Deductions do they come off AGI or just taxes owed?

Question

I'm curious for future business planning.

Lets say I start a business this year. I spend $1500 on a computer and supplies and only have a total of $1750 in money come back.

Is $1750 part of my AGI? I haven't exactly "earned" $1750 because I spent $1500. I only "made" $250.

I suppose what I'm wondering is do deductions come off my AGI?

Thanks.

Yes I know I'll owe on the $250 let's say, but would $1750 be added to my AGI?

Answer 1

Depends on what the deductions are for. In the case you described those deductions would come off the $1750 because they were the expenses you incurred in earning the $1750. They would be reported on a Schedule C and the net profit in that case would be $250, which would be part of your AGI. Now for mortgage interest paid for your personal residence that is also a deduction, but that is reported on Schedule A, and is subtracted from your AGI after ariving at AGI to help arrive at taxable income.

Answer 2

You net business profit is calculated on Schedule C. The $250 would then carry over to the front page of the 1040 so you are taxed on only the $250.

Note: Once you get above $400 in net profit you must also file Schedule SE and pay Self-Employment tax on that income.

Answer 3

In your example, $1,750 is not added to your AGI. Only your net income (or loss) from business is added to (or subtracted from) your AGI.

Costs of operating your business are subtracted from the gross income of the business. If you purchase a computer to be used exclusively for the business, it can be deducted all at once from your gross business income. You could also choose to deduct it over five years.

Answer 4

Neither. Business expenses are subtracted from your gross business income on Schedule C of Form 1040 (assuming we are talking about a sole proprietorship). However, because the computer is a durable item expected to have a useful life in excess of one year it must be depreciated instead of expensed (i.e. deducted over several years) unless you opt to take a Section 179 allowance.