20 



The Florists^ Review 



Februabt 23, 1922 



corporate. Under the old law he would 

 be taxed on such gain at the time of 

 incorporating the business. Under the 

 new law he is not taxed on such gain, 

 provided he becomes owner of at least 

 eighty per cent of the stock in the cor- 

 poration. 



Net Losses. 



The revenue act of 1921 has some- 

 what simplified the rule in regard to net 

 losses. In view of recent business con- 

 ditions, this rule may be of interest to 

 some readers, particularly seedsmen. 



When the revenue act of 1918 was be- 

 ing drafted, just after the armistice 

 was signed, it was thought that serious 

 losses would probably occur when prices 

 dropped from war-time to peace-time 

 levels. Congress expected such decline 

 to occur in the year 1919. Therefore, a 

 rule was established that a net loss in 

 the year 1919 might be applied against 

 a profit in the year 1918 and the tax at 

 the 1918 rates might be redetermined 

 on the basis of the net income of the 

 2-year period. Any overpayment of 

 tax was to be remitted or credited to 

 the taxpayer. It was further provided 

 that if the loss of 1919 exceeded the 

 gain of 1918, the difference could be 

 applied against the income of the year 

 1920. No provision, however, was made 

 regarding losses sustained in 1920. 



The new revenue act provides that a 

 taxpayer may apply the amount of his 

 business losses in 1921 against business 

 gains in 1922 and will be subject to tax 

 only on the net income in the 2-year 

 period. If the 1922 gain is less than 

 the 1921 income, the difference may be 

 figured to apply against the income in 

 1923. The general rule is that a tax- 

 payer has two years to make up an in- 

 come for a loss sustained. But he cannot 

 apply 1921 losses against 1924 gains. 



The taxpayer in this instance may be 

 an individual engaged in business, a 

 corporation or an association taxed as 

 a corporation. 



The net loss mentioned means a loss 

 which results from the conduct of any 

 trade or business regularly carried on 

 by the taxpayer, including losses sus- 

 tained from the sale or other disposi- 

 tion of real estate, machinery or other 

 capital assets used in the conduct of 

 such trade or business. 



Organization Dues. 



A florist may deduct as a business ex- 

 pense the fees or dues paid l)y him, pro- 

 vided he is engaged in business on his 

 own account, to organizations in which 

 membership is a means of advancing 

 his business interests. Thus, the annual 

 dues paid by a florist to the Society of 

 American Florists, the Florists' Tele- 

 graph Delivery Association, the Na- 

 tional Flower Growers' Association or 

 any of the other organizations in the 

 trade which are engaged in the promo- 

 tion of the trade's interests, may be de- 

 ducted as a business expense. Expenses 

 incident to attending meetings of such 

 organizations, if one is a member, are 

 fully deductible from gross income. 



In this connection it might be men- 

 tioned that the new law has eliminated 

 the problem regarding deductibility of 

 traveling expenses by allowing as a re- 

 duction from gross income the entire 

 amount of one's traveling expenses, in- 

 cluding whatever is spent for meals and 

 lodging, when away from home on busi- 

 ness. If a taxpayer's automobile is used 

 for making business calls, that propor- 

 tion of the upkeep and expenses occa- 



sioned by such use is deductible from 

 gross income. 



Bad Debts. 



A decision approved last December by 

 the Secretary of the Treasury changes 

 the previous practice in regard to de- 

 ductions for bad debts in two particu- 

 lars; first, by recognizing a reserve for 

 bad debts, and second, by allowing a 

 debt to be charged off in part. The rev- 

 enue act of 1921 states that there shall 

 be allowed as a deduction "debts as- 

 certained to be worthless and charged 

 off within the taxable year (or, in the 

 discretion of the commissioner of inter- 

 nal revenue, a reasonable addition to a 

 reserve for bad debts) ; and, when satis- 

 fied that a debt is recoverable only in 

 part, the commissioner may allow such 

 debt to be charged off in part." Under 

 this provision bad debts may be treated 

 in either of two ways: First, by a de- 

 duction from income in respect to the 

 debts ascertained to be worthless in 

 whole or in part; or, second, by a deduc- 

 tion from income of an addition to a 

 reserve for bad debts. For the year 

 1921 taxpayers may, regardless of their 

 previous practices, choose either of these 

 two methods, but they will be required 

 to continue in later years the use of the 

 method chosen unless permission to 

 change is granted by the commissioner 

 of internal revenue. 



A debt may be charged off and de- 

 ducted in part when it is clearly proved 

 that it is recoverable only in part, and 

 it is no longer necessary that a debt be 

 wholly and entirely worthless before 

 any part of it may be deducted. 



The bureau of internal revenue recog- 

 nizes that where all the attendant cir- 

 cumstances indicate that a debt is un- 

 collectible and that legal action to re- 

 cover payment would probably not re- 

 sult in the satisfaction of execution on 

 a judgment, a showing of these facts 

 will be sufficient evidence of the worth- 

 lessncss of the debt for the purpose of 

 deduction. Bankruptcy, according to 

 the bureau's view, is not necessarily 

 an indication of the worthlessness of a 

 debt; a taxpayer, therefore, will not be 

 allowed to deduct a debt, when bank- 

 ruptcy proceedings have been instituted, 

 until the receiver in bankruptcy has 

 been discharged and the final payment 

 made on account of outstanding obliga- 

 tions. 



In case a creditor continues to extend 

 credit to a debtor, the debt of the latter 

 may not be claimed to be worthless. 



The income tax return must show 

 some evidence of the manner in which 

 the wortlilessness of a debt was ascer- 

 tained; that is, it should state that the 

 debtor was discharged in bankruptcy or 

 disappeared leaving no property or that 

 the ordinary methods of collections have 

 been exhausted, or similar facts. 



Decrease in Value of Assets. 



In view of the interest in this trade 

 regarding deductions for a decrease in 

 value of capital assets, some explana- 

 tion of the terms used by the internnl 

 revenue regulations as applied in differ- 

 ent circumstances will be useful. 



The term, "amortization," is not 

 used in the banker's sense, but is ap- 

 plied by the bureau of internal revenue 

 only to the writing off of the value of 

 buildings and equipment acquired for 

 the production of articles contributing 

 to the prosecution of the recent war. 

 "Obsolescence" is the term by which is 

 indicated the decrease of value of prop- 



erty because of advance in art or science 

 or changes in the drift of population. 

 A simple instance of this would be a 

 machine which is superseded by a newly 

 invented device and therefore markedly 

 lessened in value. The term, "loss of 

 useful value," is applied in the case of 

 distillers, brewers and saloon keepers 

 because their stock in trade was sud- 

 denly rendered legally unsalable and 

 therefore suffers loss in value by the 

 Eighteenth amendment. ' ' Shrinkage ' ' 

 is a term that properly relates to adjust- 

 ment made by banks and trust compa- 

 nies. Depletion corresponds somewhat 

 to depreciation, with this distinction — 

 that depletion relates solely to the im- 

 pairment of natural resources, as in the 

 case of gas and oil wells, coal mines and 

 the like. 



Depreciation. 



Depreciation, the term which interests 

 florists, is distinct from all other forms 

 of decrease in value such as have been 

 mentioned above. Depreciation, in the 

 income tax sense, is the measure in 

 dollars and cents of the deterioration 

 of property due to the lapse of time and 

 ordinary physical wear and tear. There- 

 fore, depreciation is a charge which 

 should be made at a regular annual rate, 

 based upon the estimated life of the as- 

 set involved. The bureau of internal 

 revenue fixes no rate of depreciation, 

 although it recognizes certain percent- 

 ages as generally accurate for some sort 

 of structures. Depreciation on a con- 

 crete building, for instance, is estimated 

 at one and one-half per cent; on a brick 

 building, at two and one-half per cent, 

 and on a frame building, at four per cent. 

 These figures are only approximate, for 

 it is only natural that a concrete build- 

 ing which is shaken by the constant 

 operation of heavy machinery has not 

 so long a life as a concrete structure 

 that serves only as an office building or 

 warehouse. The bureau uses only the 

 words "a reasonable allowance to de- 

 fine the rate of depreciation." These 

 words are explained in the tax regula- 

 tions thus: "The proper allowance for 

 such depreciation of any property used 

 in the trade or business is that amount 

 which should be set aside for the taxa- 

 ble year in accordance with a consistent 

 j)lan by which the aggregate of such 

 jimounts for the useful life of the prop- 

 erty in the business will suffice, with 

 the salvage value at the end of such 

 useful life, to provide in place of the 

 property its cost, or its value as of 

 March 1, 1913, if acquired by the tax- 

 payer before that date." 



Figuring Fair Estimate. 



If the florist will divide 100 per cent 

 by the number of years he can reason- 

 ably expect his houses to last, he will 

 iirrive at the proper percentages to de- 

 duct each year. Suppose a florist built 

 two greenhouses last year at a cost of 

 .$20,000 and he estimates that they will 

 last twenty years; then he will charge 

 off $1,000 per year as depreciation, or 

 five per cent. If he estimates that they 

 will last only sixteen years, he charges 

 off $1,250, or six and one-fourth per 

 cent. If he believes they will last twen- 

 ty-five years, he charges off only $800, 

 or four per cent. 



It is reasonable to suppose that the 

 florist will still be paying an income 

 tax sixteen or twenty or twenty-five 

 years from now, and in the event that 

 the greenhouses are still in operation 

 after the period of years in which 100 



