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  • Tax question for a small business California

    I have a friend that buy cars that need to be completely restored and then he sales them.
    So the question is, if he pays $1,000 for a car and puts $10,000 into it and sales it for $15,000 he should only have to pay $5,000 on the profit he made right?

    Also if he pays $10,000 in parts and the parts sit in his garage for 6 months, it's still an expense until the part is sold right?

    The CPA he is using is telling him different and he is paying allot in taxes, when I believe he only needs to pay on the profit that he is making.

  • #2
    It it is as you say, then you are correct. However, two points. One: "puts into it" would include only items that he purchased and paid for. His labor is part of his taxable income. Documentation is the key. He must have receipts and a way of showing what he paid for parts and what vehicle each part went into. Any parts that he scavenged or came about in some other way would not be a deductible expense to him. My guess would be that the lack of documentation would be what a CPA would be concerned with.
    Last edited by Scott67; 05-01-2010, 03:27 PM.
    Please post questions on the forum rather than sending me a private message or email. That way others who have similar issues have access to the discussion.

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    • #3
      Originally posted by Aaron J View Post
      Also if he pays $10,000 in parts and the parts sit in his garage for 6 months, it's still an expense until the part is sold right?
      Unsold parts would be inventory. The cost of the parts is not a deductible expense until the parts are sold (either incorporated into a restored car or individually) or until they are physically discarded. Until then, they are an asset.
      David K. Staub (www.illinoisbusinessattorney.com)
      Forum posts are not legal advice, are for informational and educational purposes only, and are not a substitute for proper consultation with legal counsel.

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      • #4
        Also, on the first question, if the car cost $1K, and $10K in parts are actually put into the car, and the car is sold for $15K, then the profit is actually $4K ($15K-$1K-$10K), not $5K.
        "Reality is that which, when you stop believing in it, doesn't go away".
        Philip K. **** (1928-1982)

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