Simple beginner tax and business questions

[Davidl]

Is writing off an expense or capital expense deducting from the profit to lower taxes? When a person writes off gas mileage, office space, office supplies, business trips do they at receive a portion or all of the money back when filing taxes or does it deduct from profits and lowers the amount of taxes you have to pay.

When you have a registered business do you have to pay sales tax on materials Ex. Furniture company buying lumber from the processing plant. Also does this apply to equipment like table saws, ladders, and down to small things like nails.

Same as the question above but in regards to shipping costs, accounting fees, ect can these be deducted:confused:

What are some ways a company can save money when it comes down to taxes? Its a broad question but if there are things I can research about or look into that would help also.

[Paul]

Expenses are simply deducted from gross profit. Then the net profit is what you pay taxes on. But don’t confuse operating expenses with capital expenditures or capital improvements such as equipment or building improvements. Those are handled differently by deducting “depreciation” from the profits, basically a portion of the cost each year.

It can be a little tricky in manufacturing. Raw materials that are used to produce finished goods such as lumber may be considered “unfinished goods” which is actually inventory. When it is used and converted to finished goods the finished goods become the inventory. In either case inventory is considered the same as cash and does not get deducted until it is sold and deducted as cost of goods. As an example, if the company makes $ 100,000 in profits and spends that on new inventory or materials it is still profit and not deductable. It can get complicated. A few dozen nails and a few pieces of lumber may be an expense BUT a truckload of either may be inventory.

You don’t pay sales tax on materials used to produce goods or inventory for resale. I don’t know every state’s tax regs so there may be some state ‘added value” taxes, but I’ve never seen any.

Yes, professional fees such as accountants and attorney and consulting fees are deductable. So are shipping and freight expenses.

There are ways to save on taxes but they will be particular to your situation. Leasing as opposed to buying equipment, a mortgage expense vs. rent, corporate structure, all need to be considered. An accountant can help you much better than I did, especially with the particulars of your business, but I hope it helped a little.

[Davidl]

Thank you.

When it is used and converted to finished goods the finished goods become the inventory. In either case inventory is considered the same as cash and does not get deducted until it is sold and deducted as cost of goods. As an example, if the company makes $ 100,000 in profits and spends that on new inventory or materials it is still profit and not deductable. It can get complicated. A few dozen nails and a few pieces of lumber may be an expense BUT a truckload of either may be inventory.



So if a furniture company sells 50,000 dollars worth of inventory, the cost of the material gets deducted as a cost of good? If a 200 dollar chair is sold and it cost 30 dollars of material, you would deduct 30 dollars per chair (does this also count employee hours, cost of running the business?)

anything that is an expense is deducted. gas, office space, machinery (overtime), factory space(?) inventory(after its sold), employee hours(?), business trips, shipping and freight, accountant and attorney fees?
Do you pay sales tax on machinery?

[Paul]

So if a furniture company sells 50,000 dollars worth of inventory, the cost of the material gets deducted as a cost of good? If a 200 dollar chair is sold and it cost 30 dollars of material, you would deduct 30 dollars per chair

Basically yes, but not exactly. . The $ 30 in lumber would be deducted from your unfinished goods or materials inventory and added to your finished goods inventory. Simple enough when there is just one material but it gets complicated if there are multiple components. As an example a sofa may use lumber, fabric, springs and cushions so you would deduct from several materials categories and add to one finished category.

Now, for your own purposes you would know that the chair cost you $ 30 in material BUT end of year financial statements would show it in “bulk” form, not broken down per piece. So if you made 1000 chairs then $ 30,000 would be the cost of material, deducted from the unfinished goods and added to finished goods. Then as the chairs are sold it would be deducted from finished goods. Again, easy with one material but a bit more complicated with multiple components.
This is usually figured out at the end of the year or period. It’s often verified by taking a physical inventory. The ending inventory is deducted from the starting inventory and any additional purchased inventory to determine the actual inventory used.

2. (does this also count employee hours, cost of running the business?

Similar for this. For your own purposes you will know it costs $ 50 in labor to build a chair. But again, end of the year financial statements will show the total labor costs, not broken down by piece. This is a payroll expense. For your own purpose it’s a cost of goods, but to be honest I don’t remember the accounting protocol, it may just be overhead. In either case it means the same for determining overall profits. Maybe an accountant on this board can answer better.

anything that is an expense is deducted. gas, office space, machinery (overtime), factory space(?) inventory(after its sold), employee hours(?), business trips, shipping and freight, accountant and attorney fees?
Do you pay sales tax on machinery?

All other expenses are considered G&A (general and administrative). Payroll, rent, gas, utilities, travel etc. Machinery, if purchased is a capital expenditure and is expensed by depreciation over time. Machinery that is leased or rented is an expense. You don’t pay sales tax on machinery for your business.

Again, I’m not an accountant and it’s been awhile since I was involved with manufacturing financial statements so definitely check with an accountant on all this.

I assume you are a furniture manufacturer. I was involved with the furniture business for many years.

[Davidl]

Thanks for your help I appreciate it.

I used furniture just as an example. Im learning the trade of leather crafting and I'm interested also in most things hand made like wood working.

[tallen]

You don’t pay sales tax on machinery for your business.

You will want to check your state laws -- at least in Maine anything your business buys that would otherwise be taxable and is not going to be resold or incorporated into goods that will be resold, for example the tools and machinery, the business must pay taxes on.

[Paul]

Thanks for your help I appreciate it.

I used furniture just as an example. Im learning the trade of leather crafting and I'm interested also in most things hand made like wood working.

If your business is small handcrafting you probably don't need to be so concerned with the unfinished goods inventory. If your buying small batches of leather and decorative buckles or other little parts as needed you probably can just book them all as supplies. It's when the on hand inventory has a significant value at the end of the year that you have to deal with what I was talking about.

There are other bits and tricks that an accountant would know. Some of it is subjective or arbitrary. As example a truck load of hides may have a market value, that is you could readily sell them as a commodity product BUT if you bought custom cut peices to your own specs, that inventory may NOT have a market value because there would not be a market until it was converted into a finished product. Accountants know the guidlines on those things.

It only gets complicated at the end of the year if there is material inventory at that time. If you've used all the materials to make finished goods its pretty simple. Even simpler if you've used all your materials to make products and sold all the products you made.

If its a bigger profitable operation an important consideration is that you have enough cash on hand to pay the taxes. Inventory IS the same as cash for tax purposes BUT you can't pay your taxes with inventory.