Bloomberg and Johnson, LLP
Jim enters Max Bloomberg’s office.
Jim: Hi, Max. Did you give a thought about my proposition? Can we recognize the expense this year?
Max: Jim, I was thinking about it. And even though it is unlikely that IRS will sanction you, I don’t think it is a good idea to manipulate the returns like this. First of all, if the IRS does finds out about the timing, not only they will prosecute your company, but it will also affect the reputation of my company.
Max: I have a better idea.
Jim: I’m all ears.
Max: We follow the tax law and do not recognize the expense this year as it should be. You also pay the $100,000 that you will owe on your returns….
Jim (angrily): But I will not be able to pay the repairs costs then!
Max: I have a question to you – how is your relationship with the hotel chain?
Jim: Well, we are in pretty good standing, despite the fact that they are desperately waiting for the generators to be fixed as soon as possible.
Max: I will need you to do some negotiations with them. Here is your proposition to them: they will pay for the repairs that are costing you $250,000. Instead they will deduct this amount from the money they owe you. And to give them a little incentive, you can tell them to deduct a little more than $250,000, so they would owe let’s say $450,000.
Jim: But I will lose then $50,000 on this deal.
Max: No, you won’t. First of all, consider this $50,000 as interest that you would’ve paid if you have taken out the loan. Second, this additional money will be counted as an expense next year, which will reduce your tax liability next year. So, it’s win-win for both you and the hotel chain.
Jim after pausing for a minute: I agree! I will talk to my hotel client tomorrow. Thanks for helping me out!
Jim left the room seemingly happier.