George Robertson, CFP, CRPS, AIF

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Business Questions & Answers

Q - I have a used truck I have been using for business. I think I can get more money for the vehicle by selling it rather than trading it in. Is there any tax advantage one way or the other?

A - Good Question! It does make a difference for tax purposes if you sell or trade-in your truck. If you sell it, you will incur either a taxable gain or loss depending upon the amount you sell the truck for less your undepreciated basis in the vehicle. As an example, suppose you sell your truck for $1,000. Your original purchase price was $12,000 and you have taken $10,000 in depreciation, leaving you with an undepreciated basis of $2,000. Subtract the $2,000 udepreciated basis from your sales price, and you will end up with a $1,000 loss. On the other hand, had you sold the truck for $3,000, the sale would have resulted in a $1,000 taxable gain.

If you trade your old truck in for the new one, any gain or loss on the old truck is adjusted into the depreciable basis of the new vehicle and not reportable as a current gain or loss. Therefore, in your case, it is better to sell the vehicle if you have a loss. Now if you have a gain, it may be better to trade it in. The trade-in decision must also consider whether the tax benefits exceed the additional money received from selling the truck.

Q - I spent a large amount of money for new equipment for my business. I know that I must depreciate this equipment, but can I separate out the sales tax and deduct it separately as a tax expense?

A - Sorry, you are required to include all the costs of acquiring the equipment into the depreciable basis, including the sales tax.

Q - I am considering setting up a self-employed retirement plan for my business and would like to know the difference between a profit sharing plan and a money purchase plan.

Q - There are two major differences between those two plans that can affect your decision on how to set up your retirement plan. Profit-sharing plans are discretionary, which means the annual contribution is not mandatory. On the other hand, the annual contributions to a money purchase plan are mandatory. Furthermore, the contribution limits for the two plans are different. For profit sharing plans, the limit is 15%, while the limit for money purchase plans is 25%.

Individuals frequently establish a combination of the two plans in order to limit their mandatory contribution, while maintaining the ability to contribute the maximum (25%). To establish this flexibility, you would establish a 15% profit sharing plan and a 10% money purchase plan, giving you the ability to contribute the maximum while limiting your required contribution to 10%.

There are other total dollar contribution limits, and the 25% limit is based upon your net profits after subtracting your contribution to your retirement plan(s). If you have employees, there are additional considerations that should be taken into account. The regulations governing self-employed retirement plans are complex, and we highly recommend you call this office before taking any action.

Q - I heard it makes a difference whether I sell or trade in my business vehicle. Is that true?

A - Yes, when you sell a business vehicle, the gain or loss from the sale is reported in the year of the sale. On the other hand, if you trade the business vehicle in, the gain or loss is adjusted into the business basis of the replacement vehicle. Therefore, if the sale would result in a loss, it is better to sell the vehicle so you could take the loss on your tax return. But, if the sale results in a profit, trading in the vehicle may be the better option. When making this determination, your gain or loss is based upon the depreciated basis of your vehicle, not what you originally paid for it. If you need assistance in determining the best course of action, please call our office.

Q - I have always carried a private health insurance policy, but now my spouse has started working for a firm that has a group policy, which cost less than our private policy. If we change to my spouse's employer plan, can I still take the same deduction I did for the private policy?>

A - With your private policy, you were allowed to deduct a portion of your health insurance premiums against your gross income, which reduced your taxable income. But, if you participate in any subsidized health plan, maintained by you or your spouse's employer for any month or part of a month during the year, amounts paid for health insurance coverage for that month cannot be used to figure the deduction. Instead, those premiums would be treated as a medical itemized deduction. The medical portion of itemized deductions is reduced by 7-1/2% of your AGI (income) for the year, so you may or may not receive any tax benefit.

Determining the best after-tax course of action depends upon whether you itemize your deductions, if your medical deductions are high enough to gain any benefit, the amount you will save in premiums for the year and the difference in tax savings between the two. Please call this office so we may assist you with this rather complex computation.