mrichman333 Posted April 11, 2014 Report Posted April 11, 2014 So this is the client I talked about in another post about EIN's He purchased land for future use. Ok I explained to him land cannot be depreciated because it is a asset that does not wear out or get used up. They way he sees it is he write a check every month to the mortgage company so he should be able to deduct it. I tried all kinds of examples and no luck, I just get a blank stare. So how would you explain the difference between a asset and an expense to a lay person who understands nothing of accounting. I looked at different site that I could send a link to him, but they are more for professionals then lay people Quote
Jack from Ohio Posted April 11, 2014 Report Posted April 11, 2014 So this is the client I talked about in another post about EIN's He purchased land for future use. Ok I explained to him land cannot be depreciated because it is a asset that does not wear out or get used up. They way he sees it is he write a check every month to the mortgage company so he should be able to deduct it. I tried all kinds of examples and no luck, I just get a blank stare. So how would you explain the difference between a asset and an expense to a lay person who understands nothing of accounting. I looked at different site that I could send a link to him, but they are more for professionals then lay people You cannot grow something where there is no fertile soil for the seed to land on. "IRS regulations do not allow it." "If you disagree, call, write or e-mail your congressman." (chances are he has no idea what Congress means, much less who his Congressman is) Do not waste your time trying to educate the "not willing to change my mind for any reason" people. 1 Quote
JMovichEA Posted April 11, 2014 Report Posted April 11, 2014 He wants to depreciate or deduct interest? What is the property being held for? Quote
joanmcq Posted April 12, 2014 Report Posted April 12, 2014 "Plank stare". I like that, for when someone is dumb as a plank. 2 Quote
JohnH Posted April 12, 2014 Report Posted April 12, 2014 You might try explaining to him that the asset "Land" is no different than the asset "Cash". He can hold cash in more than one account at the bank, or he can hold some of his cash in the bank and some more of his cash in the form of land. So when he writes the check to pay for the land, the portion that goes to pay principal is simply being moved from one location to another. It is no different than moving cash from one account at the bank to another account at the bank. The only difference is that he can't write a check from his "land" account, and he can't easily divide, spend, or add to his "land" account in the same way he can divide, spend, or add to his "cash" account. If he can grasp that, you're well on your way to getting him to understand the other half of the transaction, in that he really doesn't own the portion of the "land" that is offset by a liability. By paying the principal down, he reduces the liability and the offsetting transaction is that his net worth increases by exactly that same amount. If you can ever get a client to understand his business and personal life as a set of flows between balance sheet accounts rather than focusing only on the P&L side and the associated taxes, you can help him become pretty good at really grasping financial concepts. 2 Quote
mrichman333 Posted April 12, 2014 Author Report Posted April 12, 2014 You might try explaining to him that the asset "Land" is no different than the asset "Cash". He can hold cash in more than one account at the bank, or he can hold some of his cash in the bank and some more of his cash in the form of land. So when he writes the check to pay for the land, the portion that goes to pay principal is simply being moved from one location to another. It is no different than moving cash from one account at the bank to another account at the bank. The only difference is that he can't write a check from his "land" account, and he can't easily divide, spend, or add to his "land" account in the same way he can divide, spend, or add to his "cash" account. If he can grasp that, you're well on your way to getting him to understand the other half of the transaction, in that he really doesn't own the portion of the "land" that is offset by a liability. By paying the principal down, he reduces the liability and the offsetting transaction is that his net worth increases by exactly that same amount. If you can ever get a client to understand his business and personal life as a set of flows between balance sheet accounts rather than focusing only on the P&L side and the associated taxes, you can help him become pretty good at really grasping financial concepts. I'm just going to give up on him. He will never understand terms like liabilities. I'm thinking of this example. A company has $100,000 in the bank earning no interest so they buy $100,000 worth of stock. Is that a $100,000 expense, if he says yes, I'll say I cannot help you 1 Quote
jklcpa Posted April 12, 2014 Report Posted April 12, 2014 I would stop trying to explain it to this client. I have one like this that will never understand. This is what I would tell him: "You won't get a deduction of any kind for that land until you sell it, and it doesn't matter if you paid for it fully by cash or financed its purchase through a loan. You will get to deduct that land at the time you sell it." 1 Quote
JMovichEA Posted April 12, 2014 Report Posted April 12, 2014 I'm just going to give up on him. He will never understand terms like liabilities. I'm thinking of this example. A company has $100,000 in the bank earning no interest so the buy $100,000 worth of stock. Is that a $100,000 expense, if he says yes, I'll say I cannot help you Yes, but if the 100,000 stock purchase was financed, he would have investment interest - deductible to the extent of investment income on form 4952 Quote
MsTabbyKats Posted April 12, 2014 Report Posted April 12, 2014 Oh this is simple. Compare it to a diamond purchased on credit. The diamond doesn't depreciate...and that kind of interest isn't deductible. Quote
kcjenkins Posted April 12, 2014 Report Posted April 12, 2014 I'm just going to give up on him. He will never understand terms like liabilities. I'm thinking of this example. A company has $100,000 in the bank earning no interest so they buy $100,000 worth of stock. Is that a $100,000 expense, if he says yes, I'll say I cannot help you Yes, as Ron White said "You can't fix stupid". http://www.youtube.com/watch?v=fL6wbsGx9qw 3 Quote
jklcpa Posted April 12, 2014 Report Posted April 12, 2014 ...and that kind of interest isn't deductible. Not true. As JmovichEA said, investment interest expense is deductible to the extent of investment income on Form 4952. And you have to test whether it may be beneficial to elect to treat cap gain income as investment income. Quote
mrichman333 Posted April 12, 2014 Author Report Posted April 12, 2014 Yes, but if the 100,000 stock purchase was financed, he would have investment interest - deductible to the extent of investment income on form 4952 Yes, but if the 100,000 stock purchase was financed, he would have investment interest - deductible to the extent of investment income on form 4952No No financing, that would confuse the heck out of him. $100,000 is in the bank Quote
mrichman333 Posted April 12, 2014 Author Report Posted April 12, 2014 Yes, as Ron White said "You can't fix stupid". http://www.youtube.com/watch?v=fL6wbsGx9qw No you cannot Quote
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