Depreciating aircraft parts, dealing with taxes, etc.

Matt Barrow wrote:
t ain't
spent.
Written against a liability, rather than Earnings.
This is true. If it weren't the case no corporation would ever pay taxes.
They'd just say the money they earned was going to be spent for widgets at
some time in the future.

That's not how a pre-paid expense works.


A reserve account is NOT a pre-paid expense.

A pre-paid expense requires you to pay it to someone.

Robert M. Gary wrote:


Corporations formed to hold an aircraft are incorporated specifically
as not-for-profit.

Not always, and there are some good reasons why you may not want to
do this (ultimate disposal of assets).

Liability issues are different beasts than taxes, but you really
want to maintain the corporation as a company for BOTH purposes.

On May 12, 5:08 am, Ron Natalie wrote:
Robert M. Gary wrote:

Corporations formed to hold an aircraft are incorporated specifically
as not-for-profit.

Not always, and there are some good reasons why you may not want to
do this (ultimate disposal of assets).

If the purpose of the company is to hold the asset I cannot see why
you would want to incorporate for-profit. If you someday want to use
the company for photography or something, that is a very different
subject and pretty much everything said on this thread would not
apply.

Liability issues are different beasts than taxes, but you really
want to maintain the corporation as a company for BOTH purposes.

Actually for tax purposes you are much better off not incorporating.
When you own the plane directly you can deduct airplane taxes
(property taxes). When you hold it in a company you cannot. SInce the
company does not have income, the deduction is wasted.

-Robert, CFII, MBA, owner Sacramento Flyers, Inc. (a Mooney)

"Ron Natalie" wrote in message
m...
Matt Barrow wrote:
t ain't
spent.
Written against a liability, rather than Earnings.
This is true. If it weren't the case no corporation would ever pay
taxes. They'd just say the money they earned was going to be spent for
widgets at some time in the future.

That's not how a pre-paid expense works.


A reserve account is NOT a pre-paid expense.

A pre-paid expense requires you to pay it to someone.

I don't recall holding any difference with that. (Are you confusing me with
"Builder"?)

AIR, you have a reserve to pay a KNOWN FUTURE expense. This is distinct from
a CAPITAL account which is set aside to buy a CAPITAL ASSET in the future.

As one put it, this is different still from a sinking fund which is, IIUC,
how depreciation is handled when a depreciable item will have to be replaced
when it's useful life is ended.

I'd call my accountant, but I don't want to pay a couple hunderd $$$ to
answer "silly" Usenet questions! :~)


--
Matt Barrow
Performace Homes, LLC.
Colorado Springs, CO

Matt Barrow wrote:


AIR, you have a reserve to pay a KNOWN FUTURE expense. This is distinct from
a CAPITAL account which is set aside to buy a CAPITAL ASSET in the future.

That's all accounting practice, but it has no bearing in regard to
taxes. If you got money in the bank, it is an asset. If it derives
interest, it's income. It doesn't matter what you consider it to be
for use.

As one put it, this is different still from a sinking fund which is, IIUC,
how depreciation is handled when a depreciable item will have to be replaced
when it's useful life is ended.

None of which has squat to do with taxes.

On Thu, 10 May 2007 20:03:02 -0700, "Matt Barrow"
wrote:


"Andrew Gideon" wrote in message
news
On Thu, 10 May 2007 16:14:30 -0700, Matt Barrow wrote:

IIUC, it should be set up as a reserve/expense account, not as income to
the corporation. The only income to the corporation should be the
management fees (??)

I guess I'm confused about how payments into the company, to be used in
some future year, are tracked as an expense.

In accounting they're called a "Pre-paid Expense"

[...]


It sounds like you're trying to depreciate components, rather than the
entire aircraft, on an hourly basis.

That's what I was thinking.

It sounds like you don't quite understand "Depreciation". Depreciation is a
reduction in value, there is not periodic cash flow. The only cash
DIFFERENCE is when you sell the asset (in this case, an aircraft) and the
difference is in how much less you get for it than you GAVE for it.

Which is where you really have to be careful.
If you have written off the entire cost of the airplane over the
years, or specific period, then when you sell it the *entire* value
you receive is taxable which makes both expensing and writing off a
double edge sword.

"Ron Natalie" wrote in message
m...
Matt Barrow wrote:


AIR, you have a reserve to pay a KNOWN FUTURE expense. This is distinct
from a CAPITAL account which is set aside to buy a CAPITAL ASSET in the
future.

That's all accounting practice, but it has no bearing in regard to taxes.
If you got money in the bank, it is an asset. If it derives
interest, it's income. It doesn't matter what you consider it to be
for use.

As one put it, this is different still from a sinking fund which is,
IIUC, how depreciation is handled when a depreciable item will have to be
replaced when it's useful life is ended.

None of which has squat to do with taxes.

Really? Depreciation is not a yearly write off against income?

In a way, you're right though - Businesses do two different accountings, one
for financial reporting and another for taxes. As an example, Inventory can
be LIFO in one, and FIFO in the other.

The discussion was how a pre-paid asset is accounted for. That derived from
"XL builder" saying that companies could avoid taxes by listing future
expenses (not yet incurred) as pre-paid. Demonstrating what a pre-paid
expense is was the point of showing the fallacy of his position.

There is a vast misunderstanding of how depreciation works, what pre-paid
expenses are (read the original post again), what "reserves" are, etc.

Roger (K8RI) wrote:

Which is where you really have to be careful.
If you have written off the entire cost of the airplane over the
years, or specific period, then when you sell it the *entire* value
you receive is taxable which makes both expensing and writing off a
double edge sword.


Yes, but if you qualify for the 15% taxable gain you will pay less
tax in the long run than if you didn't depreciate it (which really
you don't have much of a choice not to). Even the current 25%
recapture rate is probably less than your top end bracket at 28.

Matt Barrow wrote:
"Ron Natalie" wrote in message
m...
Matt Barrow wrote:

AIR, you have a reserve to pay a KNOWN FUTURE expense. This is distinct
from a CAPITAL account which is set aside to buy a CAPITAL ASSET in the
future.
That's all accounting practice, but it has no bearing in regard to taxes.
If you got money in the bank, it is an asset. If it derives
interest, it's income. It doesn't matter what you consider it to be
for use.
As one put it, this is different still from a sinking fund which is,
IIUC, how depreciation is handled when a depreciable item will have to be
replaced when it's useful life is ended.
None of which has squat to do with taxes.

Really? Depreciation is not a yearly write off against income?

I didn't say that. I said that it makes no difference that the money
you are banking in reserve is intended to counter the depreciatable
asset. It makes no difference tax wise whether you are banking money
to buy a second plane for your company or to replace the current one in
the case that it really does depreciate to zero value.

Matt Barrow wrote:
"Ron Natalie" wrote in message
m...
Matt Barrow wrote:


AIR, you have a reserve to pay a KNOWN FUTURE expense. This is
distinct from a CAPITAL account which is set aside to buy a CAPITAL
ASSET in the future.

That's all accounting practice, but it has no bearing in regard to
taxes. If you got money in the bank, it is an asset. If it derives
interest, it's income. It doesn't matter what you consider it to be
for use.

As one put it, this is different still from a sinking fund which
is, IIUC, how depreciation is handled when a depreciable item will
have to be replaced when it's useful life is ended.

None of which has squat to do with taxes.

Really? Depreciation is not a yearly write off against income?

In a way, you're right though - Businesses do two different
accountings, one for financial reporting and another for taxes. As an
example, Inventory can be LIFO in one, and FIFO in the other.

The discussion was how a pre-paid asset is accounted for. That
derived from "XL builder" saying that companies could avoid taxes by
listing future expenses (not yet incurred) as pre-paid. Demonstrating
what a pre-paid expense is was the point of showing the fallacy of
his position.

I was using the that as an example of what someone could NOT do. Hell, Matt
I was agreeing with you.

The poster was saying it was a an expense that just hadn't been distrubuted
yet. I was saying it deosn't matter and used the widget to show grossly why
it wouldn't work.