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176. Does an Installment Sale Defer the Tax on Recapture of Accelerated Depreciation? No. Can the Tax on Recapture of Accelerated Depreciation Nevertheless Be Deferred When an Installment Sale Occurs? Yes.
162. Transfer a Family Business to the Next Generation During the Parent's Lifetime, Retain an Asset for Income, Give the Transferee a Stepped-up Basis, Defer the Gain on Sale, Support the Parent with Deductible Rent, and Finance the Transaction, Too
May 5, 2010
The situation: I have two questions which relate to creativity. The first pertains to my business. Because of changes in the industry in which I do business, I need to re-evaluate the business model for my company. So far, every time I try to do that I come up with the same things I’ve always done, and they’re not working all that well. How can I break out of that mold and do some really fresh thinking?
My second question pertains to your business. You regularly discuss taxes, and quite often you have creative ideas for minimizing taxes. This strikes me as an anomaly; taxes seem to me to be at the far end of the spectrum from creativity. How can taxes, which are so very rules based, have anything in common with creativity? (Of course, I want to minimize my tax burden, just as about everyone else does, so I can cope with anomalies if necessary!)—Business Owner
Editor's Comment: You are right to begin with your business model, because a business model can either cause or prevent success—or it can cause success at one time and then prevent that same success when conditions change. As you have discovered, your business model can get moldy.
Anyway, out of many possibilities, I’ll suggest a few that may help you begin to think in a fresh way.
1. Use your right brain, or borrow one.
Creativity comes more from the right side of your brain than from the left side. The left side is more linear. It thinks from point A to point B to point C. The right side, on the other hand, may omit A, B or C, or may re-arrange them. The right side tends toward bold ideas and bold action, such as sliding down the banister instead of walking down the stairs. The left side, being linear, tends to build on known information and to follow it to a logical conclusion. The right side, being somewhat improvisational, may start with a conclusion and ask the left side, "Why not?"
At least in my own experience, creativity has almost always begun with a "why not" sort of question, and the left side of my brain is then given the task of building a structure accordingly, sometimes working from the answer backward to the underlying point of beginning, the point at which I am looking for a solution.
If you tend to be more left-brain oriented, and the right side of your brain is dormant or weak, find someone who is your opposite. Begin a series of conversations with that person about your situation. It may even be better if that person doesn’t know beans about your business or how it works, because that person’s role is to come up with questions for you to consider, that you might have never considered because they’re so off the wall.
2. Use your left brain, or borrow one.
If, on the other hand, it’s your left brain that is the under-nourished side, engage in the same sort of conversations with someone who is your opposite: someone who can build a coherent structure for those ideas which attract you but you can’t see how to implement them.
3. Get over a dismissive attitude about your counterpart.
Strongly left-brained people tend to think right-brained people don’t know anything worthwhile in the areas that count (e.g., mathematics, logic, engineering, accounting, many areas of the law, company policies, government bureaucracies, organizational imperatives). Strongly right-brained people tend to think left-brained people don’t know anything worthwhile in the areas that count (e.g., beauty, art, expression or understanding of feelings, intuition, inter-personal relations). Get over it, because, in my experience, at least, creativity comes from extended and on-going interchange between someone who is strongly left-brained and someone who is strongly right-brained. Whichever you are, you aren’t better. You need the other.
4. Reason from principles, not from particular details.
Even left-brained people such as me can do this. Creativity can blossom when it is given a wide horizon, and that means it should start with principles before it addresses a particular problem. What is the reason why I have this business? What do I want to achieve with it? What will make me feel good about myself with this business, and what won’t? Just as philosophers seek (at least, should seek) truth, goodness and beauty, what is true about my business? What is its goodness? Where does it, or can it, achieve beauty?
Be prepared for surprises as you examine such questions. You may decide that you don’t like some aspects of your business, even if they seem to be quite successful.
5. Use categorical reasoning.
Here I turn to taxes, to illustrate my meaning. I am not using "categorical reasoning" in the pejorative sense of being closed in one’s thinking. What I mean here is that very often the problems one encounters are problems of category: a category that is wrongly chosen, or chosen simply by habit, or chosen simply because of the name you have attached to what you do. If we assign a problem to category "x" and it really would fit better in category "y", we are likely to use entirely the wrong approach and get entirely the wrong outcome.
Taxes are almost entirely questions of category. Is this revenue ordinary income, or is it capital gain? Is this activity a business, or is it a hobby? Is this business selling this property as a dealer or as an investor? Is this asset an item of supplies, or an item of inventory? Is this transaction a sale, or is it a loan, or is it a lease? The tax result will depend on the category to which the thing is assigned, and, surprisingly enough, you may have a considerable degree of flexibility in choosing the category, because you can choose how you do what you do.
This does not at all justify fakery or calling something what it isn’t. Often, however, you can choose to do something the way that it has always been done, in category "x", but you also have the freedom to do the thing in quite a different way and therefore be in category "y". If you like the outcome of category "y" better, then look for a way to structure what you do accordingly.
The categories are givens. What you do is not.—Stan Crow
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The Latest Installment addresses situations, questions and issues which are brought to us in the course of the consideration, negotiation or execution of transactions. We don't use the real names of parties to transactions, and we may edit the statement of the question to try to tell the story better. Please feel free to comment, or to take issue, or to raise your own question or situation. If you do the latter, please do not relate any confidential information.
The Latest Installment blog is edited by Stanley D. Crow, who is president of S.Crow Collateral Corp.