DarkRange55
Enlightened
- Oct 15, 2023
- 1,699
Just some clarifications on depreciation.
I've heard that sometimes you may not want to fully deduct something?
Example: Tax accounting and GAAP accounting have two different systems, with different purposes. Say you buy a Snowplow for $250K and you have plenty of income to support expensing it for tax purposes (for obvious reasons). You can section 179 (Tax expense it all, as long as you have the profit to offset the expense) the Snowplow for tax purposes, but it you did this for the bank under the GAAP accounting method, the bank would not think you were credit worthy, considering that you had $250K in profit before the purchase, but now your profit is zero. Another thought is that the snowplow my have a salvage value at the end of say 10 years of service. You may not want to fully GAAP depreciate the snowplow if you know the catalytic converter and metals are worth $4500 at the end of its useful life.
One of the benefits in owning a business or a building is that you are allowed to depreciate items that may not necessarily be depreciating. Depreciation is a no-cash expense, so you could be running a loss, but your cash flow is positive.
People think that depreciation is a magic deduction but it's really just recovering the cost of the property that you bought. Because you're paying the mortgage, the interest is deductible. But the principle payment is not but you're kind of getting that with depreciation.
People think you can just appreciate your property then you can just sell it and you get this massive gain because real estate goes up. You also get what's called recapture. Because what the IRS does is when you depreciate something like a capital asset, when you sell that, they were generous enough to give you a deduction on your taxes for depreciation. But its not a free deduction. Because when you sell it, to keep it simple, you pay higher tax rates than a capital gain tax rate on all your gain that came from depreciation. So even when you sell the property, you're gonna get a massive tax bill, higher than you can possibly expect.
The 2017 tax law (Tax Cuts and Jobs Act, or TCJA) permitted a 100 percent bonus depreciationdeduction for assets with useful lives of 20 years or less, so assets classes with over 20 years of deprecation would not normally be permitted to fully expense the cost. There maybe also other factors that limit the bonus deprecation, so it all depends on the area, the type of improvement(remodel or upgrade) and they type of business the building is being used for.
IIRC you can still bonus depreciate or 100% expense the cost of an airplane that you place in service in 2022. Bonus depreciationis eventually gonna start phasing out. Its an amazing benefit that basically allows you to write off all of an asset's depreciable basis in one year. Thats eventually gonna start getting phased out in the next couple of years. However it looks like you still can.
As a tax benefit, if you have a business and you are putting a plane into service and you fully depreciateit, that reduces your taxable income. That reduces your net profit. Lets say you're in the highest federal tax bracket and you deduct this entire $13,000,000 plane and assuming there's no pass-through limitations, ect. you get a $4.810,000 tax benefit from this because you had $13,000,000 less in income than you would have, had you not bought this plane. This doesn't even factor in self employment tax, ect. I don't know the exact tax situation but theoretically this provides at least a $4.8 mil tax benefit. However, you still spent $13,000,000. So even though you get a deduction which reduces your taxable business income by $13,000,000, you still spent almost $13,000,000 plus the maintenance costs. A tax deduction a tax "write-off" whatever you want to call it is not the end-all-be-all. Its great that you can fully deduct it. Sometimes you might not necessarily want to fully deduct something. But its not the best thing in the world because you're still spending $13,000,000. I also briefly looked up California's conformity with bonus depreciation, I wont get into it, but you might not get such a great write-off for your California tax return but thats between you and a CPA. The ongoing costs of owning a private jet include maintenance, fuel, storage, repair and more. Costs can range between $500,000 - $1,000,000. Its just another massive "liability" (its not really a liability) thats going to cost you a massive amount of money.
Furniture is usually depreciated or expensed for tax purposes. So if you think about it, you got to write off the cost for taxes.
If you donate it to a charity, your tax deduction is usually no greater than your adjusted cost basis, or Zero if fully depreciated or expensed(see above).
If you did donate furniture that say was an antique, then it has a ordinary gain associated with FMV > adjusted cost basis. But you also get a charitable donation for the ordinary gain you picked up. So it's a break even.
Fair Market Value(FMV)
To determine how much you can deduct for the depreciated assets, begin by estimating fair market value, or FMV. Generally, an asset's FMV is the maximum amount you can take as a charitable contribution deduction. The Internal Revenue Service notes that FMV isn't determined using formulas, such as a fixed percentage of an asset's acquisition cost. Instead, the price you can obtain from a willing buyer at the time the donation is made is more accurate. Factors to consider when estimating FMV include the condition of each asset, the prices obtained for recent and comparable sales, the cost your business would incur to replace the asset and, if applicable, the opinions of experts.
Depreciation and Adjusted Basis
For donations of depreciated business assets, it's necessary to determine the adjusted tax basis for each asset. The adjusted basis of an asset is equal to all acquisition costs -- including the purchase price, sales taxes and cost of freight and installation -- minus the sum of all depreciation deductions taken on the asset. If adjusted basis is more than an asset's FMV on the date of donation, your charitable contribution deduction is equal to its FMV. When FMV is greater than adjusted basis, however, figuring out how much you can deduct requires an additional step -- calculating how much of the difference between FMV and adjusted basis constitutes ordinary income.
Ordinary Income Gain
All depreciable business assets are treated as "ordinary income property." When ordinary income property is sold at a gain -- when FMV, or the sales price, is greater than the adjusted basis -- the tax rules may require recognition of ordinary income rather than a long-term capital gain up to the amount of all depreciation taken or the difference between FMV and adjusted basis, whichever is less. Although you donate the assets, it's necessary to calculate the amount of ordinary income that would result had you sold the asset at FMV instead. That's because the tax rules limit the amount of your charitable deduction to the asset's FMV minus the amount of ordinary income that would result in this hypothetical sale.
How to Deduct
Figuring out the amount of your charitable deduction is usually more involved than determining how to deduct it. If you report business income on your personal return -- meaning you're a sole proprietor, partner, shareholder of an S corporation or a member of a limited liability company that doesn't elect to be taxed as a C corporation -- charitable deductions are taken as an itemized deduction on Schedule A. C corporations, as well as other entities that elect to be taxed as one, report all charitable contribution deductions on Form 1120 -- the corporate income tax return.
I have heard of situations in which a business owner takes a personal charitable tax write-off even though they were business assets that were expensed within their business. It's not correct, but I'm guessing it happens more than you think.
I've heard that sometimes you may not want to fully deduct something?
Example: Tax accounting and GAAP accounting have two different systems, with different purposes. Say you buy a Snowplow for $250K and you have plenty of income to support expensing it for tax purposes (for obvious reasons). You can section 179 (Tax expense it all, as long as you have the profit to offset the expense) the Snowplow for tax purposes, but it you did this for the bank under the GAAP accounting method, the bank would not think you were credit worthy, considering that you had $250K in profit before the purchase, but now your profit is zero. Another thought is that the snowplow my have a salvage value at the end of say 10 years of service. You may not want to fully GAAP depreciate the snowplow if you know the catalytic converter and metals are worth $4500 at the end of its useful life.
One of the benefits in owning a business or a building is that you are allowed to depreciate items that may not necessarily be depreciating. Depreciation is a no-cash expense, so you could be running a loss, but your cash flow is positive.
People think that depreciation is a magic deduction but it's really just recovering the cost of the property that you bought. Because you're paying the mortgage, the interest is deductible. But the principle payment is not but you're kind of getting that with depreciation.
People think you can just appreciate your property then you can just sell it and you get this massive gain because real estate goes up. You also get what's called recapture. Because what the IRS does is when you depreciate something like a capital asset, when you sell that, they were generous enough to give you a deduction on your taxes for depreciation. But its not a free deduction. Because when you sell it, to keep it simple, you pay higher tax rates than a capital gain tax rate on all your gain that came from depreciation. So even when you sell the property, you're gonna get a massive tax bill, higher than you can possibly expect.
The 2017 tax law (Tax Cuts and Jobs Act, or TCJA) permitted a 100 percent bonus depreciationdeduction for assets with useful lives of 20 years or less, so assets classes with over 20 years of deprecation would not normally be permitted to fully expense the cost. There maybe also other factors that limit the bonus deprecation, so it all depends on the area, the type of improvement(remodel or upgrade) and they type of business the building is being used for.
IIRC you can still bonus depreciate or 100% expense the cost of an airplane that you place in service in 2022. Bonus depreciationis eventually gonna start phasing out. Its an amazing benefit that basically allows you to write off all of an asset's depreciable basis in one year. Thats eventually gonna start getting phased out in the next couple of years. However it looks like you still can.
As a tax benefit, if you have a business and you are putting a plane into service and you fully depreciateit, that reduces your taxable income. That reduces your net profit. Lets say you're in the highest federal tax bracket and you deduct this entire $13,000,000 plane and assuming there's no pass-through limitations, ect. you get a $4.810,000 tax benefit from this because you had $13,000,000 less in income than you would have, had you not bought this plane. This doesn't even factor in self employment tax, ect. I don't know the exact tax situation but theoretically this provides at least a $4.8 mil tax benefit. However, you still spent $13,000,000. So even though you get a deduction which reduces your taxable business income by $13,000,000, you still spent almost $13,000,000 plus the maintenance costs. A tax deduction a tax "write-off" whatever you want to call it is not the end-all-be-all. Its great that you can fully deduct it. Sometimes you might not necessarily want to fully deduct something. But its not the best thing in the world because you're still spending $13,000,000. I also briefly looked up California's conformity with bonus depreciation, I wont get into it, but you might not get such a great write-off for your California tax return but thats between you and a CPA. The ongoing costs of owning a private jet include maintenance, fuel, storage, repair and more. Costs can range between $500,000 - $1,000,000. Its just another massive "liability" (its not really a liability) thats going to cost you a massive amount of money.
Furniture is usually depreciated or expensed for tax purposes. So if you think about it, you got to write off the cost for taxes.
If you donate it to a charity, your tax deduction is usually no greater than your adjusted cost basis, or Zero if fully depreciated or expensed(see above).
If you did donate furniture that say was an antique, then it has a ordinary gain associated with FMV > adjusted cost basis. But you also get a charitable donation for the ordinary gain you picked up. So it's a break even.
Fair Market Value(FMV)
To determine how much you can deduct for the depreciated assets, begin by estimating fair market value, or FMV. Generally, an asset's FMV is the maximum amount you can take as a charitable contribution deduction. The Internal Revenue Service notes that FMV isn't determined using formulas, such as a fixed percentage of an asset's acquisition cost. Instead, the price you can obtain from a willing buyer at the time the donation is made is more accurate. Factors to consider when estimating FMV include the condition of each asset, the prices obtained for recent and comparable sales, the cost your business would incur to replace the asset and, if applicable, the opinions of experts.
Depreciation and Adjusted Basis
For donations of depreciated business assets, it's necessary to determine the adjusted tax basis for each asset. The adjusted basis of an asset is equal to all acquisition costs -- including the purchase price, sales taxes and cost of freight and installation -- minus the sum of all depreciation deductions taken on the asset. If adjusted basis is more than an asset's FMV on the date of donation, your charitable contribution deduction is equal to its FMV. When FMV is greater than adjusted basis, however, figuring out how much you can deduct requires an additional step -- calculating how much of the difference between FMV and adjusted basis constitutes ordinary income.
Ordinary Income Gain
All depreciable business assets are treated as "ordinary income property." When ordinary income property is sold at a gain -- when FMV, or the sales price, is greater than the adjusted basis -- the tax rules may require recognition of ordinary income rather than a long-term capital gain up to the amount of all depreciation taken or the difference between FMV and adjusted basis, whichever is less. Although you donate the assets, it's necessary to calculate the amount of ordinary income that would result had you sold the asset at FMV instead. That's because the tax rules limit the amount of your charitable deduction to the asset's FMV minus the amount of ordinary income that would result in this hypothetical sale.
How to Deduct
Figuring out the amount of your charitable deduction is usually more involved than determining how to deduct it. If you report business income on your personal return -- meaning you're a sole proprietor, partner, shareholder of an S corporation or a member of a limited liability company that doesn't elect to be taxed as a C corporation -- charitable deductions are taken as an itemized deduction on Schedule A. C corporations, as well as other entities that elect to be taxed as one, report all charitable contribution deductions on Form 1120 -- the corporate income tax return.
I have heard of situations in which a business owner takes a personal charitable tax write-off even though they were business assets that were expensed within their business. It's not correct, but I'm guessing it happens more than you think.
