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I am 52 years old and employed, making 22,000 a year. I had 42,000 in a retirement fund from a prior employer. I decided to start up a small business selling go karts, parts and rebuilding their motors and use this money to buy a van and trailer and necessary equipment and parts. I have to travel every weekend to these races to get customers. Because I am not over 59 1/2 and took the money in a lump sum I would have to pay over 12,000 in taxes if it wasn't for the business. My question is since I am just starting the business and all of the money went on the purchase of the van and trailer (paid cash) and equipment (paid cash) and I have not realized any profit how do I decrease the amount of taxes ($12,000) that I owe. I know some about depreciation, amoritization, etc. Thank you for your help.
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Subject: small business
Date: 4/9/99 4:40 PM
Author: dearnold
Number: of 14250
I am 52 years old and employed, making 22,000 a year. I had 42,000 in a
retirement fund from a prior employer. I decided to start up a small business
selling go karts, parts and rebuilding their motors and use this money to buy a van
and trailer and necessary equipment and parts. I have to travel every weekend to
these races to get customers. Because I am not over 59 1/2 and took the money in
a lump sum I would have to pay over 12,000 in taxes if it wasn't for the business.
My question is since I am just starting the business and all of the money went on
the purchase of the van and trailer (paid cash) and equipment (paid cash) and I
have not realized any profit how do I decrease the amount of taxes ($12,000) that
I owe. I know some about depreciation, amoritization, etc. Thank you for your
help.


The retirement money is added to your income plus the penality. The business does not affect this.

Your business expenses go on schedule C. Your depreciation goes on form 4562 (not sure of number, but it is the standard form used for depr). On 4562 you can deduct as an expense about 18,000 of equipment purchases (van, etc). This will help cut taxes.

I think you want to see a CPA to help you out this year.
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Based on what you said, your schedule C should throw off a sizable loss to offset the extra income. Also the penalty 10% or $4,200 is abated in some circumstances (health, new home, disability) this does not hit right on the head but there might be some relief here if you paid your own medical insurance or other expenses. I reiterate the advice to get a CPA to help. I am one, but I am not sure where you are or if you want my help. It certaintly does not have to me but get someone's help and make sure thay work for you!
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[[ Because I am not over 59 1/2 and
took the money in a lump sum I would have to pay over 12,000 in taxes if it
wasn't for the business. My question is since I am just starting the business and
all of the money went on the purchase of the van and trailer (paid cash) and
equipment (paid cash) and I have not realized any profit how do I decrease the
amount of taxes ($12,000) that I owe. I know some about depreciation,
amoritization, etc]]

You'll have to complete Schedule C and take your business dedutions there. But it's not quite that easy...the business deductions may not help you out dollar for dollar against your early retirement distribution, and they will do NOTHING for the penalty that you'll be assessed on the early retirement distribution.

for additional information on how the Schedule C works, and the deductions that you may be able to claim, see IRS Publication 334 in the IRS web site.

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Roy

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