Let’s say that you have narrowed the purchase of your business desk to either an antique or a regular desk. Each desk sells for $5,000. Which desk gives you the best business result? Is the difference worth thinking about?
First, you should know that some relatively recent appeals court decisions allow you to depreciate and expense the desk, regardless of its antique status. Thus, you can deduct the $5,000, antique or not, but that’s where the similarity ends.
There can be a huge difference in financial results at the time of resale.
For example, in 10 years, the antique desk might increase in value to $15,000, whereas the regular desk could decline in value to $500. But to see the true financial results, you need to look at the after-tax numbers.
Let’s say you are in the 35% income tax bracket and the 15% capital gain bracket at the time of sale. On the $15,000 proceeds from the sale of the antique desk, your federal taxes would be
- $1,500 on the $10,000 capital gain part of the profits ($15,000 selling price minus $5,000 original basis times 15%);
- $1,750 on the $5,000 of depreciation recapture ($5,000 depreciated in full, taxed at the ordinary income tax rate of 35%).
After taxes, you pocket $11,750 on this sale of your antique desk ($15,000 minus $1,500 minus $1,750).
On the sale of your regular desk, you pocket only $325 after taxes ($500 sales proceeds minus $175 in recapture taxes).
The antique desk gives you 36 times more cash ($11,750 compared with $325). Imagine an entire office full of antiques!
Tax knowledge says to you:
If you can buy an antique car, clock, rug, desk, cabinet, bookcase, paperweight, conference table, chair, umbrella stand, coatrack, library table, or other asset that will function just as well as a new purchase, take the antique!
W. Murray Bradford, CPA
Tax Reduction Letter