[pianotech] Quick Quickbooks Question

[tnrwim at aol.com]

Frank

You are correct. All I was trying to do is make it a very simple mathematical example. I realize that there are lot's of other variables involved. But trying to explain all of those variables, would be like trying to explain the physics of what's involved in a pitch raise, when all the customers needs to know is the end result, and how much it's going to cost. 

Wim









-----Original Message-----
From: George F Emerson <pianoguru at cox.net>
To: pianotech <pianotech at ptg.org>
Sent: Thu, Feb 24, 2011 12:07 pm
Subject: Re: [pianotech] Quick Quickbooks Question


Wim B Wrote:
>If you brought in, lets say, $50,000, last year, and you bought $1000 worth of parts, then you are taxed on $49,000. 
 
Not exactly.  I suppose it could work that way if you never bought a replacement part until you had a customer ready to buy it, but that would mean that if you found a bridle strap that needed to be replaced, you would have to order the part and come back a week or so later to install it.  I don't think any of us do business that way.
 
If you purchase parts in advance of the need to have them available for immediate use, such purchases cannot be written off as an expense.  It increases the company's inventory of replacement parts, and is therefore a company asset.  At the end of the year, you may well pay income tax on income that was not realized as cash income, but as an increase value of inventory assets.
 
If a company derives any income from sales, the IRS will need to see a beginning inventory (the same as last year's ending inventory), plus inventory purchases made during the tax year, minus the year's ending inventory.  The difference is the cost of goods sold, which is what is deductible as an expense for that year.  It might be that the cost of goods sold turns out to be less than expenditures on inventory purchases, in which case, you have an indirect profit from an increased value of inventory goods.  On the other hand, the cost of goods sold might turn out to be greater than expenditures for replacement parts, in which case, you have depleted inventory accumulated in previous years, and reduced the value of the end of year inventory.  It's not like you are paying tax on parts you bought to eventually sell to customers.  Whether you care to look at it that way or not, the IRS views it as income, whether it is cash income or an increase in the value of company assets.
 
Frank Emerson

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