# How do you handle taxes for profits invested back into business?



## Bulent (Feb 24, 2009)

What do you guys do for taxes on business profits that are reinvested back into your business? Do you claim that reinvested profit as a business expense deduction, or do you pay taxes on the profit, even if you do reinvest it into the business?

I have just started my business and I haven't gotten through a tax year yet, so I'm curious as to how this works.


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## Liberty (Jul 18, 2006)

It depends on how your business is structured, Sole Prop vs Corp, and what you are "reinvesting" in. If you buy equipment, then you can depreciate and likely take a section 179 where you write off the cost in one year. If you are buying supplies, then they are usually included in your ordinary expenses. If you are putting inventory on the shelf, then that is treated as inventory, shows on the balance sheet and is not deductable until it is used. If you are a C corp, then it may be held as "retained earnings" and the corporation pays corp taxes but you'd pay no income taxes. 

Really, you need to know these answers before you invest. Tax savings can be a huge funding mechanism when getting a business going. 

It is the type of question best left to the professionals. A good accountant can save you more than enough to make it worth the fees.


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## hostingdiva (Mar 31, 2006)

A lot of stuff is considered ordinary expenses so it really depends on what you're doing with your money. Can you give us some specifics?


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## Bulent (Feb 24, 2009)

Well, I haven't put any money back into the business yet, but I plan on using profit to order more shirts, have them printed, and to buy more shipping supplies. 
Also, I'm a sole proprietorship.


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## Girlzndollz (Oct 3, 2007)

Bulent said:


> What do you guys do for taxes on business profits that are reinvested back into your business? Do you claim that reinvested profit as a business expense deduction, or do you pay taxes on the profit, even if you do reinvest it into the business?
> 
> I have just started my business and I haven't gotten through a tax year yet, so I'm curious as to how this works.



Most people here have accountants that take care of this for them.  That is the very best place for you to start. Find a local accountant who is also familiar any local taxes you might also owe. 

This investment may seem big, considering one's financial circumstances, but errors in this area can quickly become much more costly than the accountant's fee.

If you go Google basic business accounting, or accounting principals, you will find some good solid information on the basics of how accounting works. 

Then call a local accountant and establish a relationship!! 

Even if it's only for a few years, while you watch over his or her shoulder, and get an idea of what goes on. 

They go to school for a reason, and learned alot while they were there. 

PS: I'm not sure I fully understand your question, because generally, money spent is not considered profit. If it is spent as a business cost, it is a cost. Please see the following, from Google:

http://en.wikipedia.org/wiki/Profit_(accounting)

In the accounting sense of the term, *net profit* (before tax) is the sales of the firm *less* costs such as wages, rent, fuel, raw materials, interest on loans and depreciation.


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## Girlzndollz (Oct 3, 2007)

Bulent said:


> Well, I haven't put any money back into the business yet, but I plan on using profit to order more shirts, have them printed, and to buy more shipping supplies.
> Also, I'm a sole proprietorship.


I hope the above link helps you. I would *strongly* suggest a Business Accounting class at a local community college. They are designed and intended for new business owners, looking to stay on the right side of the balance sheet. 

Also, consider contacting your local Small Business Development Center. If you google their name, you will find a tool called "Locate your local SBDC" in the menu options. They are a fabulous resource who will also help you learn how to do this. Best wishes.


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## Bulent (Feb 24, 2009)

> In the accounting sense of the term, *net profit* (before tax) is the sales of the firm *less* costs such as wages, rent, fuel, raw materials, interest on loans and depreciation.


I completely forgot about what net profit was. I think that answers most of my question. Thanks, Kelly. I'll also look into an accounting class at my community college.


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