Restyling & Truck Accessories - February '15

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Page 45 of 48 FEBRUARY 2015 | Restyling & tRuck AccessoRies 43 the assets of the operation, the- business pays fully tax-deductible lease payments for the right to use those assets in its operation. The business is exchanging depreciable equipment or its building for bad- ly-needed capital and immediate deductions for the lease payments that it is required to make. The new owner of that equip- ment, whether the business's own- er, shareholder or, perhaps, a trust established for the benefit of the owner's children, will receive pe- riodic lease payments. With one transaction, the aftermarket ac- cessories professional has found a way to get money from the prac- tice without the double-tax bite imposed on dividends and a tax write-off as the owner of the prop- erty or equipment. Even more im- portantly, the business receives an infusion of badly needed cash. Unfortunately, under U.S. tax laws, specifically Section 469, in- come from rental real estate is generally considered "passive ac- tivity" income, regardless of the shop owner's level of involvement in managing the property. The tax rules clearly state that a taxpayer can use losses from a passive activ- ity only to offset passive activity income. In other words, passive losses cannot shelter other income such as profits, salaries, wages or portfolio income such as interest, dividend or annuity income. A loophole built into the rules states that rental realty income is not passive activity income if the property is rented for use in a trade or business in which the taxpayer materially participates. This rule prevents taxpayers with passive ac- tivity losses from artificially creat- ing passive activity income to ab- sorb the losses. The Cost Of Self-Financing With conventional financing still difficult to obtain, it is little wonder that "self-financing" is the number one form of financing used by small business owners. It's quick, doesn't require a lot of pa- perwork and is often less expensive than conventional financing. When investing in their busi- nesses, many owners overlook the cost of self-financing. The cost that every business owner using his or her funds should consider is the so-called "lost opportunity" cost. The "lost opportunity" cost is the amount that could have or might have been earned had those funds remained in savings or invested elsewhere. However, in the current topsy- turvy economic climate, doing it yourself or keeping financing within the family frequently pro- duces the fastest and best results. Unfortunately, U.S. tax laws create obstacles that must be overcome to avoid penalties and corresponding higher tax bills. The complexity of the tax rules, the requirement that all trans- actions be conducted at "arm's length," have a bona fide eco- nomic purpose rather than mere tax avoidance, and be properly structured, obviously requires pro- fessional guidance especially for any automotive aftermarket ac- cessories professional wishing to avoid paybacks and those dreaded "accuracy-related" penalties down the road.

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