Interesting Tax Strategy

**patticakes** · 01-09-2009, 03:54 PM

I was talking with a coworker yesterday who mentioned their plan to avoid paying taxes this upcoming season. They had figured out that they would roughly have to pay $50,000 so they "took advantage" of buying 2 new phones, 3 new computers and a brand new Escalade (without selling the other one they already own & have payments on). By investing into the business, they think they have avoided $30,000 in taxes so they are happy to pay $20,000.

These actions just don't sound prudent in the economy we're in. Mostly having two Escalades with monster payments.

I can only hope life continues well for them and they don't find themselves completely in over their heads.

**Greebo** · 01-09-2009, 04:19 PM

I suspect they also don't understand depreciation, and why the purchase of the Escalade may not be as helpful as they hoped.

Basically when you purchase an asset, like a vehicle or real estate, you can't just deduct the cost. The car has value, and is not an expense as such. It can be depreciated, however, over time.

They need a CPA before they do more of this stuff....

**fixer** · 01-09-2009, 04:37 PM

I agree with Greebo. Depreciation only allows a set amount of an item to be deducted. The IRS sets a useful life for each item and you only can take a years worth of it's value. Example: if the cars have a life of ten years, they would get five thousands dollars a year. However, the IRS has been raising the amount you can deduct off of the top. It used to be as little as one thousand dollars and the last I checked it was eighteen thousand dollars. My guess is they may be able to nullify their tax burden with their purchases. This is a strategy that is employed by a lot of farmers I know. They believe since a purchase made will offset their taxes, the government is buying a large percentage of the item for them. While this approach is warranted when you actually need something to make your business more profitable, when it is used just to avoid taxes you end up with a lot of equipment that loses value every year. It robs you of the cash that would be left over after paying taxes. When I farmed, cash was the most important thing to me. It is no fun to have a net worth of several hundreds of thousands of dollars and not be able to come up with three hundred dollars to pay an unexpected expense. They say that a farmer never has money except for one day in his life, the day he sells his operation. I saw this firsthand. This is why when you see my response to a post, I will always advocate liquidity. Whether it is right or wrong, my past has lead me to this conclusion.

**thefrug** · 01-09-2009, 05:25 PM

I don't like it when anybody finds ways to skate out of paying their taxes like a responsible citizen of this country. Pay up! I see these commercials for these tax lawyers and these people are SO smug about how they got out of paying all their taxes. Makes my BP go up. You did whatever it was to raise the taxes you owe, so pay them you cheaters. Makes me wonder what else they cheat others out of if they're not honest tax paying citizens.

**my4littlebuffaloes** · 01-09-2009, 06:12 PM

Yikes! Why didn't they have the money to pay the $50,000 in taxes? To end up owing that much, they had to make a hefty profit on the business, where did it go? Crazy!

**Greebo** · 01-10-2009, 08:28 AM

Originally Posted by my4littlebuffaloes

Yikes! Why didn't they have the money to pay the $50,000 in taxes? To end up owing that much, they had to make a hefty profit on the business, where did it go? Crazy!

Clearly not into an "income tax" fund.

Serious mistake of so many business owners - make a profit and forget to take out the Government's cut up front.