End of Year Tax Planning: Overlooked Deductions (Part 3)

Hello. Let’s take a look at part three of Overlooked Deductions. If you haven’t seen part one or part two, I do advise you go back and watch those videos. You might be able to find some deductions you might have overlooked. Today, we’re going to specifically examine your fixed assets and how you might be overlooking some deductions you could have of your fixed assets. So, while you run your business, you are on the habit of buying assets. You might buy a computer, you might buy an equipment, you buy something. And then you think that equipment or that computer is going to help you increase productivity one way or the other, or you buy something and then you realize, “I don’t really need it.” I would rather just buy something else ’cause this is more productive. Well, you accumulate these assets in your business, but the problem is they’re not helping you make any revenue or increase productivity or reducing expenses. And so, when they’re not doing that in your business, it’s almost worthless. So, what do you do with these worthless assets? Well, you sell them. When you sell them, you can gain. You can claim the loss on your tax return if you sell it for less than your book value. So, let’s take a look at some examples. So, here it is, I have a computer. I bought it for $5000. Year-to-date, they are only paying depreciation of $200. The book value is $4800.

Well, this computer when I bought it, I thought that it was going to be this great computer and it was going to do everything I thought I needed in my business, but I bought it, and it was so complicated, I didn’t even know how to use it. So, guess what happens when I don’t know how to use something? I already have more than enough to think about. I don’t want to have to start learning complicated systems or stuff. So, what I’m going to do is stuff it to the side and buy something simple that I can actually deal with. So, that computer is just sitting down there. I’m so busy, I’m not even thinking about it. But once a year, I challenge you to go ahead and take a look an inventory of all your assets and say, “Hey, of all those assets I have which ones are not useful to me?” So, you look at the asset, you ask yourself the question, “Will net income fall as a result of selling this asset?” And so, if you’re not using it, it’s not going to affect anything in any way. So, the answer to that question will be “no.” And then you say, “Okay, so maybe net income will not fall awful. But will buying a replacement increase productivity?” So, maybe it’s an old asset and it’s like it’s a computer that’s running so slow like it’s driving you out of your mind. And just to start the computer every morning takes like two hours. And then before you get anything done, it’s like 10 hours.

So, you also want to look at those assets. So, if you were to replace it, it obviously will help you increase productivity. But in this case, we’re talking about asset that we never use ’cause it’s very complicated. So, in this case, well, you probably have a replacement for this complicated asset. So, it will be no. So, since the case we’re not buying a replacement, we’re not going to worry about computer internal rate of return, the next example, it’ll be an example where we actually have to compute that amount and then figure out if a replacement would be better. But for now, we’re not talking about that. Let’s just keep talking about… Let’s go through the same line. Then, I can probably sell this asset on eBay for $4000. And if that’s the case, “Hey, I can claim the loss on my book of 800.” Two things happen here, I got $4000 cash I can get right back into my business and I also have an $800 loss I can claim on my taxes. Good deal, huh? So, if you have assets just sitting down there, not doing anything for you, think about selling it because, there you go, you might get extra cash that is just sitting down there, worthless…

Remember, things like assets, the longer you keep them, things like computer equipment, the less value they have. So, the faster you can get rid of them, the better for you. So, let’s look at a piece of equipment that we know we can probably increase productivity by replacing the equipment. So here’s an equipment we bought for $10,000, year-to-date take a depreciation of $2000. So, our book value is $8,000. Well, if we were to go ahead and sell this asset, our net income will fall because we actually use this asset to make revenue. It might be like maybe we’re a print shop and we need the equipment to print screens or we are a consulting business, so we need the computer to consult. So, yeah, if we got rid of our computer and we’re consultants, it’s almost like we can’t do anything, we need the computer. But, however, even though net income will fall, productivity might increase by buying a replacement asset. So, it might be… If the computer is just so slow, it takes like 10 years to start up. Okay, that’s an exaggeration. It takes like 30 minutes to start up and then every now and then it locks up and it freezes. And every time I’m on the phone with a customer or client, it’s freezing up and it’s just so frustrating.

So, I just need another piece of computer. It’s not working for what I need it for. So, productivity increase. So, the next thing we want to do is you want to figure out what our internal rate of return is. So, we scroll down, and we say, “Okay, if we were to buy a new equipment, the new equipment will cost us $8000. We can probably sell the old one for… Maybe we can sell it for $1000. And we can probably get interest rate about 5%. So, the amount of revenue… So, let’s say this is a computer and all our revenue we earn in the business, comes through by working on this computer, so over the next five years, we’re estimating our revenue will be $100,000. Let’s just say it’s $100,000 all the way through. There are multiple computers, but this computer directly is bringing in $100,000 each year. And if the case was it was increasing productivity, so, by increasing productivity which means you can bring in more revenue. So, you want to add the additional revenue you’re making just by increasing productivity, or if it’s a case that’s basically increasing productivity, so you don’t need to hire as many people, then you want to enter your savings.

So, basically whatever you’re saving and whatever this asset is doing for your business, you want to try and monetize it, which means you want to try and estimate the monetary value of this asset. And then, so, just based on this we can see, we have internal rate of return of 14.29%. So, we put that in there, and the suggestion is to replace the assets.

So, which means you are better off with this new asset because, one, your productivity is going to increase which means your revenue is going to increase. You can sell this asset for… If you sell this asset for what we previously said down here, which was $1000 so we changed it to $1000. We’ll have a net loss of $7000 and we have $1000 in cash. So, here’s cash we never had before that we have now. Productivity’s going to increase, and we have a loss we can write up on our tax return. Hmm, win-win, right? Let us look at an example where the net present value is negative.

So, remember when we say it’s neg… When a net present value is negative it means we’re not going to make our money back over the next five years ’cause that’s what the template computes. Just over five years. So, let’s say this is a -52% internal rate of return but yet with this asset, we actually can… If we sell it, net income will change. It will fall as a result and if we… And buying a replacement could possibly increase productivity. But the one we’re currently looking at is way too expensive. So, when this is the case, we can choose to keep or replace. We can keep shopping for other alternatives till we find something that would be declared positive or look for lower cost of borrowing money. So, our cost of capital is less, or we can just choose to keep it and keep working with what we have because… Until we find a better option in the market.

So, in this case selling is not the most appropriate thing to do when you’re faced with this situation. But if you do choose to sell. You need the cash… Maybe you need the cash in your business, let’s say you sell for $500, that’s $500 cash you get and $500 loss you get to claim in your taxes. But when a situation is like this, like I said, you’re better off holding up till you find something that will provide a positive internal rate of return and keep what you have. And then over time replace it. Because obviously the value of that asset to your business is falling, so you want to keep a very good eye on that.

So, to wrap things up, remember at least once a year you want to take an inventory of all the assets you have. See which ones are still providing value to your business. See which ones are worthless. You want to sell the ones that way at least you get cash. You can get… You can claim a loss on your tax return. And so that’s one deduction that’s often overlooked is deductions that are wrapped up in assets. Now I didn’t talk about if the assets are fully depreciated or… And recapturing depreciation. That was not the topic of discussion here. Obviously, this is more complex than what I’ve talked about. That’s why I do recommend you talk to your CPA. But if you want a copy of this template for your own analysis you can go ahead and download it by clicking the link below.

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By |2018-12-06T17:26:58+00:00December 18th, 2018|2018 Tax Planning|Comments Off on End of Year Tax Planning: Overlooked Deductions (Part 3)

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