Depreciation options

by | Feb 10, 2019 | Guides, Taxes | 0 comments

Dear GMP CPA Client:

We are wrapping up the Company’s tax returns and would like to make you aware of an option that the Company is eligible to make based on the new tax laws passed in 2017. This option relates to depreciation, which for many business owners, is a big reduction in their tax bill. In your/the Company’s case, the leasehold improvements and equipment purchases are nearly 100% deductible, which creates a potential $500,000 loss for 2018 income taxes. This is an extraordinary amount and definitely would stand out in comparison to the last several years of tax returns that have been filed. If you were not otherwise in a higher income tax bracket and the loss was not so large, this would not even be an issue.

Depreciation in your company

The option(s) that you have is to take a portion of the depreciation in year one, 2018 and then stretch the remainder of the depreciation over the next few years. You/the Company can also take the full depreciation expense for 2018, which will offset current year income and reduce the next year (or two’s) income as well. Either of those options is fully supportable by the documentation we have; however, the larger loss is certainly on the aggressive side and raises the possibility of the IRS attention simply due to the large amount and the dynamic change from last year’s income to a large loss.

The other issue that we have run into before with financed deductions is matching up deductions with cash flow. When a large depreciation deduction is taken up front and then loan payments stretch out over a few years, there is a mismatch between cash flow and deductions. Future loan payments will be a use of cash – and not part of the deductions – which can create a cash crunch when the tax is due in the future. If the full depreciation expense is not taken for 2018, then future deductions will more closely align with loan repayments and reduce future tax bills.

I realize that this is a complicated scenario to consider and there are several possible outcomes to consider. Please let me know if there would be a good time to speak about this next week.

Best Regards,

GMP CPA

MORE ARTICLES FROM OUR BLOG

Depreciation options

Dear GMP CPA Client:We are wrapping up the Company's tax returns and would like to make you aware of an option that the Company is eligible to make based on the new tax laws passed in 2017. This option relates to depreciation, which for many business owners, is a big...

Employee Recreation and Parties Survive TCJA Tax Reform

When you know the rules, you can party with your employees and deduct 100 percent of the cost. Interestingly, if you feed your employees during a training program, your deduction is only 50 percent. Make sure you know the rules that give you the 100 percent deduction for employee entertainment.

Want to see how we work? Read exemplary audit management letter by GMP CPA!

We recently had an engagement that required GMP CMP to gather data from several different accounting softwares and create enough of a documentation trail to support an audit. The results of our work was reported to management in a letter of recommendation, which we...

Forming a Management Entity

Many organizations experience a level of growth that stretches the leadership or executive team thin across several entities. This is especially true when there is one executive that is responsible for the day to day decisions of several operating units or divisions....

How to create the paper trail for rental real estate deductions

Taxpayer’s trying their hand at real estate investment often miss a few key points with how they approach their time spend on real estate matters. Whether your real estate investment is for appreciation (or speculation), flipping, or renting, the ability to prove what...
Newsletters are the new....newsletters?
QBI walkthrough for our clients