Accelerated Depreciation Often Fools Taxpayers
Small businesses have many difference options to depreciation equipment.
Sometimes the options are over whelming! Should you choose Section 179 depreciation, regular tax depreciation or elect straight line depreciation.
Some taxpayers wish they didn't even have to worry about this decision.
Many tax preparers elect Section 179 depreciation for their client's without even discussing the consequences.
Congress allows for taxpayer of small businesses to elect to accelerate the depreciation in one year.
To exit tax lingo, in plain English, taxpayers can fully deduct their fixed asset purchases in the year they are purchased.
Of course Congress has place in some rules and regulations which have been changing annually, so taxpayers should ask their tax advisor on specific information.
The accelerated depreciation is usually conceived as a brilliant decision by their tax preparer.
This election creates a significant deduction which results in lower taxable income.
However, the part of the equation which is usually over looked is a matching of the tax deduction and cash outflow to the business.
A lot of small businesses finance their equipment and other fixed asset purchases over multiple years.
Additionally taxpayers are often more sensitive to cash flow than to financial positioning.
The first year the tax preparer does look brilliant, even genius like.
The taxpayer gets to deduct the entire purchase price of the fixed assets even though they have only paid a fraction of the purchase price (due to financing the fixed asset).
However, more often than not, the remaining life of the loan the taxpayer has large amounts of cash outflow, but no offsetting deduction (besides interest, perhaps).
For example, this was a common practice and mistake with taxpayers with the "SUV deduction".
For the past several years, taxpayers heard and believed they could purchase a SUV and fully deduct it.
Excluding the personal use of a business vehicle issues; without proper counsel, taxpayer did purchase the SUV and they receive a "brilliant" first year deduction.
However, the same taxpayers have been suffering ever since due to having to make the loan payments (cash outflow), but not receiving a tax deduction (a reduction of debt is not tax deductible).
In essence, taxpayers financed their tax liability.
As a result, these taxpayers are facing difficult cash flow in a now challenging economy.
Taxpayers need to be vigilant when they hear want they usually want to hear "you can deduct that".
Taking in a full understanding of the financial consequences in tax decisions is complex and you should contact your tax advisor.
Sometimes the options are over whelming! Should you choose Section 179 depreciation, regular tax depreciation or elect straight line depreciation.
Some taxpayers wish they didn't even have to worry about this decision.
Many tax preparers elect Section 179 depreciation for their client's without even discussing the consequences.
Congress allows for taxpayer of small businesses to elect to accelerate the depreciation in one year.
To exit tax lingo, in plain English, taxpayers can fully deduct their fixed asset purchases in the year they are purchased.
Of course Congress has place in some rules and regulations which have been changing annually, so taxpayers should ask their tax advisor on specific information.
The accelerated depreciation is usually conceived as a brilliant decision by their tax preparer.
This election creates a significant deduction which results in lower taxable income.
However, the part of the equation which is usually over looked is a matching of the tax deduction and cash outflow to the business.
A lot of small businesses finance their equipment and other fixed asset purchases over multiple years.
Additionally taxpayers are often more sensitive to cash flow than to financial positioning.
The first year the tax preparer does look brilliant, even genius like.
The taxpayer gets to deduct the entire purchase price of the fixed assets even though they have only paid a fraction of the purchase price (due to financing the fixed asset).
However, more often than not, the remaining life of the loan the taxpayer has large amounts of cash outflow, but no offsetting deduction (besides interest, perhaps).
For example, this was a common practice and mistake with taxpayers with the "SUV deduction".
For the past several years, taxpayers heard and believed they could purchase a SUV and fully deduct it.
Excluding the personal use of a business vehicle issues; without proper counsel, taxpayer did purchase the SUV and they receive a "brilliant" first year deduction.
However, the same taxpayers have been suffering ever since due to having to make the loan payments (cash outflow), but not receiving a tax deduction (a reduction of debt is not tax deductible).
In essence, taxpayers financed their tax liability.
As a result, these taxpayers are facing difficult cash flow in a now challenging economy.
Taxpayers need to be vigilant when they hear want they usually want to hear "you can deduct that".
Taking in a full understanding of the financial consequences in tax decisions is complex and you should contact your tax advisor.
Source...