Question About Depreciation and Taxes

[ATeam]

Once upon a time Joe and Jane Driver purchased a new truck to haul expedited freight. They worked hard, ran well and did everything their accountant told them to do.

When they had their income taxes done in year four, they noticed they had to pay in because, as their accountant explained, the truck was fully depreciated after three years and the depreciation deduction was used up.

One sunny day, a couple of months later, Joe and Jane wandered onto a truck dealer's lot just to pass some time and see what, if anything, was new in trucks. The salesman who met them knew his business and customers well. Seeing Joe and Jane come out of a four year old truck, he asked about taxes and learned that Joe and Jane did not like paying money in after they had received refunds three years before.

"I have the solution to that," the salesman said. If you trade your present truck in on a new one, you can start the depreciation schedule over again and regain the large tax deduction that helped get you that nice refund in earlier years.

The idea of a brand new truck and more tax refunds sat well with Joe and Jane so they did exactly what the salesman suggested. They traded in their well maintained, fully functional, four year old truck on a new truck and started their depreciation deductions again.

Question for readers: Did Joe and Jane do the right thing? Why or why not?

 

[fketchum]

Ok this is really confusing me knowing your background. But to make a guess I would think the depreation deduction would not be greater then the payments. But then I guess they are a write off also. It is also my poorly educated guess that repairs and preventive maintiance can replace some of the depreation deduction. Now im even more confused

 

[Steady Eddie]

No they should have kelpt the old truck. You failed to say if they still owed on the old truck. But at any rate, the note would be higher, They may owe more than the old truck is worth, rolling over the differance into the new payment. How many miles are on the old truck? Repairs and maintenace still could be lower on the old one and come out ahead due to higher payment, yes the new one will be under warnanty. Pay the diff. in qtly tax just in case.

 

[jjoerger]

In my opinion if it was a class 7 trading it may have been a good idea as it was probably close to being worn out.
If it was a class 8 it still had a good 6 years of service left in it.
Buying a new truck just to take the depreciation and to save money on taxes is not normally a good idea unless you are a very large trucking company.
Of course I'm not an accountant and I would have to see proof that I could save money by purchasing a new truck. I don't think the tax savings would equal the cost of a new truck.

 

[nightcreacher]

if they depreciated to 0,they wont be able to deduct the full depreciation on the new truck.The difference from what the dealer gives for the old truck for the new truck, will get a capitol gain tax.It has nothing to do with what is owed on the old truck.If you depreciate in three years,you need to trade in 3 years,plus the value of the truck is much better in three years than it will be in four.I think,now you have to take the depreciation over 5 years.I made an awfull mistake when I bought my 2004,I depreciated the whole thing the first year.A real mistake

 

[moose]

.The difference from what the dealer gives for the old truck for the new truck, will get a capitol gain tax.It has nothing to do with what is owed on the old truck.

absolutely, when an Expediter sells a truck, once the price is agreed upon, the Expediter needs to add a sells tax to reflect his own tax burden.
not only that, but this is not a 'per tax year event', as capital gain/loss can be carry over to the next tax year.

to answer the OP?
bad deal for the drivers, you never spend money on your business for the sole porpoise of saving money on taxes,
they got penny's on the $.

 

[OntarioVanMan]

There is no answer....all this is assumption and presumption...everyone's tax situation is different...it is so general and well, kinda not well thought out...for a Phil question....

 

[scottm4211]

Who do they drive for?

 

[OntarioVanMan]

Who do they drive for?

LOL...are they married or common law?

Does their state recognize common law ?
any children? any investments? win a recent lottery?..recent inheritance?

 

[highway star]

Doesn't the cute, story telling fashion he used to ask the question make up for the vague premise? Seriously, way too many potential variables.

I'm doing mine over five years and I'll probably keep it another year.

 

[Steady Eddie]

LOL...are they married or common-in-law?

Does their state recognize c-i-l ?
any children? any investments? win a recent lottery?..recent inheritance?

I think you may mean "Common Law Marriage" unless they are living as Father-in Law or mother in law.....

 

[OntarioVanMan]

I think you may mean "Common Law Marriage" unless they are living as Father-in Law or mother in law.....

Thanks...I needed that!...

 

[LDB]

But wait, common-in-law might be right. Look at Prince Harry.

 

[greg334]

1 - that is what I pay my accountant for, to advise me.

2 - shouldn't this thread be in the tax forum?

3 - Phil must have realized he isn't going to offset those millions with this truck and he is thinking about getting another one.

 

[Dynamite 1]

if you use the money you get for trade or selling price as a down payment there is no capital gains tax applied. as for depreciation i still think 3 and 5 yr terms are available. when we bought ours we did a 3 yr. term but over 4 tax years. 6 mo. the 1st and 4th and 12 mo. the middle 2 yrs.

after your truck is paid off there is going to be some tax you have to pay if you keep a paid for truck. more than likely it will be in the form of self employment tax. you can reduce that amount by simply maxing out ira contributions or spending a little more money from your personal income on business purchases or numerous other legal ways.

fact is its not alot of money over the year so just understand that you have to pay a little something. just dont pay to much. we payed an average of 225.00 a mo for self employment tax for both of us combined. so we traded a 2100.00 a mo. truck payment for a 225.00 mo. tax payment. not a bad deal. just keep up on your quarterly tax payments and its not a big deal at the end of the year. also if you dont use them this year they will reduce the amount owed the following year.

as for the answer to the question. keep the truck and earn some real money for a few years. manage the tax payments and sell or trade it when needed. or another good idea, just reinvest and rebuild it and take that depreciation.

 

[ATeam]

Moose has it right and says it well:

"...you never spend money on your business for the sole purpose of saving money on taxes."

 

[highway star]

if you use the money you get for trade or selling price as a down payment there is no capital gains tax applied.

I'm not sure what the "or selling price" part of that means, but I think when you trade in, that money is the same as if you sold it for cash and would be a capitol gain.

I'm with Phil and Moose on the spending money to save on taxes deal. You just buy the things you need when you need them. My CPA laughed at me when I asked about doing that.

Edit: After a few minutes to ponder, I am slow, would it be that instead of a capitol gain, the trade amount just lowers the amount to be depreciated?

 

[chefdennis]

While it is true that you don't buy equipment based on lowering your tax exposure...there are still too many details missing to even try to give an answer to this OP'ers question....The structure if the business and any special offsets of income or re-classification or deferment of income, who owns the truck, is the owner leasing the truck to the drivers, are the drivers employees of a comapny who is taking the investment tax credit....and that is just few questions that any good accountant and tax preparer would ask....

If Joe and Jane are simply buying a new truck as they would a new car, and titling it in their own names and just making payments out of their pocket, they are leavng all kinds of money to the irs that there is no reason for....

 

[ATeam]

If Joe and Jane are simply buying a new truck as they would a new car, and titling it in their own names and just making payments out of their pocket, they are leavng all kinds of money to the irs that there is no reason for....

Yes indeed, but how many Joes and Janes are doing exactly that?

That's why I started this thread, to make the point to newbies and others that there are some things to be known -- some of which require some effort to learn -- that can make a big difference in how much money you end up with at the end of the day.

There is the money you make and the money you spend. In between the two there is a whole lot that goes on that affects how much you actually have to spend after it is made. The way one understands (or misunderstands) and uses (or misuses) a depreciation deduction is one of those things.

 

[purgoose10]

I think you may mean "Common Law Marriage" unless they are living as Father-in Law or mother in law.....

What kind of water is in that river??