Question by : What about using the tax exempt income for capitol in my small business; i.e. new equipment?
I am considering taking on a two month project and filing exempt. With the non taxed money, buying equipment for my small business. Paying taxes on the money that is not spent for business.
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Answer by SmartA$ $
You are not allowed to claim “exempt” on a W-4 form unless you had no tax liability last year and expect to have no tax liability this year. It says so right on the W-4 form. If you want to virtually eliminate federal withholding, its perfectly legal to claim a bunch of allowances as long as you don’t end up owing more than $ 1,000 when you file.
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The money that you describe would not be exempt. Even if you claimed exempt on your W-4, you would be required to pay tax on the money later.
Illegally claiming EXEMPT on Form W-4 can carry a $ 500 administrative penalty and get you a Lock Letter from the IRS that would force your employer to withhold tax at a level set by the IRS, normally Single + 0 or Single + 1 regardless of what you can legally claim. Don’t go there!
The money you spend on start-up costs is not deductible in the traditional sense. You can take a limited deduction in the first year and then must amortize the rest of the costs over a period of time.
Equipment purchases generally must be depreciated over the useful life of the equipment. You MIGHT be able to claim a Section 179 deduction for SOME equipment in the year of the purchase however there are limitations on how much you can claim there.
I would strongly suggest a consultation with a CPA or EA who specialized in small business taxation. You need to get your bookkeeping system up to speed and you need to know how to handle your start-up costs properly. Improperly claiming EXEMPT on Form W-4 is NOT the way to go about this!
The income from your project is all taxable income.
When you file the schedule C for your business you can include the expenses for the equipment or a portion if it items that have a life more than one year and you have to depreciate over a period of time.