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jgordosea
jgordosea, Enrolled Agent
Category: Tax
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Experience:  I've prepared all types of taxes since 1987.
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Hi, this question is about ability to claim Cost of Goods Sold. We

Resolved Question:

Hi, this question is about ability to claim Cost of Goods Sold.

We provided hardware to a customer in 2008 as a lease (36 months). We then obtained a bank loan against that lease for the 36 month value of the lease......to have the money up front. Each month we would put the lease payment received to sales and the bank loan payment out to COGS. In 2009 we obtained a consolidated loan that paid off the original loan against the lease thus those monthly payments were no longer made and identified as COGS.........we did continue to receive lease payments that we put to sales but had no offsetting COGS entry.

The lease is no over and we applied all of the 36 months of lease payments as Sales but not all of the COGS as we just tracked the new-consolidated loan as Principal/Interest on that loan.

We are about to pay the consolidated loan off early in a lump sum.

Question - can I apply a portion of the consolidated loan we pay off as COGS to match back to the original sales. Thus if loan is 10,000 and 4,500 of that was attributed to the original lease-loan. Can I put 4,500 to COGS this year when I pay that loan early.

Thanks...........
Submitted: 3 years ago.
Category: Tax
Expert:  jgordosea replied 3 years ago.

Greetings,

 

No, there is not an allowable expense as you have described the situation.

Unfortunately, what you describe does not appear to have been recorded properly for income tax purposes. See INCORRECT LESSOR TAX RETURNS for an overview of the issue.

 

Property that you are leasing to another party does not have any cost of goods sold (COGS) component allowable as a current year expense for the cost of the property being leased. Rather, for an operating lease, the property cost is recorded as an asset and depreciation is claimed to recover the cost of the leased property instead of taking a COGS expense.

 

Buying a property with borrowed funds is not recorded differently for the asset and depreciation as buying the property with cash. The entire property cost is recorded as the value of the asset a depreciation expense is claimed annually to recover the cost of the leased property and an accumulated depreciation account for that asset is used to track the basis (cost - accumulated depreciation) of the asset.

 

The loan is recorded as a liability on your books. The interest paid during the tax year on a loan to obtain the asset would be a current year expense. The principal is recorded against the loan to reduce the liability amount of the loan on your books.

 

At this point, you need to review the expenses claimed to determine the correct amount that should have been deducted as depreciation and what might remain as a depreciable basis for a current year depreciation expense.

Whether you attempt to do this yourself or have an accountant or tax practitioner assist in determining the correct amounts is your choice.

 

I hope this clearly explains why you can not simply deduct the loan payments as COGS and the basics of what needs to be done for income tax purposes.

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer: replied 3 years ago.

 

 

I see, not good for me then. What if in the future I sell a piece of hardware that the client pays for over a period of time..................say 24 months. Would the initial purchase of hardware be cogs in that case or still my assest that is depreciated?

 

 

Expert:  jgordosea replied 3 years ago.

Hello again,

 

Sale with installment payment would allow for claiming the cost and gain in the year sold. You would record the balance due in the future as an asset and reduce that receivable as payments are later received.

 

Sale and lease are not the same; since you do not continue to have rights of ownership after the sale.

 

I hope that helps to clarify for you.

jgordosea, Enrolled Agent
Category: Tax
Satisfied Customers: 2993
Experience: I've prepared all types of taxes since 1987.
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