Burned Up! ... Ask TaxMama ... May 21, 2004

Ask TaxMama.Com
Tax Information With A Mother's Touch

Published by Eva Rosenberg, MBA, EA
Volume 6, Issue 259 May 21, 2004


	TaxMama Resources & Specials
	Retire on Your Kids' College Fund?
	Calif Sales Tax
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	Burned Up!


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Burned Up!

» From: Dallas, TX

Dear TaxMama:

I own a business that had a catestrophic fire. All of the business equipment was lost. Somehow, the depreciation was never taken.

Now the IRS says that I should have taken the depreciation and that all of the insurance money is taxed as income.

It cannot be balanced with the value of the lost equipment.

Is there any relief?

Thanks,

George

Dear George,

Sad, but true.

It would burn me up, too!

If your tax professional hasn't been taking the depreciation - get a new one. Now.

The code basically says depreciation is 'allowed or allowable'.

While that means nothing to you - what it means to IRS is that if you didn't take depreciation when you should have, they will treat your asset as if you had taken deprecation and compute gain on that basis.

In other words, suppose you paid $5,000 for something and should have taken $2,000 depreciation by now, your tax basis would be $3,000. Let's say you sell it for $4,000.

You think you have a loss of $1,000. ($5,000 - $4,000)

IRS will treat it as if you have $1,000 profit. ($4,000 selling price minus $3,000 basis)

You have some things you may do.

Have IRS compute the depreciation at the lowest allowable rate - straight line. That may reduce some of your depreciation - depending on how old the equipment is.
Amend your last three tax returns. Take the depreciation deductions. At least you can recoup that.
Have a nice long chat with your tax preparer and find out why they overlooked a deduction this obvious.
Incidentally, if you happen to have a net operating loss carryforward for several years - then, make an adjustment and increase it to take into account all the depreciation you're being charged for now.
Have a competent tax professional review IRS changes. If you have replaced the equipment and are still using it in your business, tax code section 1033 let's you put off paying tax on the gain. (read more here)

Please review this information with a skilled tax pro at your side. The few bucks you pay them are deductible and can make all your taxes go away. (Taxes paid to IRS are not a deduction.)

And if you're in this trouble because you did your own tax returns, shame on you. If you're in business, you should never be preparing your own returns. That's why WE spend so much time getting educated - so we can do it right.

Best wishes,

Eva Rosenberg
Your TaxMama

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