Uncle Sam spoils dream trip to space

[Cancel 2016.2]

Lady T... you could not be more wrong on this. Tell me where I am wrong....

IF I have $100k in revenue and my marketing expense is $100k for this promotional giveaway.... how is my effective tax rate the same as if I only claimed the promotional expense as $10k. In the first, I pay taxes on $0 of earned income. In the latter I pay taxes on $90k. I would say that makes it a pretty big difference in taxes paid.

 

[Damocles]

You two are getting caught up in language and catch frases like deduction without understanding the P&L mechanics.

A deduction is not the same as a tax credit. A deduction in this case would only serve to mirror actual earnings depending on the type of accounting they practice. Some companies are on accrual accounting others are on a cash basis.

If they booked his flight on the revenue side and incurred the expenses, on their cash-in and cash out not reflect the loss. They are being allowed to deduct the lost revenue or revenue not receieved from their bottom line. Their earnings are still going to be taxed at the same rate no matter how its stated.

Sorry you two are dead a$$ed wrong on this one. It won't make a difference unless they've funny accounting going on.

You are however right SF about uncle sam and FV though.

Methinks you are assuming that I am wrong because of the actual value. However because they give the ticket away they have a larger deduction to the cost. They are allowed to deduct the sales value of the ticket, which is larger than the wholesale value of the same. They get a net larger tax deduction because they are able to deduct against the "value" rather than the "cost" of the item. Therefore contests are not only popular because people "win" but because of the "actual value" deductions allowed under the current rules.

Therefore companies who give away prizes as advertising are allowed to deduct more becuase of the value of the prize, IF the prize has to do with their actual business.

A bank giving away a ticket to Bermuda cannot deduct that cost, therefore they get another company who can to "give" them the ticket that they give away. Promotional "expense" can be a net winner for taxation purposes. It isn't zero-sum here any more than shelters are.

 

[LadyT]

Lady T... you could not be more wrong on this. Tell me where I am wrong....

IF I have $100k in revenue and my marketing expense is $100k for this promotional giveaway.... how is my effective tax rate the same as if I only claimed the promotional expense as $10k. In the first, I pay taxes on $0 of earned income. In the latter I pay taxes on $90k. I would say that makes it a pretty big difference in taxes paid.

Lets say your line of business is taxed at 35%. That is 35% of net earnings.
If you bring in 100 and spend $100 you're tax liability is 0 or 35% of zero.

If you're expenses are $10K you're earnings for that time period is 90K. You're tax liability will be 35% of 90K. That is same effective tax rate from the example above. From my understanding if the promotional expense involves T&E, you may have to add back a portion of the expensed item. However if its normal business as usual ops your expenses you definitely can the full amount of the expense. In the case we are talking about from what I've read it would seem that his trip would fall under BAU.

Depending on what type of accounting they are bound to if they had to accrue his flight as revenue, they'd still incur the cost of the trip, then they would be able to deduct the revenue from net income in determining taxes. If they operate on cash basis accounting they would record no revenue, and incur the cost and the net income is going to be the same at which they would be taxed on say 35%.

 

[Damocles]

Let's say they were only able to deduct the actual cost to them, they would have only a 75K deduction for giving away a ticket. However because of the "actual cost" rules they are able to deduct 187K or whatever they would have sold the ticket for rather than what it actually costs them. Therefore they make a net increase in tax savings because of the current rules regardless of actual income.

The income doesn't change, but the tax deduction is larger than their actual outlay and therefore is a net savings rather than a zero-sum.

 

[LadyT]

They are allowed to deduct the sales value of the ticket, which is larger than the wholesale value of the same. They get a net larger tax deduction because they are able to deduct against the "value" rather than the "cost" of the item. Therefore contests are not only popular because people "win" but because of the "actual value" deductions allowed under the current rules.

Well, it was my understanding that you can only deduct the cost associated with as stated in the example you posted. Not the "sales value". If you can show me otherwise, I'll stand corrected. I've been in finance for quite some time now and I've never seen anyone deduct the price of something. Its always you're cost.