The holiday season is here once again and two very hard working super heroes are busy with the task at hand. As another year comes to a close, our financial super heroes are engaged with tax planning for their clients.
Tax guy: my goodness Amazing, I am grateful for the opportunity to serve those Americans that are up to speed with their financial matters.
AR: Right you are Tax Guy. It is indeed a privilege. My hope is that more and more people, not just in America, become more involved in financial, business, and tax matters.
Just then, the phone rings. JC Minyon (Tax guy) answers the phone. It is Innocent Spouse and she is quite excited (as women are apt to get). She is frantic that her husband, Clueless American, is making a big financial mistake. Clueless owns a small business that he started at the beginning of the year. He has done zero financial and tax planning and Innocent Spouse is afraid of what consequences might face them.
Innocent Spouse: Oh help us mighty Tax guy! I am afraid that our financial and tax situation will be out of control!
Tax guy: Fear not dear lady. Do try to calm yourself as the Amazing R and I are on the way to look over your situation.
Tax guy changes into his blue uniform, red cape, with a white TG posted upon his chest, He flies to the rescue of our financially distressed couple. The Amazing R is clad dapperly (as always) in his black tuxedo with red bowtie and cumber bun. The Amazing R takes to his stretch limousine driven by Bob.
Tax guy: (crashing through the window) I am here Innocent Spouse, Where is Clueless American?
Innocent Spouse: He is looking for his numbers oh great financial warrior.
AR: (cool and collected entering calmly through the front door) Fear not dear lady, we will be able to provide you with practical advice you can put in motion immediately.
Clueless American: Oh great financial heroes! I am grateful for your attention to our situation. Innocent Spouse does get quite excited over many situations.
AR: (in a chastising tone) I am sure this is true inattentive citizen. In this case however, she is right to raise concern. It is the duty of every American Citizen to understand at least the basics regarding financial matters. It is each American’s duty to ask questions when they are in need of help.
Tax guy: Well said Amazing. You are indeed a leader for all (Begins looking through the information that Clueless American has turned over).
Innocent Spouse: Oh thank you Amazing Ron. I will forever be in your debt.
AR: (to Tax guy) what have you found oh loyal side kick and knower of all tax laws?
Tax guy: Clueless American’s business has netted $30,000 in profit for the year. He has not made any estimated tax payments He will owe both income tax and self-employment tax on this number unless… unless he purchases equipment before the year end.
AR: (to Clueless American) how about this then? Is there a need for purchasing equipment?
Clueless American: Yes, I do in fact need some equipment and have already secured financing to make the purchase. The equipment will cost $35,000. Should I purchase it this year? I am expecting larger profits next year and will be in more need of deductions.
Tax guy: Based on the circumstances, it does make sense to put the equipment in service during the current year. Under Internal Revenue Code 179, a taxpayer can expense up to $250,000 of fixed assets placed in service during 2008 (returning to $125,000 after 2008). The 179 expense deduction can not be taken if there is a loss and it can not create a loss.
AR: (to Innocent Spouse) to you have income dear lady?
Innocent Spouse: Yes, I have W-2 wages from my employer.
Tax guy: Excellent question Amazing R! We can then take 179 against the $30,000 in profit from Clueless American’s business, and can use Innocent Spouse’s income thus allowing us to take the entire equipment purchase into expense.
AR: That’s right Tax guy. Not only will we eliminate the exposure to income tax from the business activity of Clueless, but we will eliminate the exposure to self-employment tax and even create an additional deduction against Innocent Spouse’s income. For the following year, when income is expected to be higher, Clueless American can implement a retirement plan best suited to meet the needs of his business. This will require keeping a watchful eye on the business and making plans through out the year.
Tax guy: We will not be able to eliminate all of the income for state purposes as Clueless’ state decouples from the federal provisions for 179 expensing. The difference will be immaterial and Clueless could make an estimated tax payment to the state by year end, in order to get a federal deduction. This is true because Clueless American and Innocent Spouse are not in the alternative minimum tax.
AR: That’s right Tax guy. I am glad you are on my team.
Innocent Spouse: Thank you both for the excellent advice. You really saved us this time!
Clueless American: I will never ignore my financial situation again. I will do what ever I can to educate myself and I will indeed stay informed regarding my business’ activities.
Tax guy hugs Innocent Souse and Clueless American. He then flies back through the broken window reminding the couple they might be eligible to claim the broken window as a casualty and theft loss on their itemized deductions form.
Amazing R bows gracefully from the waste and exits gracefully to the front door and into his stretch limo.
AR: (to Bob) another Clueless American is saved from a financial plight. Let us away to the office to ready ourselves for the next battle.