Recognizing that the interweb is not the place for authoritative advice, I thought I would still ask a hypothetical question on taxes for sole proprietorship small business.

Let's say a person purchases a new truck for $49,000, and a Honda commercial walk-behind lawnmower for $1000. The truck is given a tailgate decal, covering the entire width of the tailgate, proclaiming "Fred's Lawn Care" and a contact number. Each week, the truck carries the lawnmower to a 1/2 acre lawn and the businessman mows that yard. Each week for 40 weeks of the year the businessman takes in $50 for the job, grossing $2000. Expenses each week for driving to the yard are minimal, but the job is ten miles away from the businessman's home.

The truck and lawnmower payment are $850 per month, meaning that the businessman loses $800 per month during the mowing season.

How would this economic loss be reckoned on the businessman's tax return?

Assuming, for the moment, that the truck and mower are used exclusively for business and is a necessary business expense...

The economic loss would be reported on the businessman's Schedule C on his 1040, and would be a negative value against his other income.

This is what people talk about when they say, "Start a business! You can get so many deductions!" It's not really accurate, as there's the whole issue with reasonably necessary and exclusive use.


*** Edit to add ***

The truck and lawnmower payment may be $850 a month, but that's not necessarily the amount that can be used to offset the businessman's $2000 in income.

Vehicles and equipment expenses are deducted based on a depreciation schedule. I'm not familiar with the schedules, but the depreciation schedule is NOT the same as the monthly payment on the vehicle and equipment.

If the vehicle and equipment are leased, then the entire leased amount is a business expense. Many businesses choose to lease their equipment rather than purchase it and depreciate over time.

Lastly, if the truck is used for any other purpose but business, Fred might not be able to deduct the entire expense. Instead, he might only be able to deduct the per-mile expense, currently 54 cents per mile.

^^^ What he said.

But the businessman better not be trying to purchase a truck and mower for his personal use while attempting to deduct it as a business. The IRS are not fools, and will catch and punish such behavior.

It would show up on Sch C for that business.

To the greater point, though, is the $850 payment for the truck would only apply if that truck is used exclusively for the lawn mowing business.

Most likely you would record the mileage used only for the lawn mowing business, multiple that by $.535 (for 2017), and that is your business expense for the truck.

So, 20 miles per week X .535 = $10.70 X 40 weeks = $428 in vehicle expense, minus about $200 in depreciation for the mower (5 year MACRS dep table), some gas and maintenance on the mower, and you'd have a taxable profit in the $1200 range, I would guess. That $1200 will role up onto your 1040 through your Sch C.

Edit to add:
Section 179 depreciation is also available to you, so you could depreciate all $1000 of the mower in year #1, making it effectively like a first year expense. This will, of course, increase your taxes in years 2-5. However, unlike an expense, when you sell the mower or dissolve the business, the residual value of the mower at the time of sale must be realized as income. Or if you replace the mower with a newer one, you could carry the depreciation forward through a 1031 exchange.

Aren't taxes fun?

From an accounting standpoint, the truck and lawnmower payment would have to be separated into interest and principal. The interest expense would be a straight deduction and you could depreciate the truck and lawnmower.

Tax wise it would be the same except there may be a different depreciation schedule. You can also expense the whole cost of the lawnmower and truck under an IRS rule (forgot the number), but you would have a huge loss that you had to carry forward and I don't know the carryforward rules off the top of my head.

I will add this.

Buying a lawn mower for a business and then mowing your own lawn with it is a practice that the IRS will never pursue or even care about.

Buying a truck, setting up a perpetual-loss business to effectively deduct your mostly personal vehicle, might cause the IRS to notice.

Good way to get a visit from your uncle.

Just to summarize what others have said so far that I agree with:

1) The $850 monthly truck payment cannot be deducted completely.

1a) The depreciation expense for the truck can be deducted on schedule C. My guess is it's on a 5 year schedule, meaning you can expense the total cost over 5 years. There's two methods: straight line where you divide the purchase cost by 5 and deduct that amount for each year or accelerated where it gives you a bigger amount in the first years and goes down with each year, the total depreciation is still the same.

1b) the interest expense for the truck loan is deductible.

1c) Lease payments are fully deductible in the year paid which is why business go this route. This is my understanding which I haven't confirmed since I don't do leases.

2) If you paid for the decal, are accepting payments for the business, maybe posting or sending flyers for your business, it's easy to say the truck is used completely for business. Be sure that the mileage, fuel costs, etc. are commensurate with the volume of business.

3) There is a maximum number of consecutive years you are allowed to have a net loss in the business. There is no real rule for strict business but if your activity approaches a hobby business, then you should show a net profit in some years out of the last five years. It seems the trigger is more than two years in the last five years. I'm sure you can show a net loss in the first three years because you're a lousy business person.

Lastly, if you are really trying to make a go of it, you should keep mileage logs. To have at audits and so that you can determine whether it's more beneficial to take the mileage deductions or the alternative (which I forget at the moment).

The gubbermint will thump you if they find you are committing fraud.