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 Dear Tax Talk:
My husband is a contractor and I have a steady income. Last year (and part of this year) he has been building our house. He still has business expenses, which I am covering, but his income this year is zero. Next year he will be back to making an income. Does a zero in the income line raise red flags? His ongoing expenses (including depreciation) are about $14,000.
-- Hillary
 Dear
Hillary,
Of course a zero in the income line is a red flag; however, no one ever knows what creates enough red flags so that the IRS will call on you personally. You can only do what is right and hope that the IRS sees things as you do.
There is no tax rule that says you have to work every day of every year and try to make the most money you can. Certainly your husband is entitled to a vacation, and whether he sits in front of the TV for that time or works on his home does not impact his ordinary and necessary business expenses.
As long as he hasn't made a decision to permanently abandon his business, he should be able to continue deducting expenses even when he has no income. If it continues for several years, the IRS could always counter that his business has become a hobby and his deductions are not allowable beyond his income.
Depreciation deductions are allowed for long-lived assets used in a trade or business. You begin to depreciate your property when you place it in service for use in your trade or business or for the production of income.
You stop depreciating property either when you have fully recovered your cost or other basis or when you retire it from service, whichever happens first. Continue to claim a deduction for depreciation on property used in your business or for the production of income even if it is temporarily idle (not in use). For example, if you stop using a machine because there is a temporary lack of a market for a product made with that machine, continue to deduct depreciation on the machine.
You retire property from service when you permanently withdraw it from use in a trade or business because of any of the following events.
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| Reasons to retire property from service |
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You sell or exchange the property. |
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You convert the property to personal use. |
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You abandon the property. |
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The property is destroyed. |
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So long as the depreciable assets have not been permanently converted to personal use, depreciation can continue during the period the equipment is idle.
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