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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 11589
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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Looking on how to get out of this mess my current business

Customer Question

Looking for info on how to get out of this mess my current business is in. We have deferred taxes for so long by deferring income over the years. We are in a situation where we will be starting the year off with income that is earmarked for a loan payment(borrowed against inventory).
We had to borrow against inventory to pay our operating line down, which again is a principal payment and is not able to be expenses. So we are going to be showing a ton of profit, yet have very little cash flow to pay taxes on the profit. Help!!
Submitted: 1 year ago.
Category: Tax
Expert:  Lane replied 1 year ago.

Hi,

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I hold a JD (Juris Doctorate, a doctoral degree in the law), concentration in Tax Law & Corporate law, an MBA (specialization in finance & tax), and BBA from Stetson School of Business and Economics, as well as CFP® and CRPS designations.

Although there are really no magic answers here, what comes to mind, especially if you need either vehicles or equipment, is the recent expansion Congress made to IRC § 179.

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The ability to expense all in the current year (rather than depreciate over class life, of 5, 7, or more years) the cost of equipment placed into service, had been expanded only for one year, and cut to a limit of only$25,000 for 2015.

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Congress has now expanded the deduction back to It's original $500,000 limit for 2016 and forward.

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And what really makes this attractive for situations such as yours, is the fact that it's available both for financed and leased equipment.

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So, many times, the tax benefit of placing new equipment into service is actually larger than the outlay for the year.

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Otherwise, the more common options are available; contribute to qualified plans for owners (lowers taxable income, but stays on the owners balance sheet), and all of the other classic deductions that would be available for a business under § 162, which says that any ordinary, reasonable (the was say ordinary and necessary, but several tax court decisions, and even IRS has said the following: "an expense does not have to be indispensable to be considered necessary."

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You can read more about that here:

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http://n expense does not have to be indispensable to be considered necessary.

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Expert:  Lane replied 1 year ago.

Hope this has helped...Let me know if you have questions.
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If this HAS helped, (and you don’t have additional questions on this), I'd really appreciate your positive rating … (by using the stars on your screen) … … That’s the only way I'll be credited a portion of what you've paid JustAnswer.
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Thank you,
Lane

Customer: replied 1 year ago.
Appreciate your response...
One quick follow upIf we are showing a net profit of $300,000 but only have $50,000 in cash at the end of the year, we could purchase a piece of equipment and place into service, while taking the full deduction on the equipment in year 1?Can a piece of equipment already in service and on the depreciation schedule be depreciated out in one year...like speed up the depreciation process?
Expert:  Lane replied 1 year ago.

Hi,

On the SECOND question, sorry no. The deduction is an incentive for putting new (or new to you) equipment to work in business.

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On the first question, yes, that's right ... And again cash on hand (is really not an issue here) because you could actually finance the equipment ir even lease, ad still deducted full fair market value ( purchase price )

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You can read more about this here: http://www.section179.org/

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Expert:  Lane replied 1 year ago.

One other point (may be stating the obvious); by accelerating all of the depreciation into the first year (and this is especially pronounced on financed equipment) you won't have that depreciation that would have been there in future years (while you may still be making payments on the equipment)

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But in your situation, where you really need something this year, it may still make sense.

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Lane

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Expert:  Lane replied 1 year ago.

Hope this has helped...Let me know if you have questions.
...
If this HAS helped, (and you don’t have additional questions on this), I'd really appreciate your positive rating … (by using the stars on your screen) … … That’s the only way I'll be credited a portion of what you've paid JustAnswer.
...
Thank you,
Lane

Expert:  Lane replied 1 year ago.

Did you see my answer?