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Accounting: Being Conservative vs. Paying Taxes 1 Views
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Transcript
- 00:00
Accounting Allah shmoop being conservative versus paying taxes Okay people
- 00:08
here's the word of the day and Morte Ization What
- 00:12
is it And why does it need to take up
- 00:13
valuable Breen space All right let's take a step back
- 00:16
for a sec Who will wait smaller Step back First
Full Transcript
- 00:20
of all understand that there is a tug of war
- 00:22
between being conservative I'ii being aggressive in depreciating cost Such
- 00:27
that the company shows lower earnings and paying taxes Okay
- 00:31
What's Almost as if you pay a penalty for showing
- 00:35
that your mohr profitable rather than less profitable Right That
- 00:39
penalty arrives with shmoop axes If you are the drinking
- 00:45
straw extrusion company suck it and you buy four million
- 00:50
pounds of plastic for eight million box two bucks a
- 00:52
pound there Well you have some choices in the way
- 00:55
that you view that expense The conservative hard core gap
- 00:59
method would be to write down a large part of
- 01:01
that eight million dollars that inventory asset the day you
- 01:05
receive it largely reflecting the will of the basic reality
- 01:08
or fact that there's very little liquid demand for multi
- 01:12
million dollar pound blocks of plastic S O Maybe you
- 01:17
hate eight million dollars for this very raw material but
- 01:20
the day you get it well may be it's only
- 01:21
worth two million dollars because in real life if you
- 01:24
had to suddenly sell all that plastic there well there
- 01:27
ain't many takers on eBay Maybe two million is even
- 01:30
too high a number Well say you suddenly take a
- 01:33
six million dollar loss on plastic inventory Well for a
- 01:37
company which had saying twenty two million dollars in pre
- 01:40
tax profits all of a sudden instead of twenty two
- 01:43
million box on which they pay a thirty percent tax
- 01:45
to the government The new taxable profit base is on
- 01:49
ly sixteen million and basically the tax bill if you
- 01:52
ignore the plastic entirely Well it just went from six
- 01:55
point six million in taxes Toe four point eight million
- 01:58
So you are notionally serve a tive from a gap
- 02:02
perspective But you just withheld from the government one point
- 02:06
eight million dollars in taxes at least for now So
- 02:09
now in all likelihood you'll eventually sell those blocks of
- 02:12
plastic in extruded drinking straws Ah fourteen months in the
- 02:16
future Twenty eight months in the future sometime in the
- 02:19
future And then you will show more profits than you
- 02:22
would have had you waited well ten years ago Like
- 02:25
straight line Immer ties the expenses of that plastic at
- 02:28
eight hundred grand a year Something like that Well in
- 02:31
most contracts not all four million pounds would have been
- 02:34
delivered immediately or well Would have had some kind of
- 02:37
return policy attached to it But had you bought that
- 02:40
plastic block on the spot market maybe not like you
- 02:44
bought it right What would have happened had you taken
- 02:47
the opposite approach that is You just took eight hundred
- 02:50
thousand dollars a year for ten years in a straight
- 02:54
line reduction or depreciation of its value As you used
- 02:58
up that plastic Radha ble at about ten percent a
- 03:01
year on twenty two million dollars of Pretext profit you
- 03:04
subtract eight hundred thousand dollars a year in Year one
- 03:07
And by the way this is twenty two million of
- 03:09
pre tax and pre inventory profits there Yeah and you'd
- 03:12
show twenty one point two million dollars of pretax profit
- 03:16
there which is then taxable of thirty percent So you'd
- 03:18
pay six point three million dollars in change in taxes
- 03:22
right So if you end up working in a manufacturing
- 03:25
company it's likely you'll have tons of choices like this
- 03:28
All kinds of products which get depreciated and or contracts
- 03:32
which get advertised away to being worthless for which you
- 03:35
can choose to be aggressive in the way you account
- 03:38
for them or expense them heavily writing them down aggressively
- 03:41
in value or doing just the opposite Well why would
- 03:44
you want to show more profits early rather than less
- 03:48
Well some kind of sleazy accountants know that a sale
- 03:52
might be near term in the offing here meaning a
- 03:55
sale of the company and they want company toe look
- 03:58
more profitable than it really is But it is highly
- 04:01
likely that the other side Cam's took this excellent shmoop
- 04:04
accounting course and aren't fooled so well Why else might
- 04:07
an accountant and honest one choose toe frontload profitability rather
- 04:11
than push off profits away into the future thinking thinking
- 04:15
Well what if the company had lost two hundred twelve
- 04:19
million dollars over the last six years And what if
- 04:22
it had net operating loss Or in a wells that
- 04:25
had been carried forward and which were expiring Like you
- 04:28
only have seven years in some cases to use up
- 04:32
net operating loss carry forward tax chits So now you
- 04:36
wisely ask uh the tax structure of the US generally
- 04:40
wants to encourage corporations to spend money especially on capital
- 04:44
equipment and research and development in technology and things that
- 04:48
employ people Why Well because putting people to work gets
- 04:52
politicians elected It makes the country more competitive relative to
- 04:56
other nations and it just looks cool The politicos you
- 04:59
know have a lot going on So one of the
- 05:00
ways the government encourages the spending is to allow companies
- 05:04
for years and sometimes decades to take previous losses and
- 05:09
deduct them against future gains So let's say you raised
- 05:13
a bunch of money from investors a decade ago and
- 05:15
started building your straw business You had to build the
- 05:18
melter of mayhem the Extrude er of access and the
- 05:22
fabulous resplendent whiz bang stripe painter thing Yeah and in
- 05:26
that process you burned two hundred twelve million dollars But
- 05:28
now suck It is starting to get profitable this year
- 05:31
The company has twenty one point two million dollars in
- 05:33
pre tax profits if it uses straight line depreciation of
- 05:36
its plastic inventory But what if you wanted to go
- 05:40
the opposite direction and show his much profit as you
- 05:43
can Could you not even take the eight hundred grand
- 05:46
and expense on the plastic you used in making straws
- 05:49
Well there probably is in fact a scenario where you
- 05:52
legally could What if you already had a ton of
- 05:55
plastic and you only bought this eight million dollars worth
- 05:58
for overflow like excess emergency Plastic Fund and you were
- 06:02
using a Fife O or first in first out accounting
- 06:05
method Or what if this eight million dollars was a
- 06:08
different type of plastic and just hold on for a
- 06:11
different type of straw Yeah well then you could probably
- 06:14
just leave it as is and appreciate zero dollars of
- 06:17
inventory this year and more to the point than the
- 06:19
legal extreme edge particulars Why would you want to do
- 06:22
this Like why would you actively seek to show Mohr
- 06:26
profits than you would notionally be vent act upon answer
- 06:30
because n a Wells or these IT net operating losses
- 06:33
expire in most cases Net operating loss carry forwards for
- 06:37
tax purposes only Lasted seven eight nine ten years or
- 06:40
so sometimes less And your company has twenty five million
- 06:43
ish dollars worth of n A wells that expire this
- 06:46
year That is when you spent your total two hundred
- 06:49
twelve million dollars plus you didn't spend it all in
- 06:51
one year You had losses for over a decade in
- 06:54
building this great little company and about six years ago
- 06:57
while you lost twenty five million dollars which will expire
- 07:00
as a loss that you can take or carry forward
- 07:03
because it has a maximum cap of seven years before
- 07:06
it's just well goes away as a tax deduction You
- 07:08
Khun take meaning that tax chit or tax deduction will
- 07:12
expire if you don't use it In other words suck
- 07:14
it must use this loss or lose it So it's
- 07:18
Wiley accountants will want toe optimize every penny of tax
- 07:22
shelter they can So what does that look like Financially
- 07:25
Well the company was able to ignore the eight million
- 07:27
dollars of purchased plastic entirely so it shows twenty two
- 07:31
million dollars in pre tax profits It had twenty five
- 07:34
million in Anna Welles to attribute to those profits or
- 07:37
go against them So it's tax Bill zero Well maybe
- 07:41
there are some filing fees or small nuggets of tax
- 07:43
costs here in there and certainly paying the accountants is
- 07:46
attacks cost but on the twenty two million dollars your
- 07:48
pre tax profits while the company keeps all of it
- 07:51
Welcome to America Quite a country and note at the
- 07:54
end of this year Suck It will still have a
- 07:57
remaining hundred eighty seven million dollars in an oil wells
- 08:01
with twenty nine million expiring next year and we're just
- 08:05
guessing here But there's no particular formula in this case
- 08:08
You have to get the basic idea that Anna Welles
- 08:11
do expire And if companies have profits that can go
- 08:13
against them They pay no tax So in this case
- 08:16
these six million bucks and change the company would have
- 08:19
paid in taxes Will they get to keep all that
- 08:21
money It's pretty nice and also note that the company
- 08:24
couldn't use up all of its Anna Welles right That
- 08:27
is three million dollars that had twenty five million It
- 08:30
could only use twenty two million Three million While that
- 08:32
went unused it expired and is now vapor Well what
- 08:36
could the company have done instead Well maybe with good
- 08:38
planning a year or two or three Earlier if they
- 08:41
knew their tax losses were going to expire maybe they
- 08:44
could have bought a company that had a bunch of
- 08:46
taxable profits where they're gonna wells you know could then
- 08:50
be deployed as a quote tax hedge unquote for a
- 08:53
buffer against the taxes the company would otherwise have to
- 08:56
pay And they could have done that Maybe at the
- 08:58
end of the day though no matter what companies do
- 09:00
to try to be clever Well the tax man will 00:09:03.306 --> [endTime] always come up so that's it
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