ( cost of mill, expenses, etc ).....Your mindset needs to be "This is 100% for business use".....or be prepared to haggle.

ALSO, your statement:

" I could saw all the wood I'll ever need, and sell it if I needed to bail out, or upgrade."

You need to be VERY careful there IF you do Section 179 ( or even standard deduction ) the mill.....because if you sell it down the road, 100% of the price you get IS INCOME.....and they will expect their share.....so if you sell a 15k mill for 10k in 5 years, you'll owe taxes on the 10k IF they find out about it. Everything I've ever deducted is allowed to rust into nothing

I have a small mill. I use it almost exclusively for personal use.

[texican]

Thanks Andy! I knew you had a small mill.

As a rule, I like to keep Uncle Sam out of my 'business' as much as possible. I know I'm going to get burned this year on taxes, if I don't do something. My main business has been slowing down, with the price of natural gas staying around 4$ for so long. Figured it's time to start breaking in a new 'cash cow'. If I can avoid sending more in, I'm all for it.

Looks like I'll be getting a tax preparer come next spring...

[just_sawing]

TNAndy is right on.
Understand that a legitimate sawmill in 2012 is going to be hard with the new 1099 laws kicking in. I don't figure that there are going to be many old farmers here that are going to be to happy about giving me their Social Security number when they buy 600 dollars of lumber.
The IRS appears to be realy going after small single owner businesses. I would contenplate not using the mill as a bussiness but if some one wanted to pay you cash for a small job they are to small to worry about.

[TnAndy]

Originally Posted by just_sawing

Understand that a legitimate sawmill in 2012 is going to be hard with the new 1099 laws kicking in. I don't figure that there are going to be many old farmers here that are going to be to happy about giving me their Social Security number when they buy 600 dollars of lumber.
The IRS appears to be realy going after small single owner businesses.

The IRS is just the enforcement arm.

The policy is coming from Congress.....a CONgress that is bought and paid for by big business.

You start looking at the whole picture, and this coming 1099 mess is just a part....there's the "food safety" bill, and other stuff that is really just a way of big business snuffing out small business competition using their agents, our Congresscritters, as the "legal" means to do this.

More and more folks are going to be forced to go underground, and risk 'outlaw' status to earn a living....earning cash, sticking it in their pockets.

I'm glad I'm pretty much out of the working age. My goal is to be as self sufficient as I can, requiring the least amount of income, and paying out the least amount of 'money' I can the rest of my life. People 50 and under are screwed, IMHO....those working a job are going to have to compete with those in the world that will work dirt cheap, and those who would have started their own business are going to be regulated out of a chance to do that.

Welcome to the American Dream v.2.0

[fordy]

..............I would just add too the discussion.......I can see only two scenerios where you could take a depreciation deduction on A Sawmill.....(1)Within the context of filing Sch F and using it too clear land for an AG purpose , or (2)In a business context on Sch C where you had a small Bizz cutting wood too sell , doing custom milling for other folks or , cutting wood for a Biz where you mfged wood products for sale like furniture . Obviously you're wanting too utilize the depreciation in one business with a Loss too flow thru too offset the profit as a landman , etc . , fordy

[texican]

Originally Posted by fordy

..............I would just add too the discussion.......I can see only two scenerios where you could take a depreciation deduction on A Sawmill.....(1)Within the context of filing Sch F and using it too clear land for an AG purpose , or (2)In a business context on Sch C where you had a small Bizz cutting wood too sell , doing custom milling for other folks or , cutting wood for a Biz where you mfged wood products for sale like furniture . Obviously you're wanting too utilize the depreciation in one business with a Loss too flow thru too offset the profit as a landman , etc . , fordy

Thanks fordy, I'll need to do some more research apparently. I do have a lot of ag deductions... this year there's a lot of large pine timber that's died because of insect and drought damage.

///thinking out loud here/// If I go and take an agricultural depreciation, and say I've cut 10K board feet off the damaged pine timber, I wonder if Uncle Sammy would want a 'cut' of the value of the 10K foot of lumber. Wpuld probably rather take an ag deduction, to keep another business from polluting my tax position.

Worrying about faceless bureaucrats makes my head hurt.

The 1099 rule is going to be an unfed frothing at the mouth wolf, as far as small business reporting is concerned. Will add hours of regular unpaid work for me... as most Oil and Gas clients like to pay by check. "Hard" to pay cash when they live on the other side of the country and we've never had a face to face.

Can only hope the "1099 Beast" dies in January... but I'm not holding my breath... left or right, they all need something out of our pockets to function.

[oneokie]

Originally Posted by texican

///thinking out loud here/// If I go and take an agricultural depreciation, and say I've cut 10K board feet off the damaged pine timber, I wonder if Uncle Sammy would want a 'cut' of the value of the 10K foot of lumber. Wpuld probably rather take an ag deduction, to keep another business from polluting my tax position.

My thoughts, if I were in your position, I would make an appointment to talk to a CPA as soon as I could. Bounce your ideas off of the CPA and they could advise you which would be the best way to go. Tax avoidance is going to get more difficult after 31/12/2010.

ETA, The money you pay the CPA for a consult can be deducted from you taxes as a legit business expense.