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Darby C Guest
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Posted: Thu Jan 08, 2009 5:27 pm Post subject: Testing costs and tax deductability??? |
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Just wondering if testing costs could be a tax-deductible expense... and, if so, what the impact would be on tax revenue. Hmmmm. |
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J C Sprowls
Joined: 25 Mar 2006 Posts: 2004
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Posted: Thu Jan 08, 2009 5:32 pm Post subject: |
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Yes. But, not as part of regular cost of goods. It's a development cost (i.e. R&D) meaning that you have to capitalize the expense and depreciate it over time. Your CPA can help you with the details. |
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Kathleen F. Site Admin
Joined: 08 Sep 2005 Posts: 11557 Location: NM Albuquerque
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Posted: Fri Jan 09, 2009 6:59 am Post subject: |
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Darby, I know what you mean (can you take it off your taxes). It's not a tax deduction but a normal and usual business expense.
Testing is not an R/D expense unless you own a textile mill. You're not developing fabric, you're developing styles. Consider the difference:
If you send some fabric to a laundry to have it shrink tested that is a direct business expense so it doesn't make sense that if you send the same fabric to a lab for lead testing, it becomes R/D. It's R/D to whoever develops the fabric (the mill). |
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J C Sprowls
Joined: 25 Mar 2006 Posts: 2004
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Posted: Fri Jan 09, 2009 9:17 am Post subject: |
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Uh oh... it looks like the accountants are going to have a field day, meaning: it can be interpreted several ways. I see Kathleen's point. But, I have received different advice.
In any event, there is some reduction in tax liability, it's just a question mark as to whether you can write it all to this year, or if you have to carry it.
Last edited by J C Sprowls on Fri Jan 09, 2009 9:24 am; edited 1 time in total |
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1001saf Guest
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Posted: Fri Jan 09, 2009 9:19 am Post subject: |
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I guess I can see both points on this, though not sure which is true. Technically, you aren't testing the "fabric" or the raw materials, but the finished product itself since the third party testing has to be done on the finished product and not the components. I can see that as being product development. That may be different for component testing, if they are gracious enough to allow that instead of the final product testing. |
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J C Sprowls
Joined: 25 Mar 2006 Posts: 2004
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Posted: Fri Jan 09, 2009 9:27 am Post subject: |
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That may be the swing vote, saf1001. It may well depend on which process incurs the expense (e.g. product development v. production). IOW: if you need to test each unit, it may be an R&D expense which is carried over time. Whereas if you test each component before you spread it on the production table, it's a production expense that is deducted during the year the batch/lot was manufactured. |
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Kathleen F. Site Admin
Joined: 08 Sep 2005 Posts: 11557 Location: NM Albuquerque
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Posted: Fri Jan 09, 2009 11:53 am Post subject: |
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JC, you said you got this advice, can you please elaborate or find something on the web to back it up? I strongly believe this is complicating matters unnecessarily, confusing the issue and is another way that fear and reluctance is being disseminated. I should get Mike C in here, he's always had good counterpoints to a lot of the accounting questions since I believe he is a former CFO. |
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J C Sprowls
Joined: 25 Mar 2006 Posts: 2004
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Posted: Fri Jan 09, 2009 12:17 pm Post subject: |
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The advice I received was from my accounting firm: Brewer & Associates. The more I think about it, though, I don't believe they have experience with manufacturing or product development - and, that's a whole other set of problems/gaps that becomes my responsibility to manage.
I'd like to hear what Mike C has to say, too. |
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Guest
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Posted: Fri Jan 09, 2009 12:24 pm Post subject: |
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Kathleen F. wrote: |
JC, you said you got this advice, can you please elaborate or find something on the web to back it up? I strongly believe this is complicating matters unnecessarily, confusing the issue and is another way that fear and reluctance is being disseminated. I should get Mike C in here, he's always had good counterpoints to a lot of the accounting questions since I believe he is a former CFO. |
CFO is one of the few titles I've not carried.
I would expense it. If I recall, minor costs are not capitalized. I would argue that since it is each individual permutation that must be tested, the cost qualifies as minor and can be expensed. Not to mention that the income producing lifetime of each individual piece is likely to be short, which is another factor supporting an expensing rationale.
If really concerned about it, I'd run that argument by your accountant and see if he agrees. |
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Kathleen F. Site Admin
Joined: 08 Sep 2005 Posts: 11557 Location: NM Albuquerque
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Posted: Sat Jan 10, 2009 10:05 am Post subject: |
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I'm pretty sure that was Mike C posting as guest above.
Once Mr. F-I returned from his trip (department head, does our personal and the business taxes) he says that even when you have a capital expense (this testing is not) you don't *have* to depreciate the cost of it over X number of years. To simplify matters of ongoing costs of business, you can do it all in one year. I was pretty sure that was the case.
Iow, for the sake of argument, let's say JC is right in that this is a capital expense, you still do NOT have to depreciate the capital expense over a number of years as was suggested.
In sum, this is not a capital expense (R/D), none of us do that. Or very darn few of us. The only capital expenses we have is equipment -mostly.
You can deduct the cost of testing as a usual and normal cost of doing business. Iow, it's not technically a "tax deduction" but it does deduct (reduce) the total tax you pay in the same way you'd deduct the operating costs of hosting fees, fabric costs or whatever. |
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J C Sprowls
Joined: 25 Mar 2006 Posts: 2004
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Posted: Sat Jan 10, 2009 11:04 am Post subject: |
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Thank you. I'll drag out the finance textbooks and then hammer on the accountant.
Incidentally... while you have to have the money, upfront, to perform the testing, the US gov't stands to lose a lot of revenue at the close of the tax period. Talk about cutting off their own nose! |
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Guest
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Posted: Sat Jan 10, 2009 4:57 pm Post subject: |
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Yeah, J C, I was wondering about how the government will feel about the impact this legislation will have on revenue... I'd love to see a ballpark figure! |
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DarbyC Guest
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Posted: Sat Jan 10, 2009 5:07 pm Post subject: |
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oops, that was me again... I have to keep remembering to sign in before posting in this part of the forum! : ) |
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