Using money from business "A" to invest in business "B"

[Big Joe]

Hi....I just started working for myself doing affiliate marketing this year.....I understand that a lot of the things I buy are tax deductible if they are purchased to "improve my business. My question is... Can I use the money I make from affiliate marketing to invest in a small music studio and still get a tax deduction for the things I purchase for the new business?

[tallen]

The short answer is "yes."

But really, it would behoove you to have a better understanding of the principles. I am assuming that both businesses, the marketing and the studio, are organized as sole proprietorships. As such, all of the revenue from both businesses (and any other sources) as well as the expenses incurred by both businesses, are ultimately "yours." Presumably, though, you will be filing a separate schedule C for each business with your 1040. Thus you need to keep track of your revenue and your expenses for each business separately. Expenses you incur in the conduct of your marketing business would be deducted against the revenue from that business, expenses you incur in the conduct of the studio business would be deducted against its revenue. This does not mean that you can only pay for studio expenses from studio revenue -- all the income is ultimately "yours" to spend (invest) as you see fit.

I would caution that some items that you purchase might not be immediately deductible as expenses in the year of purchase, but might have to be depreciated over time. Also, you may want to make sure that you don't find your deductions limited by the "hobby loss" rules.

[Big Joe]

The short answer is "yes."

But really, it would behoove you to have a better understanding of the principles. I am assuming that both businesses, the marketing and the studio, are organized as sole proprietorships. As such, all of the revenue from both businesses (and any other sources) as well as the expenses incurred by both businesses, are ultimately "yours." Presumably, though, you will be filing a separate schedule C for each business with your 1040. Thus you need to keep track of your revenue and your expenses for each business separately. Expenses you incur in the conduct of your marketing business would be deducted against the revenue from that business, expenses you incur in the conduct of the studio business would be deducted against its revenue. This does not mean that you can only pay for studio expenses from studio revenue -- all the income is ultimately "yours" to spend (invest) as you see fit.

I would caution that some items that you purchase might not be immediately deductible as expenses in the year of purchase, but might have to be depreciated over time. Also, you may want to make sure that you don't find your deductions limited by the "hobby loss" rules.

Thanks for that great info.....to get more specific.....the studio would not really make any revenue right now, as I'm just building it....what I'm asking is if I use my revenue from marketing to buy things for the studio I.e. (Computer, soundproofing, microphone ect.) would those purchases be tax deductible from my marketing revenue at the end of the year? Also would it make it easier to keep track of revenues and expenses if I merged the business's into one llc or c corp?

[tallen]

How is the studio related to your marketing business? You can only deduct expenses that are "ordinary and necessary" for the conduct of the specific business. So no, I would think that you would not be able to deduct the expenses related to your music studio against the revenue from the marketing business.

However, if indeed you are building this studio with the intent of going into the music business, you will be able to begin deducting the depreciation expense from this investment as soon as you declare that you are in business. You will want to refer to IRS guidance documents to determine when that is (I am not sure that you have to have revenue coming in, but I think you do have to actively seeking revenue).

If you are "in business" (the music business), but have no revenue coming in yet, your depreciation expense and any operating expenses will mean that your music studio will show a loss for the year. For your overall tax return, this loss may offset other income (such as from your marketing business). Again, you will want to read up on "hobby loss" limitations.

Note, from your description of the investments you are making in the studio, I am pretty sure that you will have to capitalize and depreciate those expenditures rather than being able to directly deduct them as business expenses (although there are Sec.179 and other avenues....). I am not a certified public accountant or other tax professional; you probably should be sitting down with one of those to figure this all out.

[Big Joe]

How is the studio related to your marketing business? You can only deduct expenses that are "ordinary and necessary" for the conduct of the specific business. So no, I would think that you would not be able to deduct the expenses related to your music studio against the revenue from the marketing business.

However, if indeed you are building this studio with the intent of going into the music business, you will be able to begin deducting the depreciation expense from this investment as soon as you declare that you are in business. You will want to refer to IRS guidance documents to determine when that is (I am not sure that you have to have revenue coming in, but I think you do have to actively seeking revenue).

If you are "in business" (the music business), but have no revenue coming in yet, your depreciation expense and any operating expenses will mean that your music studio will show a loss for the year. For your overall tax return, this loss may offset other income (such as from your marketing business). Again, you will want to read up on "hobby loss" limitations.

Note, from your description of the investments you are making in the studio, I am pretty sure that you will have to capitalize and depreciate those expenditures rather than being able to directly deduct them as business expenses (although there are Sec.179 and other avenues....). I am not a certified public accountant or other tax professional; you probably should be sitting down with one of those to figure this all out. okay....thanks a lot for that helpful information....I'm looking on yelp for a good tax guy in my area. I'm starting to get a little nervous realizing that I'm going to have to pay "self employed" tax this year for the first time ever.