Let’s face it, as the owner of a funeral home, you’re always buying stuff. From paper clips to buildings and all things in between, you’re constantly making choices of what to buy, how much to buy, when to buy it, and who to buy it from. The variables you consider when choosing to buy stuff are many including cost, quality, need, and so on. As CPA’s, one question we’re often asked when clients are buying stuff is “If I buy this stuff, will it reduce my taxes?”
You would think that when you buy stuff for your funeral home, you could just expense it and move on. Pretty simple, right? WRONG! As you should know by now, nothing in the tax code is simple, especially those sections that deal with stuff. Why? Because there are a lot of different kinds of stuff and the stuff you’re dealing with determines its tax treatment. As a matter of fact, there are HUNDREDS of pages of IRS regulations that all deal with the tax treatment of stuff. Knowing how that stuff is treated for tax purposes can be important when choosing to purchase stuff. So let’s talk about stuff!
Merchandise inventory is the stuff that you sell to your families and generally consists of those items that you include in the merchandise section of your Statement of Goods and Services such as caskets, urns, vaults and monuments. A well-managed funeral home will track the quantity and cost of this inventory so its cost of goods sold is accurate. For tax purposes, inventory is typically expensed only when it is sold, not when it’s purchased. So if you spend $25,000 on caskets near year-end and they’re still sitting in your inventory on the last day of your tax year, you won’t get to deduct that $25,000 on your tax return. You’ll need to wait until those caskets are sold before you can write them off. There are a few exceptions to this rule, but it’s best to contact your CPA before buying inventory as a way to lower your tax bill because that plan may not work as intended.
Materials and Supplies (M&S)
M&S are those items that are used to provide services or operate your funeral home. These include office and cleaning supplies, small items for minor repairs and maintenance, as well as consumable operating supplies such as cards, embalming fluids, gloves, gels, sprays, and cosmetics. With few exceptions, most funeral homes don’t keep a physical inventory of these M&S so they are considered incidental. Incidental M&S can be expensed when purchased, even if you have some on hand at year-end. That means a large purchase of M&S near year-end is one way to accelerate expenses into the current year and reduce your tax bill. One more thing; due to their size and operating structure, some larger funeral homes may maintain an inventory of their operating supplies as part of their overall internal control system. For these larger businesses, operating M&S are considered non-incidental and therefore would not be expensed until they were actually consumed, similar to how merchandise inventory is not expensed until sold. If this is your situation, that large year-end purchase of M&S may not work to reduce your tax bill. Once again, check with your CPA before you make such a purchase.
Furniture, Fixtures and Equipment (FF&E)
In addition to the stuff you sell or consume in your funeral home, there’s an awful lot of stuff that you purchase and use over and over again. Look around your establishment and you’ll see tables, chairs, pedestals, computers, etc. Look in the garage and you’ll see vans, hearses and other vehicles. In tax jargon, this is all called “personal property”, but it’s basically stuff that you’ll use for more than a year and is not real estate, inventory or M&S. We’ll call it furniture, fixtures and equipment (FF&E) and the tax code contains various options on how to expense FF&E when it’s placed in service. Here’s a summary of those various provisions:
• De minimis rule: Historically the tax code required businesses to depreciate FF&E (i.e. you had to expense them over a period of years). However, a relatively recent change in the regulations known as the de minimis rule now allows a business to elect to immediately expense any individual item of FF&E that costs less than $2,500. For example, you spend $10,000 to purchase 200 new chairs for your viewing room. Even though the total cost exceeds $2,500, each chair cost less than $2,500 so you can expense the entire $10,000 purchase. To qualify, the invoice needs to clearly show the cost of each individual item purchased. You must also treat all qualifying purchases the same way; you can’t elect to immediately expense some qualifying purchases and not others. Finally, a de minimis election statement must be included with your annual return. The de minimis rule is pretty easy to comply with and provides a great opportunity to reduce your tax bill.
• Section 179 election: Many business owners are already familiar with this election since it has been around for a long time. By making a 179 election, a business owner can expense the purchase of almost any FF&E that is used in a trade or business up to a total of $1,020,000. Recent tax law changes also expanded qualifying property to include certain real estate type purchases which were previously disallowed such as roofs, HVAC property, fire protection and alarm, and security systems. A few important caveats: the allowable amount of Sec 179 will begin to decrease when your total qualifying property purchases exceed $2,550,000; the write off can’t create a loss for your business; and some states will not follow the federal Sec 179 rules so your state deduction could be far less. Finally, Sec 179 cannot be used for rental activities.
• Bonus depreciation: Bonus depreciation is similar to Sec 179 in that it allows for the immediate write off of FF&E. It can also be used for certain kinds of property that won’t qualify as Sec 179 property, such as paving a parking lot. A couple key differences are that, unlike Sec 179, you can create a business loss using bonus depreciation and there is no cap on the allowable deduction. An unusual aspect of bonus depreciation is that the tax code forces you to use bonus depreciation. If you don’t want to use bonus depreciation, you must elect out of using it (an “elect-out” statement needs to be included with your return) and the election applies to an entire class of assets; you can’t elect out for some assets within a class and not others. Bonus deprecation is set to begin phasing out in 2023 and will be fully phased out in 2027. Beware; few states allow bonus depreciation so you won’t get the same tax benefit on your state return.
• Depreciation: The final way to deduct the cost of FF&E is through depreciation. Under this method, you expense a portion of individual FF&E purchases over time based on methods allowed under the tax code. The write-off period and methods depend on the property being depreciated and normally span 5-7 years.
• A Word About Vehicles: For the most part, the Sec 179, bonus depreciation and regular depreciation rules explained previously also apply to vehicles. However, certain limitations could apply to specific types of vehicles based on their weight and use. If a vehicle weighs less than 6,000 lbs and is not a special purpose vehicle (such as a removal or flower van), certain depreciation limits will apply. These rules become complicated and vary with each method described above so we’ll leave it at that. Bottom line (as you probably guessed it) is to talk to your CPA before buying a vehicle that might not provide you the tax savings you were hoping.
As you can see, there are a lot of tax rules on how to write off stuff. (Heck, we never even got into the rules applicable to real estate; we’ll save that for another article!) But an important rule to remember is that purchasing stuff should not be tax driven; it should always be a business decision. Never buy stuff you don’t really need. Every purchase should be something that will increase your top line, help you become more cost efficient, or maintain your current profits. We’ve had funeral home clients ask us if they should buy a new hearse to save on taxes. Our answer is normally another question: Do you really need it? Sure, buying a hearse will reduce your taxes. But even if you’re in the top tax bracket, unnecessarily buying a hearse will mean you’re spending $1 in order to save 37¢; you’re still losing 63¢. Also, it sometimes makes sense to limit deductions now while preserving others for the future when you’ll be in a higher tax bracket. Rarely should tax planning be based on a single year.
Few people like to pay taxes, but the reality is that income tax is a cost of doing business, just like insurance and utilities. Similar to other business expenses, you can employ strategies to minimize your taxes and one way is to wisely manage what stuff you buy, when you buy it, and how to expense it on your tax return. So be smart and contact your CPA before you buy stuff. FBA
This article is meant to provide general information and should not be construed as legal or tax advice or opinion and is not a substitute advice of counsel, CPAs or other professionals.
Raymond L. Bald, CPA, CFE is a funeral home tax accountant and consultant with Cummings, Lamont & McNamee, PLLC. He can be reached by phone at 603-772-3460, or you may email him at [email protected]
Ronald H. Cooper, CPA is a funeral home accountant and consultant with Ronald Cooper, CPA, PLLC. He can be reached by phone at 603-671-8007, or you may email him at [email protected]