[a cu men]
n. keenness and depth of perception, discernment or discrimination, especially in practical matters.
Accumulated Depreciation & Recapture Tax
Depreciation can certainly be a tax benefit to business owners while they own their business. Certain items qualify for immediate expensing under Section 179 of the Internal Revenue Code while other items, like most capital improvements, are depreciated over a longer period of time according to established IRS depreciation schedules.
While owning and operating a business, depreciation can be a helpful friend to the business owner. Depreciation reduces taxable income and thus reduces the amount of tax the business has to pay relative to the profit it generates. However, when the sale of depreciated assets occurs, the IRS looks to recapture some tax revenue based upon the proceeds received from the sale of those depreciated assets.
BOOK VALUE MATTERS
Suppose you buy a vehicle for your business. You pay $50,000 for the vehicle and it qualifies for immediate expensing under Section 179. When you file your tax return for the year, you’ll claim a depreciation deduction of the $50,000 purchase price, which has the same net effect of reducing your taxable income by the same amount. You’re happy, because you won’t pay tax on $50,000 of business income and you also have a new vehicle.
As far as your books are concerned, however, the value of the vehicle you just purchased is already zero.
Further suppose that two years later, you sell or trade-in that vehicle to acquire a newer model. You get $30,000 for the vehicle when you sell it.
When you file your tax return for the year in which you sold the vehicle, the IRS may consider part of the $30,000 received when you sold the vehicle as recapture depreciation, which will be subject to ordinary income rate tax. Remember, on your books, the vehicle has a value of zero dollars; thus everything you receive when you sell it is considered to be ordinary income, capital gain or both.
ACCUMULATED DEPRECIATION
Section 179 deductions are great for certain items such as vehicles or retorts, especially when you have a profitable year for business income. Not everything is eligible for immediate expensing under this provision; big things, like real estate and larger capital improvements, must be depreciated over longer periods of time. Land is, of course, never depreciable. Each year, as deductions against income are taken for the amount of depreciation allowed on depreciable assets, the net book value of those assets declines in lock-step.
Of no surprise to anyone, the IRS requires us to keep track of our business income and our business expenses – as well as our accumulated depreciation and net book value on capital assets. The latter will be used in determining the Recapture Tax upon the sale of those assets when the business is sold. Depending upon the extent of the assets held by the corporation – and the extent to which those assets have been depreciated when you sell them – this can be a significant component of the tax you will pay when you sell. It is, therefore, beneficial to heighten awareness of recapture tax implications in advance of a sale.
TAX ANALYSIS
Engaging an accountant or other tax professionals to prepare a Comprehensive Tax Analysis as you consider selling your business is a necessary step for most owners. This analysis will not only provide insight as to the overall tax consequences of a sale at a given sales price, it will also provide guidance in determining whether it is more beneficial to sell stock or assets, and, in the case of an asset sale, how to allocate the proceeds of the sale.
Simply stated, a Comprehensive Tax Analysis will help you understand how much of the sales price you can reasonably expect to keep. And that may well be the most important number to understand before you decide to sell.
PROFESSIONAL GUIDANCE IS ESSENTIAL
Whether related to ongoing operations or the sale of your business, tax matters are unquestionably complex and require reliable, professional advice. Recent changes to the Internal Revenue Code may make this is a good time to review the tax plan for your firm – and your exit strategy.
When it comes to the actual process of selling your funeral or cemetery business, professional guidance is also essential. As an acquirer of funeral homes and cemeteries since 1962, our vast experience and knowledge in this area becomes a great resource for reliable information. If you have questions about the sales process, in general, please give us a call or Contact Us for a completely confidential conversation.
NOTE: SCI and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
While owning and operating a business, depreciation can be a helpful friend to the business owner. Depreciation reduces taxable income and thus reduces the amount of tax the business has to pay relative to the profit it generates. However, when the sale of depreciated assets occurs, the IRS looks to recapture some tax revenue based upon the proceeds received from the sale of those depreciated assets.
BOOK VALUE MATTERS
Suppose you buy a vehicle for your business. You pay $50,000 for the vehicle and it qualifies for immediate expensing under Section 179. When you file your tax return for the year, you’ll claim a depreciation deduction of the $50,000 purchase price, which has the same net effect of reducing your taxable income by the same amount. You’re happy, because you won’t pay tax on $50,000 of business income and you also have a new vehicle.
As far as your books are concerned, however, the value of the vehicle you just purchased is already zero.
Further suppose that two years later, you sell or trade-in that vehicle to acquire a newer model. You get $30,000 for the vehicle when you sell it.
When you file your tax return for the year in which you sold the vehicle, the IRS may consider part of the $30,000 received when you sold the vehicle as recapture depreciation, which will be subject to ordinary income rate tax. Remember, on your books, the vehicle has a value of zero dollars; thus everything you receive when you sell it is considered to be ordinary income, capital gain or both.
ACCUMULATED DEPRECIATION
Section 179 deductions are great for certain items such as vehicles or retorts, especially when you have a profitable year for business income. Not everything is eligible for immediate expensing under this provision; big things, like real estate and larger capital improvements, must be depreciated over longer periods of time. Land is, of course, never depreciable. Each year, as deductions against income are taken for the amount of depreciation allowed on depreciable assets, the net book value of those assets declines in lock-step.
Of no surprise to anyone, the IRS requires us to keep track of our business income and our business expenses – as well as our accumulated depreciation and net book value on capital assets. The latter will be used in determining the Recapture Tax upon the sale of those assets when the business is sold. Depending upon the extent of the assets held by the corporation – and the extent to which those assets have been depreciated when you sell them – this can be a significant component of the tax you will pay when you sell. It is, therefore, beneficial to heighten awareness of recapture tax implications in advance of a sale.
TAX ANALYSIS
Engaging an accountant or other tax professionals to prepare a Comprehensive Tax Analysis as you consider selling your business is a necessary step for most owners. This analysis will not only provide insight as to the overall tax consequences of a sale at a given sales price, it will also provide guidance in determining whether it is more beneficial to sell stock or assets, and, in the case of an asset sale, how to allocate the proceeds of the sale.
Simply stated, a Comprehensive Tax Analysis will help you understand how much of the sales price you can reasonably expect to keep. And that may well be the most important number to understand before you decide to sell.
PROFESSIONAL GUIDANCE IS ESSENTIAL
Whether related to ongoing operations or the sale of your business, tax matters are unquestionably complex and require reliable, professional advice. Recent changes to the Internal Revenue Code may make this is a good time to review the tax plan for your firm – and your exit strategy.
When it comes to the actual process of selling your funeral or cemetery business, professional guidance is also essential. As an acquirer of funeral homes and cemeteries since 1962, our vast experience and knowledge in this area becomes a great resource for reliable information. If you have questions about the sales process, in general, please give us a call or Contact Us for a completely confidential conversation.
NOTE: SCI and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
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