Stephen,
I would agree with your analysis of the tax and cash flow implications.
But I'm still at a loss to understand why they wouldn't sell or give the
stuff away. John would have cheerfully saved them the tipping costs at
the local landfill!
Bill Stanke, CPA
Stephen Troy wrote:
>
> >From: "Daniel J. Mitchell"
>
> > With some things, the problem is that they've already written them off
> >against tax by the time they get rid of them; they depreciate them over five
> >years (say) and then they've got to get rid of them because they officially
> >have no value.
> >
> > Or something like that; the company my father works from has a big crushing
> >crate in the basement where old PCs go, and again there they can't just sell
> >them on/give them to schools/whatever -- the kit now has officially zero
> >value, and doing anything that might get value out of them in any way isn't
> >allowed.
>
> No, no, no, no! That's not how it works!
>
> Let me give an example. Here in the US, the federal corporate tax rate is
> basically 35%. So if you chuck your spare parts inventory that costs $100,
> you show a tax loss of $100 and save $35 in tax, putting $35 in your pocket
> (note: you can't depreciate inventories).
>
> If you sell off the same spare parts inventory for $25, for example, you
> show a tax loss of only $75 and save only $26.25 in taxes. However, this
> actually puts $51.25 in your pocket ($26.25 tax savings + $25 proceeds on
> selling the stuff).
>
> Using the PC example above, the same logic holds - if you throw it away,
> there's only the tax savings from the depreciation to put in your pocket.
> If you sell it, you get the tax savings of whatever depreciation and/or
> loss you incur, plus you get the sales proceeds, too.
>
> And just because something has been "depreciated" for accounting or tax
> reasons, that doesn't mean it has no value. Otherwise, send me all your
> Pen-Fs and OM-1s as they must certainly be depreciated down to no value by
> now - and you HAVE to get rid of them!! I'll pay the postage!!
>
> While there may be a logical strategic or business reason to do so, there
> is no valid accounting or tax reason to throw away stuff rather than sell it.
>
> Steve Troy
> CPA & MBA
>
> (sorry - no bagpipe content)
>
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