Lawn care business tax tips.

I want to say first off, I am not an accountant nor are any of the forum members who took part in this discussion. We are business owners, sharing with you some of our insight. If something here piques your curiousity, please bring the topic up with your accountant to learn more about it.

As tax time is near and everyone is scrambling to get their taxes done a member of the Gopher Lawn Care Business Forum asked a couple of questions on lawn care equipment depreciation and carrying a loss forward into your next year.

He wrote “how important is equipment depreciation and how do you calculate it? As an example how would I calculate the depreciation of my lawn tractor? It is about 1 year old.¬†I don’t know how this factors into the books.”

Another lawn care business owner responded “when we buy a piece of lawn care equipment, generally speaking we can write off any amounts $500.00 or less at 100% in the year they were purchased. On 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 of use you can get out of that piece of equipment). Thus you can reduce your business income by 20% of the purchase price, less any tax you paid until the full value is NIL.

Every company has a balance sheet, this lists among 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.”

What does that mean to the average lawn care business owner?

“Basically you are required by law to keep proper records and accounting. If you are ever subjected to an audit, you need to have everything in order so when an auditor sees your records are in good order they don’t have to dig. If you hand them a box of paperwork, that is another story. The same holds true should you decide to sell your company. Your records should always be in good order.”

Can you help me with an example to better explain it?

Say my lawn care business just started up and I spent $15,000 in expenses for marketing or other things I needed to get going. But I only made $10,000 in income, I lost $5,000 my first year. How does having a loss help me in the future years?

Say my lawn care business just started up and I spent $15,000 in expenses for marketing or other things I needed to get going. But I only made $10,000 in income and lost $5,000 in my first year. How does having a loss help me in the future years?

“It depends. If you spent $15,000 to get started, how much was spent on equipment or was it a capital asset over $1,000? If it was all under the $1,000 limit and other money was spent on marketing then you would have a $5,000 loss in the first year. Let’s say in the second year you made $20,000 and your expenses were $10,000 that gives you a $10,000 profit less your previous years loss of $5,000 so your taxable income is $5,000. You have to check with your accountant because there are limits to how far forward you can carry a loss.

Using the above example you made $20,000 but spent $25,000 in operational costs, then your carry forward tax loss for year three is $10,000.”

Does the 5 year depreciation term cover mowers, vehicles and trailers?

“Depreciation is any capital item, this includes among other things all vehicles and equipment over $1,000.”

With all this discussion on depreciation and all, do you have any thoughts on when it is better to buy vs. lease equipment. Or lease and then buy at the end of the lease?

“Personally I do not like leasing. I think it is good for a new company that can not obtain credit however you really take a beating on the payout at the end of the lease.”

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