Masonry Magazine December 1989 Page. 45
TAX MATTERS
Irving L. Blackman is the most published CPA in the country and spreads his tax knowledge as a dynamic speaker. Mr. Blackman specializes in closely held businesses and will consult with readers of this column. He is a partner in Blackman Kallick Bartelstein, a Chicago-based accounting and business consulting firm. Direct your questions to 300 S. Riverside Plaza, Chicago, IL 60606, or call (312) 207-1040.
How To Increase Your Depreciation Deduction
Most people know business equipment can be written off over a five- or seven-year period. But do you know how much depreciation you get in the year you first use the equipment? As a general rule, you get a half-year's depreciation. And this is the case whether you buy the equipment on January 1 or December 31.
Then logic would tell you to buy and put equipment into use before your year end. Careful, there is a trap.
The tax law has special rules that prevent you from taking the normal half-year's depreciation when you buy more than 40 percent of your business equipment in the last three months of your tax year. Then, you get only 1½ months' depreciation on equipment purchased in the last quarter of the year. Now some good news: You also get 10½ months' depreciation on equipment purchased in the first quarter.
You can turn the trap into a tax-saving opportunity by playing your cards right. Here's how: Buy enough equipment during the last three months of the year to push you over the 40 percent mark. Next, depreciate equipment purchased early in the year and elect to expense equipment purchased at year end.
You can expense up to $10,000 worth of equipment in the year you buy it, as long as your total equipment purchases for the year don't top $200,000. This is the happy result: You write off 100 percent of your year-end purchases (up to $10,000), plus you get more than the usual six-months of depreciation on purchases made early in the year.
An example should drive the point home. Joe owns a business that bought a $12,000 piece of equipment in March, 1989. He buys a $10,000 computer in December, 1989. That triggers the 40 percent rule. Joe elects to expense the $10,000 computer. He also gets 10½ months of depreciation for the equipment-a real, winning tax move.
How To Make A Nondeductible Donation Deductible
Millions of people incur expenses while doing work for their favorite charity. Every dollar of such expenses is deductible. For example, money paid to buy food, which is then donated to the church bazaar, is deductible. When you use your car for the benefit of a charity, you can deduct the actual cost of your car use or 12 cents per mile, whichever is higher. You probably never thought about it, but these gifts are all directly for the benefit of the charity.
What happens if the charitable gifts are for the benefit of particular people even though for the benefit of a charity? Sorry, no deduction. For example, you coach the charity's softball team and buy the kids their uniforms, not to mention bats, balls and a constant flow of out-of-pocket cash. Or how about deducting the cost of a trip for a group of Girl Scouts when you generously pick up all the travel costs? Same result, no deduction.
Is there a way to get the job done? Yes. Make your contribution directly to the charity. Make sure to confer with the charity in advance so it installs a formal program that will cause the charity to pay the expenses as they come up.
And one final thought: Often, the deduction can be converted into a business expense. Go ahead and buy those baseball uniforms. Pay for them out of your business and put your company's name on the uniforms.
Yes, You Can Still Sell Your Business To Your Kids
I'm troubled. I keep getting calls from clients and readers from all over the country asking "Can I still sell my business to my children?" The answer is "Yes." But you'd better do it right. If it is done wrong [if it violates the new Section 2036(c)], the value of your business when you die will revert back into your estate. And that's the law: Even though you no longer own the business, its appreciated value will be subject to estate taxes.
I'm troubled by something else: Most business owners don't even know Section 2036(c) exists. They may sell their business to their kids without even knowing that their family will be clobbered by the estate tax after they die. Actually, this new Section of the law can apply to any transfer of your business to your kids.
Probably the easiest way to transfer your business to your child and avoid the new rules is to sell the company to your child and take back "qualified debt." This means your child agrees to buy your business at a specific price over a period of 15 years or less. You should have your child pay you interest on the debt. The interest rate must either be fixed for the entire loan period or tied to a specific market rate (for example, one point over prime). Also, the payment dates for principal and interest must be fixed.
What's the result of this transfer by sale? The business's future appreciation escapes estate tax. Plus, you keep an income interest in the company as a creditor-for up to 15 years.
Here's an example. Joe Success sells his company to his son John for $1 million. Joe agrees to take the purchase price over a period of 15 years. John's payments are to be made quarterly with interest at 1½ points over prime (but not more than 11 percent). When Joe dies, years later, the business is worth $3 million. Joe never had any interest in the business after the sale, except as a creditor for the $1 million debt. The result is a super tax saving: The $2 million in appreciation is not included in Joe's estate.
One warning: This item is only the tip of the iceberg. The new transfer law has many other rules, traps and exceptions. You must get expert help.