I have a serious question for any accountants or tax experts out there. Really. I do not completely understand accelerated depreciation expensing write-offs. Why is it an advantage, say to accelerate asset depreciation from say 7 years to 5 years or even 3 years? Seems to me it just nets out the same over time, but I really don't understand business taxes completely. Thanks.
Snarky responses not necessary.
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Republicans are red, democrats are blue, neither of them, gives a flip about you.
Not sure if this addresses your question but this is my story. When I started my business I payed a lawyer $700 to generate and file the necessary paper work with the state and federal government.
For some reason he wanted to be payed in full but on my taxes I had to write it off over 7 years.
Obviously the net effect is that I payed taxes on money I did not have.
That's what I don't understand. You can lay out 100% of the money up front, and then you have to deduct the expense over time. Or someone can finance something big like a corp. jet and deduct it over a shorter time. Its all too nutty to me. Fuzzy math.
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Republicans are red, democrats are blue, neither of them, gives a flip about you.
LOL wrote: That's what I don't understand. You can lay out 100% of the money up front, and then you have to deduct the expense over time. Or someone can finance something big like a corp. jet and deduct it over a shorter time. Its all too nutty to me. Fuzzy math.
One possibility I can think of is if you can deduct a really large cap expenditure, like a stadium, it could bring you down to a low tax bracket for that year. But I don't know what corp tax brackets are. They must be big.
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Republicans are red, democrats are blue, neither of them, gives a flip about you.
There is a time cost to money, the one that has it can invest it.
If you cannot deduct the full expense of an expense in the year you incurred it, the govt has rcvd an interest free loan from you unless they allow you to deduct more than 100% of the cost over time. If you had been able to fully deduct the expense in the year you incurred it, you would have more money in hand at the end of that year and you could invest it to make more by the time the 7 years is out vs. if they govt held on to it for you and allowed you to have a little each year.
What this amounts to is a property tax. I am not saying it is a property tax, I am saying that mathematically it works out the similar way, but at least only for 7 years. You have traded things of equal value - money for the increased value of turning your company from nonexistent to existing. Money that simply exists is typically not taxed. If you don't spend $100 you have for a year and just leave it on a table, it may loose value due to inflation, but it is not taxed. If you buy something of significant value like land, vehicles or a business (even via creating it) - you will be taxed on the thing just because it exists. This is a property or excise tax and they generally provide incentive to make bad decisions, which are sometimes just discounted.
Three kickers.
1. I hope you were incorporated if you actually made more than say $9150k in profit (700/(.062+.0145)). I assume you know why I wrote that formula. Could be slightly off if you did actually have to expense over time.
2. I am not sure you had to actually expense this over time and not all the first year. You may have been given bad advice or you may have had the right to an option of two methods of computation but you were not presented this as an option and given the info to make an informed decision. My guess without research is that this is the case. Often one can evaluate which would be better. If you start the business with a bang, that would be a great year to have a deduction. This option if exists likely comes from someone lobbying to game the system.
3. You did not need the lawyer to fill out the simple paperwork if someone just told you what forms you needed to fill out or filings to make. I am sure there would have been some filing fees, but not $700. I will admit that I did start my first firm with a lawyer, but not after that. Same with land purchasing and sales, I usually hire a lawyer for the first one in any given state and then just use the docs they provided as a boiler plate for the next sale. Often there is much room for improvement vs. what they standard "professional" will provide you vs. what you will get if you are informed or you just take the time to do it yourself. It is a lot like going to the doctor.
And on that note....just more bad advice from the internet.
One possibility I can think of is if you can deduct a really large cap expenditure, like a stadium, it could bring you down to a low tax bracket for that year. But I don't know what corp tax brackets are. They must be big.
I think tax laws are bought by individuals and companies and sold by politicians.
Wasn't it Microsoft that stayed above the frey, did not donate to any politician and got seriously molested by government?
That is why I think we have a better chance to change at the politician side than the corporate side. The pols work for us. At least they are supposed to.
OTN, thanks for the clear comments. My mistakes have been bought and paid for but it could help others.
Yes I see the time cost to money argument. So it seems to me you should deduct the expense as you pay for it, not over the useful life of the item. But still in the end, it should average out over time and the IRS collects the same net amount of tax. Tax on revenues-expenses. WTF
So I still don't see where the loop hole is on accelerating depreciation. Ughh
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Republicans are red, democrats are blue, neither of them, gives a flip about you.
LOL wrote: Yes I see the time cost to money argument. So it seems to me you should deduct the expense as you pay for it, not over the useful life of the item. But still in the end, it should average out over time and the IRS collects the same net amount of tax. Tax on revenues-expenses. WTF
So I still don't see where the loop hole is on accelerating depreciation. Ughh
Taxes are paid on profits. Expenses reduce profits. Accelerated depreciation increases expenses.
It really is just that simple. Don't try to justify it long term. It's a short term tax reduction. That's one of the many problems with many businesses - they're stuck in short term thinking.
"Whatever you are, be a good one." ~ Abraham Lincoln
LOL wrote: Yes I see the time cost to money argument. So it seems to me you should deduct the expense as you pay for it, not over the useful life of the item. But still in the end, it should average out over time and the IRS collects the same net amount of tax. Tax on revenues-expenses. WTF
So I still don't see where the loop hole is on accelerating depreciation. Ughh
Govt doesn't care about the future, only the present. This is why everything they do has impact today, without concern for the future (That will be some other politician's problem down the road). That is why we still have govt pensions, fully unfunded.
They want the maximum tax revenue today. That is why they want you to take a tax write off over the "life" of the item. If you took the full write off when you spent the $$, they would lose TODAY's $$.
Accelerated depreciation allowed may prompt a company to invest in new equipment, since they can actually take the tax deduction at the same time they spent the $$. This is what really matters to a company.
Too bad future generations aren't here to see all the great things we are spending their $$ on!!
