Taxes and the RedOne - Jan buy?

[Rick Darge]

I'm not even sure if Red will deliver my #363 before 2007, but if they do, would it be wise for deductions to just wait until Jan 2 to buy my Red? I figure I probably couldn't claim it as a deduction this year since I don't own it yet..

Thoughts?

[Mike Prevette]

I seem to remember you can only claim when you take possession. So prepaying won't help. I could be wrong.

[Kevin Halverson]

One approach might be to prepay for the entire order, but have a single accessory shipped to you and the remaining items on the purchase order would be on back order. This should allow you to fully expense the purchase in this fiscal tax year.

Obviously, you would want to check with your tax account to confirm, but this should work.

[Rick Darge]

I wasn't talking about pre-paying, just extending my own wait time if my Red is ready in December - Would it be beneficial and save me more money in the long run, if I just wait 12 days and pick it up in 2008. That's if, hypothetically my Red is ready to ship before 2008.

[Bill Goehring]

As with many things, it all depends--on how long you think the RED ONE will be in service to your business, when in the year you put it into service, projections for income and expenses over the coming years, and how aggressive you and your accountant are.

Most strategies entail accelerating the deduction of expenses and delaying the recognition of income, but, if this was a slow year for you and you anticipate that next year will bring lots of income, you may want to do the opposite. Generally, one tries to smooth out the peaks and valleys of income and expenses by balancing them accordingly.

If I receive my RED ONE between now and the end of the year, my accountant will almost certainly balk at deducting the entire cost in 2007. In fact, he would probably recommend that I depreciate this kind of asset over five to ten years, and, since I will not have placed the asset into service until at least the fourth quarter, would recommend that I divide the depreciation for 2007 into quarters and only recognize one quarter of the annual depreciation this year.

[Rick Darge]

That makes sense BillG - Thanks - In that case, if they want to ship our Reds before years end, I will gladly accept

[donatello b]

i thought if you did a 5 year depreciation - if you put it into service in 12/07 you only get a month write off for 2007 - not a full year ? so your depreciation would be 5 years starting dec 2007 and ending dec 2012 ??

[Bill Goehring]

The whole idea of accounting is to "account," in some reasonable way, for income and to match the expenses that were incurred to generate that income so that a profit or loss can be determined on investments and the benefits they generate.

When applying that data to financial statements and the way they affect taxable income, there is leeway as to what is "reasonable." Financial data tends to be tabulated on a quarterly basis, so it could be argued that no finer distinction need be made between matching income and expenses.

On the other hand, if one really wants to be anal about it, I suppose you could match income to expenses on a daily basis and subdivide a depreciation schedule into 365 parts per year. But that's not very practical, is it?

Accounting theory is a matter of practicality and is a blend of art and science. To many people, it is mysterious and even magical to the extent that they might believe that recognizing expenses and disregarding income is not a means to an end but an end in itself, ie. merely a way to reduce one's taxes.

This is what gets accountants and their clients into trouble, even when they think they are The Smartest Guys in the Room.

[Stacey Spears]

There is also the sales tax deduction for 2007, which may not return for 2008. Since you are located in CA (same for WA), you will have to pay sales tax on the camera.

Sadly, because you are in CA, you have to choose between sales tax and last years state tax to deduct, I believe. in WA, we don't have a state tax, so we deduct the sales tax.

[Rick Darge]

I hate taxes.. so confusing..

[Greg M]

You should talk with an accountant as any advise here wont apply to your specific tax situation...that said you can fully depreciate this purchase in one single year if needed.

[Peter Richardson]

DigitalFX is right -- you can use the Section 179 deduction to depreciate the entire cost of the item in a single year. Keep in mind, you need to put the item into service, not just pay for it, to take the deduction. Have your accountant look at your tax situation for this year and he will be able to tell you whether you should take it this year or next. It's not rocket science, but close ;)

Peter

PS Im not an accountant.

[Jeff Deveraux]

I wonder if we will get taxed on the $2500 in bonus gear. I'm no expert, but I would think that if RED invoices the sale as a "RED ONE package", then we will be taxed on the total amount. If RED breaks up the order into two different invoices?....

[Bill Goehring]

Peter--Sure, you can take a Section 179 deduction this year (up to $100,000 per year, I think) on an asset PUT INTO SERVICE THIS YEAR. But then what about next year, as the asset brings in revenue? What expenses are you going to charge off against those revenues, another new camera? And then, how about the year after that? Try to balance expenses against the revenues they produce over the long run or you will forever be chasing your tail, buying things that you may or may not need just to get a deduction.

Jeff--Expenses are expenses only if you have to pay for them. The $2,500 bonus only reduces the total cost of the asset, effectively reducing the deduction in the eyes of the IRS. But, if you'd like to deduct that extra $2,500, I suppose RED would be happy to let you forego the bonus to help you foil that damn IRS. ;-)

[Ryan Patch]

Yes. I have done the math and consulted tax lawyers. To quote my lawyer:

The timing of the deduction is when you starts using it (i.e., “placed in service” date) so a down payment in 2007 with a final payment and delivery in 2008 will make it a 2008 asset rather than 2007.

Meaning that you can write it off against 2008 income, instead of spreading it, depreciating it, etc.

[Obin Olson]

I need to buy the RED now in 2007 how can that be done?

[Bill Goehring]

Obin--

What's your reservation number? If it's not under 300, you almost certainly are out of luck no matter what. And, while I expect Jim will do his utmost to make good on his vow to deliver 200 more cameras in December, I expect that, as in the past, he will come in just under the wire. So, even if your reservation number is under 300, I wouldn't leave on your runway lights on Christmas Eve expecting Jim to land his jet in your backyard and pop down the chimney with a bag o' goodies slung over his shoulder. More likely, you'll get the call to come pick it up between Christmas and New Years--and probably closer to New Years.

Then, after you get over that hurdle, are you going to be able to get any shooting done on the camera before the end of the year? If so, will you be just testing or shooting an on-going project or payable gig, (to say nothing of receiving any revenue from that gig--you know, that pesky balancing revenues with expenses thing)?

In the event that you get that dreaded envelope in the mail from the IRS next year asking you if you would stop in for a little visit to review your 2007 tax return, what convincing evidence will you put forward to justify the deduction in 2007 instead of 2008? Are you a gambler, a risk-taker, a let-the-details-sort-themselves-out-later kind of guy? Well, good luck with that. There are probably millions who play Russian Roulette every year with the IRS. Most fire an empty chamber, a few don't. But, what the hell, it's one HELL of an exciting rush!

Seriously, do you have any accessories (or other expenses) you're expecting to buy along with the RED ONE? If so, maybe you can get those this year, even though I'd still argue that you only take a partial deduction on them this late in the game.

[Jeff Deveraux]

Jeff--Expenses are expenses only if you have to pay for them. The $2,500 bonus only reduces the total cost of the asset, effectively reducing the deduction in the eyes of the IRS. But, if you'd like to deduct that extra $2,500, I suppose RED would be happy to let you forego the bonus to help you foil that damn IRS. ;-)

No. I have no interest in messin' with the IRS.

[Peter Richardson]

Bill,

My point wasn't so much whether you SHOULD take the 179 deduction, just if you COULD, which you can, assuming you put the camera into service this year, as you and I both point out.

Whether you take the deduction this year or next (assuming you have the luxury of an early reservation and have taken delivery of a camera) of course, as you point out, depends on your given revenue for the year and how you plan on tackling your tax situation.

But your point about "chasing the tail" is certainly well-taken! It is tempting to have an excuse for us gear-heads to keep buying and buying and buying to offset our tax liability, but not always wise from a business perspective.

Peter