On Mon, 01 Jul 2013 18:50:18 -0400, Tom Gardner Mars@Tacks wrote:

On 6/30/2013 9:52 AM, Ed Huntress wrote:

So you've found an even better angle -- you expense everything, and
carry the value of your equipment on your books at zero.

Very nice, Tom. That's a better dodge than rapid depreciation. Hats
off to your accountant.



Tell me how to value a machine, legally, for depreciation, a machine
that I have say 5k$ in parts and material and about 320 hours in?

There are several ways to do it. Your accountant took the path that
saves you the most tax money.

For another purpose -- insurance, for example -- he would value it at
what it would cost you to have it replaced, or what it cost you to
make it. In fact, that's what you did -- with your $5k in parts and,
what, $6k or $7k in labor?

But what you did is exactly what any good accountant would tell you to
do -- expense the labor as if it was going to production, and expense
the parts as if they were replacements or repair parts. There's
nothing illegal about that, depending on what the law is these days
for that kind of tax accounting, and I doubt if it's changed much over
the years.

But now you have an asset with which you're making money, and for
which you paid both in materials and labor, and you're effectively
depreciated it all out at once. So you got a bigger than normal tax
break (which you can carry forward as a distributed expense, if that
happens to be better for you tax-wise, but it almost never is) and
it's an asset that continues to make you money. The tax advantage for
you came from expensing it all up front.

That got you an initial break that probably wouldn't be recovered by
normal depreciation, because the chances are the one-shot gave you a
one-time tax-bracket advantage, as well. Not necessarily, but
statistically, that's the way it works out. But that's not the primary
tax break you got, anyway.

The primary break was in NOT paying out that cash for taxes in the
first year. The future value (FV) of that cash is greater than the net
FV of the positive cash flows from the distributed savings you'd get
over, say, five years if you depeciated the real value over that
period of time. That's why you expense rather than depreciate, when
you can.

Your accountant did the right thing for you, as he should. And there's
nothing illegal about it. But the difference between that FV and the
net taxes you would have paid (run through a basic cash-flow analysis)
is the taxes you DIDN'T pay -- but the rest of us did, to make up for
what you didn't pay.

The amounts we're talking about are small. So are the amounts that
Kidding is not paying for motor fuel taxes, which is what you were
bitching about. But you're both getting a tax break, for reasons that
are right in line with many items in the tax code. Yours is to
encourage small business. His is to encourage reducing usage of
petroleum fuels. They're both legitimate goals.

What
difference? I'm not dodging taxes at all, unless you say that I turned
a 5k$ pile of materials into 100k$.

See above.


What advantages of costing VS. depreciating? Me accountant said I can
only value a machine at what I paid for it, which isn't **** compared to
the value. But, I can't just assign a value and screw around with
taxes. If I *sell* it, that would assign a value, I imagine.

That would assign a value, which would be a capital gain. But in most
such cases, businesses hold onto custom machinery until it has no
value except as scrap.


It sure would make the value of the business look good to a bank if I
could assign values!

How does your bank assign the value to your business? How does it
account for your productive assets?

Have you ever sold a business? My family sold two of them while I was
growing up. Valuing assets is always difficult, but you SURELY would
find a way to value your machinery. The most basic way is to calculate
the volume of sales you're getting from that machine, calculate your
ROI on your total productive assets, and then back into a value for
your custom machine based on your average ROI.

(That may not matter to a bank, because they may just value your
business as some multiple of your net profit. In retail, for example,
the physical assets may be small, and most of your assets are
designated "goodwill.")

I did have the OEM of some of my brush machines
formally estimate the resale value of these used machines on the current
market in the industry for bank purposes but they are over 20 years old
and fully depreciated. I was AMAZED at those numbers, but I don't have
to pay PPT on them at that level, as I'm assured by my lawyer.

Amazed that they were high, or low? Usually, when you do it that way,
the value is little better than scrap value. Otherwise, you should be
in the machinery-building business.

The bank wants to know the minimum it could get by liquidating your
business.


Ed, I've NEVER done anything even remotely clever yet alone shady or
Heaven forbid, illegal.

I wouldn't suggest that you did, Tom. The point is, you were
complaining about the small tax break EV owners get. You're probably
getting a bigger one yourself. There's nothing shady about that. Your
accountant is taking advantage of provisions in the tax code that are
put there to support and promote small business.

Likewise, Kidding is taking advantage of tax breaks -- and it's a lot
more than motor-fuel tax -- that are put there to support and promote
use of non-petroleum-based fuels. In both cases, we have a small bit
of social engineering via tax codes.

As we should. The idea that we shouldn't do that with tax codes is so
stupid it isn't worth arguing. There are things we do with taxes to
promote business, and home ownership, and innovations, and many other
things, and they've worked out really well for our economy, the
biggest in the world, over the past century.

--
Ed Huntress