Originally Posted by Steve
I think this is a very important concept that is not widely understood. Could you tell us a little about what that means? How does that help the average lawn care business owner?
Also for the new lawn care business owner what is equipment depreciation?
As always it is best to contact an accountant in your area who knows your Provincial or State tax rules, here is a general explanation that would fit pretty much anywhere in North America, quite often you will read in a financial statement they were prepared with generally accepted accounting principals, again generally speaking.
Our governments basically set the tax rules at the Feredat level then the province or state will piggy back onto that rule, for example if the Federal Government here were to tax you at 20% on profits, in Nova Scotia the Provincial Government would tax you on the amount owing to the Federal Government, this is your total business tax.
When we buy a piece of equipment, generally speaking one can write off any amounts $500.00 or less at 100% in the year they were purchased anything above that it is generally accepted that a piece of equipment has a life of five years (not to be confused with how many years you can get out of that piece), thus you can reduce your business income by 20% of the purchase price, less any tax you paid until the full value is NIL, this same rule is used by most companies that trade on the exchanges.
Every company has a balance sheet, this lists amoung other things Capital assets and owners contributions. In year one the purchase price less sales tax is shown at the full value of the item until the company year end at which time you depreciate and record depreciation, we consider it a non cash journal entry if you will however it reduces your company income and thus the taxable income, if you record a loss you can carry it forward to future years profits.
I don't want to get complicated but tax losses are sometimes sold to companies that have very large profits, when I worked in gold exploration we had no income, we were funded by shareholders and new shareholders, our tax loss(s) were in the millions per year, we could sell these to for example a mining company that had large profits, not a 100% but at a %.
In our case if we had tax loss(s) and I am not sure what the rules are in the USA, it is considered an asset and the purchasing company would pay an amount for those loss's as they can apply them towards profits.
So in summary the reason for all this is it's required book keeping and should you ever go for financing, if it is not present it could show that one is not keeping proper accounting records.