Dear GP 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.