Depreciating aircraft parts, dealing with taxes, etc.

[Andrew Gideon]

Most owners, I assume, have corporations which do the actual owning and
which provide a liability firewall. But how are taxes managed?

The issue I think I'm facing is we pay money into the corporation against
future events like overhaul, repainting, etc. These monies add up. But
since this is really just a reserve that's going to be spent in a few
years, I'm loath to have this considered "profit" and thereby become
taxable.

The answer, I'd imagine, is to depreciate those things against which the
reserves are accumulating. For example, if I pay $25/hour into the bucket
for engine reserve, I want to depreciate the engine by $25/hour.

Can one do that? What [very!] little I know about taxes has
calender-based depreciation schedules. Can one have a use-based schedule?

Thanks, and any suggestions, corrections, pointers, or ideas would be
welcome.

- Andrew

[Matt Barrow[_4_]]

"Andrew Gideon" > wrote in message
...
>
> Most owners, I assume, have corporations which do the actual owning and
> which provide a liability firewall. But how are taxes managed?
>
> The issue I think I'm facing is we pay money into the corporation against
> future events like overhaul, repainting, etc. These monies add up. But
> since this is really just a reserve that's going to be spent in a few
> years, I'm loath to have this considered "profit" and thereby become
> taxable.

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 (??)

>
> The answer, I'd imagine, is to depreciate those things against which the
> reserves are accumulating. For example, if I pay $25/hour into the bucket
> for engine reserve, I want to depreciate the engine by $25/hour.
>
> Can one do that? What [very!] little I know about taxes has
> calender-based depreciation schedules. Can one have a use-based schedule?

It sounds like you're trying to depreciate components, rather than the
entire aircraft, on an hourly basis. I don't think that's a good idea. That
takes much more work for your accountant. I can imagine doing a
calendar-based depreciation, but not if the calendar is harder on your
aircraft's value than useage is.

> Thanks, and any suggestions, corrections, pointers, or ideas would be
> welcome.

Are you a "partner" to the corporation, or is it third party, such as a
partnership or lease back?

(My explanation here is probably NOT technically correct)
My company (LLC) is the registered owner of my aircraft. We deduct expenses
as incurred and take depreciation and make an entry in "Reserves" on an
hourly basis for such things as recurring maintenance and overhaul.

The LLC then "charges"me for any personal use I make of the aircraft. I then
declare that as personal income, just as when I draw from our cash accounts
for "personal income - cash".

You can get into "trouble" if you try to expense your personal usage, so
make DAMN sure you are really doing business and have documentation to back
it up. This is probably (though not sure) more critical when you have
corporate ownership.


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

[Robert M. Gary]

On May 10, 2:29 pm, Andrew Gideon > wrote:
> Most owners, I assume, have corporations which do the actual owning and
> which provide a liability firewall. But how are taxes managed?
>
> The issue I think I'm facing is we pay money into the corporation against
> future events like overhaul, repainting, etc. These monies add up. But
> since this is really just a reserve that's going to be spent in a few
> years, I'm loath to have this considered "profit" and thereby become
> taxable.
>
> The answer, I'd imagine, is to depreciate those things against which the
> reserves are accumulating. For example, if I pay $25/hour into the bucket
> for engine reserve, I want to depreciate the engine by $25/hour.
>
> Can one do that? What [very!] little I know about taxes has
> calender-based depreciation schedules. Can one have a use-based schedule?
>
> Thanks, and any suggestions, corrections, pointers, or ideas would be
> welcome.
>
> - Andrew

What taxable income are you trying to defer with depreciation???

-Robert

[Newps]

Andrew Gideon wrote:

> Most owners, I assume, have corporations which do the actual owning and
> which provide a liability firewall.


Most owners do not as this provides no protection at all.

[Matt Barrow[_4_]]

"Newps" > wrote in message
. ..
>
>
> Andrew Gideon wrote:
>
>> Most owners, I assume, have corporations which do the actual owning and
>> which provide a liability firewall.
>
>
> Most owners do not as this provides no protection at all.

Depends on "who" the corporation consists of, and for what purpose.

[Newps]

A corporation with the aircraft as the only asset and only one officer,
the owner of the plane.





Matt Barrow wrote:

> "Newps" > wrote in message
> . ..
>
>>
>>Andrew Gideon wrote:
>>
>>
>>>Most owners, I assume, have corporations which do the actual owning and
>>>which provide a liability firewall.
>>
>>
>>Most owners do not as this provides no protection at all.
>
>
> Depends on "who" the corporation consists of, and for what purpose.
>
>

[Matt Barrow[_4_]]

"Newps" > wrote in message
. ..
>A corporation with the aircraft as the only asset and only one officer, the
>owner of the plane.
>
>

That's one scenario. Certainly not the only one.

It sounds to me like Andrew's situation is one of an "Aircraft Management"
corporation.

That may or may not provide liability protection. In the case of an owned
corporation owning the aircraft, it doesn't protect the corporation, but it
does protect the pilot and his personal assets. If the prupose of corporate
ownership is merely to avoid liability, that probably won't work.

>
>
>>>
>>>
>>>Most owners do not as this provides no protection at all.
>>
>>
>> Depends on "who" the corporation consists of, and for what purpose.

[Andrew Gideon]

On Thu, 10 May 2007 18:33:24 -0600, Newps wrote:

> A corporation with the aircraft as the only asset and only one officer,
> the owner of the plane.

In my particular case, I'm speaking of a corporation owned by 45 members
which owns four aircraft. But I'm guessing that the difference between
this and other organizations is more of scale than anything else.

Does single owner/single aircraft reduce the protection of the corporate
veil? Is that very different from two owners, or twenty?

- Andrew

[Andrew Gideon]

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.

[...]

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

That's what I was thinking.

> I don't think that's a good idea.
> That takes much more work for your accountant.

That's a good point.

[...]

> Are you a "partner" to the corporation, or is it third party, such as a
> partnership or lease back?

I'm one of the "shareholders", except that it's a corporation that doesn't
issue shares.

>
> (My explanation here is probably NOT technically correct) My company
> (LLC) is the registered owner of my aircraft. We deduct expenses as
> incurred and take depreciation and make an entry in "Reserves" on an
> hourly basis for such things as recurring maintenance and overhaul.

So you depreciate the value of the entire aircraft by the reserve amount
each hour? And then, at engine overhaul time, you increase the value of
the airplane by the value of the engine?

>
> The LLC then "charges"me for any personal use I make of the aircraft. I
> then declare that as personal income, just as when I draw from our cash
> accounts for "personal income - cash".

I don't follow this paragraph at all, I'm afraid. If you're paying into
the LLC, how is that personal income?

- Andrew

[Andrew Gideon]

On Thu, 10 May 2007 16:18:34 -0700, Robert M. Gary wrote:

> What taxable income are you trying to defer with depreciation???

I'm not sure that it's taxable income (which is part of my problem), but
I'm envisioning this asset called a "reserve account" growing over the
years until an overhaul is required.

- Andrew

[ArtP]

On Thu, 10 May 2007 21:50:58 -0400, Andrew Gideon >
wrote:


>Does single owner/single aircraft reduce the protection of the corporate
>veil? Is that very different from two owners, or twenty?

If you have a partner who is flying the plane when he does something
stupid to crash it you are protected from personal liability unless it
can be shown that you had reason to believe he would do something
stupid. The corporation is toast as is the partner who was flying. If
you are a single owner the corporation offers no protection.

[Newps]

Andrew Gideon wrote:


> Does single owner/single aircraft reduce the protection of the corporate
> veil?



It eliminates it. You cannot get out of personal liability with a scam,
which is basically what a one owner/single aircraft is. It would take
an average lawyer no time at all to get pierce this. If it were really
an effective protection device how come you don't have one for your
house or your cars?

[Matt Barrow[_4_]]

"Andrew Gideon" > wrote in message
...
> 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.

>
>> I don't think that's a good idea.
>> That takes much more work for your accountant.
>
> That's a good point.
>
> [...]
>
>> Are you a "partner" to the corporation, or is it third party, such as a
>> partnership or lease back?
>
> I'm one of the "shareholders", except that it's a corporation that doesn't
> issue shares.
>
>>
>> (My explanation here is probably NOT technically correct) My company
>> (LLC) is the registered owner of my aircraft. We deduct expenses as
>> incurred and take depreciation and make an entry in "Reserves" on an
>> hourly basis for such things as recurring maintenance and overhaul.
>
> So you depreciate the value of the entire aircraft by the reserve amount
> each hour?

No, the reserve is for periodic maintenance, such as overhauls, annuals,
etc. For depreciation, it's strictly an accounting/tax entry.

> And then, at engine overhaul time, you increase the value of
> the airplane by the value of the engine?

Possibly. Some aircraft appreciate in value, some depreciate.


>> The LLC then "charges"me for any personal use I make of the aircraft. I
>> then declare that as personal income, just as when I draw from our cash
>> accounts for "personal income - cash".
>
> I don't follow this paragraph at all, I'm afraid. If you're paying into
> the LLC, how is that personal income?

I'm not paying into the LLC, all company revenue flows INTO the LLC and the
LLC holds certain assets, one of which is my aircraft.

At the same time, all expenses are paid by the LLC, such as construction
costs, fees, materials, aircraft expenses, etc., and cash that we withdraw
as our income. That way, the value of the company keeps growing nad does not
require "leverage". We've done some small projects that we capitalized (ie,
paid for) ourselves, rather than using banks for cost of construction loans.

If you are not using your aircraft for business, you can't depreciate your
share of it. If you are, you can only depreciate that portion that you use
it for business, but you must use it for business > 50% of the hours you use
it in total.

Such are the benefits of operating as a corporate entity, rather than as an
individual: you pay expenses out of pre-tax dollars rather than out of
after-tax $$.


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

[Matt Barrow[_4_]]

"Andrew Gideon" > wrote in message
...
> On Thu, 10 May 2007 16:18:34 -0700, Robert M. Gary wrote:
>
>> What taxable income are you trying to defer with depreciation???
>
> I'm not sure that it's taxable income (which is part of my problem), but
> I'm envisioning this asset called a "reserve account" growing over the
> years until an overhaul is required.
>

It's not an asset, it's a pre-paid expense.

The money is "spent", it just hasn't been distributed yet.
--
Matt Barrow
Performace Homes, LLC.
Colorado Springs, CO

[Ron Natalie]

Andrew Gideon wrote:
> Most owners, I assume, have corporations which do the actual owning and
> which provide a liability firewall. But how are taxes managed?
>
I just used the regular depreciation schedules. At the time you
actually dispose of the item, if there is any value above what
it's been depreciated to, then you have to recapture it. If it's
worth less than the depreciation taken, you just take that as a loss.

[Ron Natalie]

Matt Barrow wrote:
> "Andrew Gideon" > wrote in message
> ...
>> On Thu, 10 May 2007 16:18:34 -0700, Robert M. Gary wrote:
>>
>>> What taxable income are you trying to defer with depreciation???
>> I'm not sure that it's taxable income (which is part of my problem), but
>> I'm envisioning this asset called a "reserve account" growing over the
>> years until an overhaul is required.
>>
>
> It's not an asset, it's a pre-paid expense.
>
> The money is "spent", it just hasn't been distributed yet.

As far as taxes in a corporation is concerned, it's an asset.
It doesn't matter that it's been allocated for a particular
purpose, if it's still sitting in the bank account it ain't
spent.

[Ron Natalie]

Newps wrote:
>
>
> Andrew Gideon wrote:
>
>> Most owners, I assume, have corporations which do the actual owning and
>> which provide a liability firewall.
>
>
> Most owners do not as this provides no protection at all.

I seem to have been confused earlier. Is this for personal ownership
or are you operating a business here?

A corporation does little to help a single owner protect himself
from liability. Further all the tax stuff is void if you're not
operating it as a business (regardless of how the ownership is
held).

[Andrew Gideon]

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

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

Ah.

>> [...]
>>
>>
>>> 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".

That wouldn't surprise me at all <laugh>.

> 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.

Hmm. I thought that depreciation showed on the books as a loss even
before the depreciating asset was sold. This would have - in my
admittedly ignorant view - permitted the corporation to accumulate the
asset of the cash paid into reserves w/o showing a profit.


>
> I'm not paying into the LLC, all company revenue flows INTO the LLC and
> the LLC holds certain assets, one of which is my aircraft.

You don't pay an hourly fee into the LLC, the money from which goes into
an account that is used to pay expenses like overhaul etc.?

[...]

> If you are not using your aircraft for business, you can't depreciate
> your share of it. If you are, you can only depreciate that portion that
> you use it for business, but you must use it for business > 50% of the
> hours you use it in total.

Hmm. So if the aircraft are not used for business - which is mostly, if
not entirely, my case - then depreciation isn't possible? But isn't the
corporation renting out that asset, thereby making it the corporation's
business (even if the people using the rental aren't using this to further
their own businesses)?

- Andrew

[Robert M. Gary]

On May 10, 7:00 pm, Andrew Gideon > wrote:
> On Thu, 10 May 2007 16:18:34 -0700, Robert M. Gary wrote:
> > What taxable income are you trying to defer with depreciation???
>
> I'm not sure that it's taxable income (which is part of my problem), but
> I'm envisioning this asset called a "reserve account" growing over the
> years until an overhaul is required.
>
> - Andrew

Only the interest is taxable. Money put in by the owners to cover
expenses (now or future) shouldn't be taxable. If you owned a lunch
truck and needed to write a personal check to make payroll one month
you wouldn't tax that either.
However, depending on your state, you may owe a minimum state income
tax. In California the minimum tax for a corporation or LLC that has
an operation (i.e. airplane) in the state is $800/yr. I believe New
York and a few other states also have this "minimum franchise tax", so
watch out.

-robert

[xyzzy]

On May 10, 7:14 pm, "Matt Barrow" >
wrote:
> "Andrew Gideon" > wrote in message
>
> ...
>
>
>
> > Most owners, I assume, have corporations which do the actual owning and
> > which provide a liability firewall. But how are taxes managed?
>
> > The issue I think I'm facing is we pay money into the corporation against
> > future events like overhaul, repainting, etc. These monies add up. But
> > since this is really just a reserve that's going to be spent in a few
> > years, I'm loath to have this considered "profit" and thereby become
> > taxable.
>
> 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 (??)
>
>
>
> > The answer, I'd imagine, is to depreciate those things against which the
> > reserves are accumulating. For example, if I pay $25/hour into the bucket
> > for engine reserve, I want to depreciate the engine by $25/hour.
>
> > Can one do that? What [very!] little I know about taxes has
> > calender-based depreciation schedules. Can one have a use-based schedule?
>
> It sounds like you're trying to depreciate components, rather than the
> entire aircraft, on an hourly basis. I don't think that's a good idea. That
> takes much more work for your accountant. I can imagine doing a
> calendar-based depreciation, but not if the calendar is harder on your
> aircraft's value than useage is.
>
> > Thanks, and any suggestions, corrections, pointers, or ideas would be
> > welcome.
>
> Are you a "partner" to the corporation, or is it third party, such as a
> partnership or lease back?
>
> (My explanation here is probably NOT technically correct)
> My company (LLC) is the registered owner of my aircraft. We deduct expenses
> as incurred and take depreciation and make an entry in "Reserves" on an
> hourly basis for such things as recurring maintenance and overhaul.
>
> The LLC then "charges"me for any personal use I make of the aircraft. I then
> declare that as personal income, just as when I draw from our cash accounts
> for "personal income - cash".
>
> You can get into "trouble" if you try to expense your personal usage, so
> make DAMN sure you are really doing business and have documentation to back
> it up. This is probably (though not sure) more critical when you have
> corporate ownership.

Reading this I don't think you and the OP are talking about the same
concept. You're talking about your business (which is primarily
building homes, right?) owning an airplane for business use.

Andrew is talking about owning an airplane for personal use, but
owning it in a corporation that exists only own the plane -- as a
liability firewall. He's not trying to make airplane usage deductible
or a business xpense, he just wants to know how to account for the
money that is deposited to pay for future airplane expenses.

[Matt Barrow[_4_]]

"Andrew Gideon" > wrote in message
...
> On Thu, 10 May 2007 20:03:02 -0700, Matt Barrow wrote:
>
>> In accounting they're called a "Pre-paid Expense"
>
> Ah.
>
>>> [...]
>>>
>>>
>>>> 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".
>
> That wouldn't surprise me at all <laugh>.
>
>> 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.
>
> Hmm. I thought that depreciation showed on the books as a loss even
> before the depreciating asset was sold.

Not a loss, but a reduction in asset valuation which can therefore be
charged against income.

> This would have - in my
> admittedly ignorant view - permitted the corporation to accumulate the
> asset of the cash paid into reserves w/o showing a profit.
>
>
>>
>> I'm not paying into the LLC, all company revenue flows INTO the LLC and
>> the LLC holds certain assets, one of which is my aircraft.
>
> You don't pay an hourly fee into the LLC, the money from which goes into
> an account that is used to pay expenses like overhaul etc.?

The LLC is my company, not a specific LLC to hold/maintain the aircraft.

We have an account on our books for something like "Maintenance Reserve",
held as a liability until the time the expense is paid. For our TSIO-550C we
allocate (not pay) $26.50 an hour for a 2000 hour TBO and $34 something an
hour for various maintenance such as the annual, avionics upgrades,
inspections and even unforeseen maintenance.

>
> [...]
>
>> If you are not using your aircraft for business, you can't depreciate
>> your share of it. If you are, you can only depreciate that portion that
>> you use it for business, but you must use it for business > 50% of the
>> hours you use it in total.
>
> Hmm. So if the aircraft are not used for business - which is mostly, if
> not entirely, my case - then depreciation isn't possible?

Correct. Depreciation is a business deduction, not a personal one.

> But isn't the
> corporation renting out that asset, thereby making it the corporation's
> business (even if the people using the rental aren't using this to further
> their own businesses)?

As a shareholder, you could only take your portion of the allotment of
depreciation if your use was for business. In the (cross)eyes of the IRS,
whether you own it, or the LLC owns it, what makes all the difference is how
you USE it (business versus personal).

Personal use is not going to be deducible. In that case (personal use), it's
just a really expensive toy. Not only for depreciation (some Bonanza's
APPRECIATE in value, so you'd have to recoup any deductions for business
use) but for expenses.

When a corporate entity hold assets, you have to account for them
separately. For instance, my aircraft, certain computers we have (I have a
$5000 blueprint printer), my SUV, office furniture, etc, is on my LLC's
books. OTOH, my wife's car, my personal car, etc., are our _personal_
property and we pay for them like anyone else (i.e., out of after-tax income
to us from the LLC).

For a good explanation (i.e., laymen's terms) get the book "Rich Dad, Poor
Dad" by Robert T. Kiyosaki http://preview.tinyurl.com/25o2j8 . It
explains common issues with a eye towards self-employment and the benefits
that regular working people miss out on.

Hope that helps, but understand that I'm not an accountant, but I pay plenty
for their services :~(


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

[Matt Barrow[_4_]]

"xyzzy" > wrote in message
ups.com...
> On May 10, 7:14 pm, "Matt Barrow" >
> wrote:
>> "Andrew Gideon" > wrote in message
>> You can get into "trouble" if you try to expense your personal usage, so
>> make DAMN sure you are really doing business and have documentation to
>> back
>> it up. This is probably (though not sure) more critical when you have
>> corporate ownership.
>
> Reading this I don't think you and the OP are talking about the same
> concept. You're talking about your business (which is primarily
> building homes, right?) owning an airplane for business use.
>
> Andrew is talking about owning an airplane for personal use, but
> owning it in a corporation that exists only own the plane -- as a
> liability firewall. He's not trying to make airplane usage deductible
> or a business xpense, he just wants to know how to account for the
> money that is deposited to pay for future airplane expenses.

Well, his first issue was taking depreciation, which is why I used the
examples I did. Only later did he bring up the liability issue, which in his
case, was no protection for HIS mistakes.

In my case, I have some liability protection for my PERSONAL assets, but our
company may take a hit. In that case, I'm out of a job, but not homeless
(just homely).


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

[Matt Barrow[_4_]]

"Ron Natalie" > wrote in message
m...
> Matt Barrow wrote:
>> "Andrew Gideon" > wrote in message
>> ...
>>> On Thu, 10 May 2007 16:18:34 -0700, Robert M. Gary wrote:
>>>
>>>> What taxable income are you trying to defer with depreciation???
>>> I'm not sure that it's taxable income (which is part of my problem), but
>>> I'm envisioning this asset called a "reserve account" growing over the
>>> years until an overhaul is required.
>>>
>>
>> It's not an asset, it's a pre-paid expense.
>>
>> The money is "spent", it just hasn't been distributed yet.
>
> As far as taxes in a corporation is concerned, it's an asset.
> It doesn't matter that it's been allocated for a particular
> purpose, if it's still sitting in the bank account it ain't
> spent.

Written against a liability, rather than Earnings.

[Gig 601XL Builder]

Matt Barrow wrote:
> "Ron Natalie" > wrote in message
> m...
>> Matt Barrow wrote:
>>> "Andrew Gideon" > wrote in message
>>> ...
>>>> On Thu, 10 May 2007 16:18:34 -0700, Robert M. Gary wrote:
>>>>
>>>>> What taxable income are you trying to defer with depreciation???
>>>> I'm not sure that it's taxable income (which is part of my
>>>> problem), but I'm envisioning this asset called a "reserve
>>>> account" growing over the years until an overhaul is required.
>>>>
>>>
>>> It's not an asset, it's a pre-paid expense.
>>>
>>> The money is "spent", it just hasn't been distributed yet.
>>
>> As far as taxes in a corporation is concerned, it's an asset.
>> It doesn't matter that it's been allocated for a particular
>> purpose, if it's still sitting in the bank account it 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.

[Matt Barrow[_4_]]

"Gig 601XL Builder" <wrDOTgiaconaATsuddenlink.net> wrote in message
...
> Matt Barrow wrote:
>> "Ron Natalie" > wrote in message
>> m...
>>> Matt Barrow wrote:
>>>> "Andrew Gideon" > wrote in message
>>>> ...
>>>>> On Thu, 10 May 2007 16:18:34 -0700, Robert M. Gary wrote:
>>>>>
>>>>>> What taxable income are you trying to defer with depreciation???
>>>>> I'm not sure that it's taxable income (which is part of my
>>>>> problem), but I'm envisioning this asset called a "reserve
>>>>> account" growing over the years until an overhaul is required.
>>>>>
>>>>
>>>> It's not an asset, it's a pre-paid expense.
>>>>
>>>> The money is "spent", it just hasn't been distributed yet.
>>>
>>> As far as taxes in a corporation is concerned, it's an asset.
>>> It doesn't matter that it's been allocated for a particular
>>> purpose, if it's still sitting in the bank account it 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.

[B A R R Y]

On Fri, 11 May 2007 14:09:41 -0700, "Matt Barrow"
> wrote:
>
>That's not how a pre-paid expense works.
>


True!

An easy to understand example of a pre-paid expense is an insurance
premium. You pay for so many months and use up (account for it) one
month at a time until it's depleted.

[Robert M. Gary]

On May 11, 1:08 pm, "Gig 601XL Builder" <wrDOTgiaconaATsuddenlink.net>
wrote:
> Matt Barrow wrote:
> > "Ron Natalie" > wrote in message
> m...
> >> Matt Barrow wrote:
> >>> "Andrew Gideon" > wrote in message
> ...
> >>>> On Thu, 10 May 2007 16:18:34 -0700, Robert M. Gary wrote:
>
> >>>>> What taxable income are you trying to defer with depreciation???
> >>>> I'm not sure that it's taxable income (which is part of my
> >>>> problem), but I'm envisioning this asset called a "reserve
> >>>> account" growing over the years until an overhaul is required.
>
> >>> It's not an asset, it's a pre-paid expense.
>
> >>> The money is "spent", it just hasn't been distributed yet.
>
> >> As far as taxes in a corporation is concerned, it's an asset.
> >> It doesn't matter that it's been allocated for a particular
> >> purpose, if it's still sitting in the bank account it 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.- Hide quoted text -
>
> - Show quoted text -

Money put in the corporation to prop up the corporation is not
"earnings".

-robert

[Jay Somerset]

On Fri, 11 May 2007 14:09:41 -0700, "Matt Barrow"
> wrote:

>
> "Gig 601XL Builder" <wrDOTgiaconaATsuddenlink.net> wrote in message
> ...
> > Matt Barrow wrote:
> >> "Ron Natalie" > wrote in message
> >> m...
> >>> Matt Barrow wrote:
> >>>> "Andrew Gideon" > wrote in message
> >>>> ...
> >>>>> On Thu, 10 May 2007 16:18:34 -0700, Robert M. Gary wrote:
> >>>>>
> >>>>>> What taxable income are you trying to defer with depreciation???
> >>>>> I'm not sure that it's taxable income (which is part of my
> >>>>> problem), but I'm envisioning this asset called a "reserve
> >>>>> account" growing over the years until an overhaul is required.
> >>>>>
> >>>>
> >>>> It's not an asset, it's a pre-paid expense.
> >>>>
> >>>> The money is "spent", it just hasn't been distributed yet.
> >>>
> >>> As far as taxes in a corporation is concerned, it's an asset.
> >>> It doesn't matter that it's been allocated for a particular
> >>> purpose, if it's still sitting in the bank account it 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.
>
It's not a damn prepaid expense -- it is a sinking fund (paid in capital).
It does not become an expense (prepaid or otherwise) until money actually
flow out to some third party.

My suggestion -- go buy a book on accounting! Most of the posts in this
thread are seriously out of touch with accounting principles and/or
understanding of financial accounts!

If there is no business that can (even in theory) earn a profit, then there
is no depreciation expense and no insulation from liability through the
corporation.

Second suggestion (to the OP) -- hire an accountant and/or a tax advisor
before you dig yourself into a hole that the IRS will trip over.
--
Jay.
(remove dashes for legal email address)

[Robert M. Gary]

On May 11, 7:07 pm, "Jay Somerset" > wrote:
> On Fri, 11 May 2007 14:09:41 -0700, "Matt Barrow"
>
>
>
>
>
> > wrote:
>
> > "Gig 601XL Builder" <wrDOTgiaconaATsuddenlink.net> wrote in message
> ...
> > > Matt Barrow wrote:
> > >> "Ron Natalie" > wrote in message
> > m...
> > >>> Matt Barrow wrote:
> > >>>> "Andrew Gideon" > wrote in message
> > ...
> > >>>>> On Thu, 10 May 2007 16:18:34 -0700, Robert M. Gary wrote:
>
> > >>>>>> What taxable income are you trying to defer with depreciation???
> > >>>>> I'm not sure that it's taxable income (which is part of my
> > >>>>> problem), but I'm envisioning this asset called a "reserve
> > >>>>> account" growing over the years until an overhaul is required.
>
> > >>>> It's not an asset, it's a pre-paid expense.
>
> > >>>> The money is "spent", it just hasn't been distributed yet.
>
> > >>> As far as taxes in a corporation is concerned, it's an asset.
> > >>> It doesn't matter that it's been allocated for a particular
> > >>> purpose, if it's still sitting in the bank account it 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.
>
> It's not a damn prepaid expense -- it is a sinking fund (paid in capital).
> It does not become an expense (prepaid or otherwise) until money actually
> flow out to some third party.
>
> My suggestion -- go buy a book on accounting! Most of the posts in this
> thread are seriously out of touch with accounting principles and/or
> understanding of financial accounts!
>
> If there is no business that can (even in theory) earn a profit, then there
> is no depreciation expense and no insulation from liability through the
> corporation.

Corporations formed to hold an aircraft are incorporated specifically
as not-for-profit. Mine is a mutual benefit company, there are other
ways but for-profit would never be a good way to incorporate a holding
company. It in no way affects the liability protection. The only way
to lose the liability protection is to not treat it like a real
company (write personal checks for maintenance and not expense them
back, etc).

-Robert

[Matt Barrow[_4_]]

"Jay Somerset" > wrote in message
...
> On Fri, 11 May 2007 14:09:41 -0700, "Matt Barrow"
> > wrote:
>> >
>> > 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.
>>
> It's not a damn prepaid expense -- it is a sinking fund (paid in capital).

Pre-paid maintenance (into a reserve account) is "paid in capital"?

> It does not become an expense (prepaid or otherwise) until money actually
> flow out to some third party.

That's what I said.
>
> My suggestion -- go buy a book on accounting! Most of the posts in this
> thread are seriously out of touch with accounting principles and/or
> understanding of financial accounts!

Such as your claim of a sinking fund?

>
> If there is no business that can (even in theory) earn a profit, then
> there
> is no depreciation expense and no insulation from liability through the
> corporation.

WTF?


> Second suggestion (to the OP) -- hire an accountant and/or a tax advisor
> before you dig yourself into a hole that the IRS will trip over.


Third sugesstion to Jay: Blow it out your ass, you pompous prick.

[Ron Natalie]

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.

[Ron Natalie]

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.

[Robert M. Gary]

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)

[Matt Barrow[_4_]]

"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

[Ron Natalie]

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.

[Roger (K8RI)]

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

>
>"Andrew Gideon" > wrote in message
...
>> 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.

[Matt Barrow[_4_]]

"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.

[Ron Natalie]

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.

[Ron Natalie]

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.

[Gig 601XL Builder]

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.