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Thread: Equipment purchases in a lean year?

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    Full Member Intothedeepbluesea's Avatar
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    Equipment purchases in a lean year?

    If you have a lean year as a sole prop, maybe almost operating at a loss etc, is it adviseable to not submit on your SARS return equipment purchases done during that tax year?

    In that the purchases are going to have no effect reducing the tax owing as there is very little or no taxable profit and no tax will be owing with or without the deduction for equipment purchases. If I don't claim for the purchased equipment the equipment will belong to me per say in that if it is disposed of at a later date I will recoup the money myself and not need to submit a recoupment income to Sars.

    Is this a done thing, any draw backs to doing it, is there anything I'm not seeing?

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    Diamond Member Justloadit's Avatar
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    You can carry a loss from one year into the next year, so effectively no change to the profitability of the company.
    Victor - Knowledge is a blessing or a curse, your current circumstances make you decide!
    Solar and LED lighting solutions - www.microsolve.co.za

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    Full Member Intothedeepbluesea's Avatar
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    How do you carry a loss forward?

    I'm probably not going to make a loss but I will be well below the tax threshold and no tax will be owing, so I'm still wondering if it's wise to claim for equipment when it's not going to facilitate reducing my tax burden which is the main reason you'd want to claim for expenditure incurred on equipment. Or are there other things to consider that make it attractive in the long term to claim for the expenditure now even though it offers no immediate financial benefit?

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    Full Member Intothedeepbluesea's Avatar
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    Anyone have any other views to add to this scenario?

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    Diamond Member Justloadit's Avatar
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    When a balance sheet is written up, it has the previous years figures and the current years figure. For the company to have made a loss, the 'loss' must be carried in a form or another, such as personal loan to the company, or a bank loan from an institution, but it is an expense to the company, which is carried over to the next year. For a company to make a profit, it must first meet is financial commitments, and one of them is to cover for the loss of the previous year which must come from profits. So repaying the loss, reduces your profit for that year, and there for reduces the amount of tax paid.

    Just remember for the company to run at a loss, it must be financially supported by a loan or other asset or collateral, or it can cause a major problem with directors or members under the reckless trading law.
    Victor - Knowledge is a blessing or a curse, your current circumstances make you decide!
    Solar and LED lighting solutions - www.microsolve.co.za

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    Full Member Intothedeepbluesea's Avatar
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    Thanks Justloadit, that makes perfect sense, always wondered how a loss was carried forward but I can see how the loan carrying the loss would push the loss into the next year.

    How does that work out for a sole prop where the loss is just coming directly out of my pocket?

    And my original question of if i should claim for business equipment if it won't help reduce my tax burden. Essentially as it stands I won't be running at a loss but my final tax profit, even without claiming for the equipment purchases, will be well below the lowest tax bracket so essentially I will owe zero tax and claiming for the equipment will be pointless. As I see it it would be better to retain ownership over the equipment myself(ie not owe recoupment to SARS if the equipment is sold at a later date)?

    Does thinking sound right?

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    Diamond Member Justloadit's Avatar
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    I am not sure what your personal financial status , and it is not my concern, as this is a private matter.
    I get very uncomfortable in a sole prop, or even having shares in a business under my own name. Just too many things can go wrong, where you can lose everything if something goes wrong way beyond your control.

    Depending on your financial status, this is where a trust comes in to protect you and your assets against a loss beyond your control. I recently had a situation that I was not aware off, until a sheriff of the court pitched up at my premises to attach my 'assets' for an outstanding court order which I was not aware off. Fortunately I was able to send the sheriff away as there was no assets in the company name. It did not mean that I must not pay, but it did give me control of the situation, in which I was able to make arrangements under my control to pay this court order. Had I not had all the assets in a trust, I would not have been able to trade for a few days, which would have placed me in a worse predicament in which I could not deliver product, and would not have been paid by my debtors.

    Use the forum search function "Trusts", there's a lot of invaluable information in a number of threads concerning trusts
    Victor - Knowledge is a blessing or a curse, your current circumstances make you decide!
    Solar and LED lighting solutions - www.microsolve.co.za

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    Hi Intothedeepbluesea, your original question is really interesting. Sole proprietor's tax returns and taxation is quite difficult to properly to account for. I will try to explain:

    1. Ideally you should have books for your business. Not only the income and expenses, also the assets and liabilities. The balance sheet (assets and liabilities) does not normally balance, either the assets exceed the liabilities, or vice versa. The net between the two represents the owners interest or capital.

    2. The tax return comprises two sections also, the income statement and then you are required to submit a statement of assets and liabilities. If you look at that statement of assets and liabilities, it is already categorised. However, the categories are meant for you, the taxpayer, not your business. There is one single category, "Net capital of business, profession or farming". In that slot you insert the net referred to in 1 above.

    3. The accounting principles of assets and expenses are universal to anybody or anything. Equipment purchases are not an expense and they do not decrease profit or increase loss. Those assets are depreciated over their useful lives and that depreciation is recognised as an expense which consequently reduces your profit or increases your loss.

    4. To withhold expenditure on equipment is actually not a choice and can have significant repercussions in later years, especially if you have an audit, which most sole props do anyway.

    5. A loss incurred by a sole prop is automatically carried forward to the next year on assessment. So it actually makes no sense whatsoever to "carry the expenditure over because you are already in a loss". If you do, and you charge the expense next year only, you are overstating your expenses for that year; understating it for the previous year is not really recognised as an excuse. It is really a non event to delay accounting for it, because although you may or may not be consciously carrying your loss forward, it is done so by SARS on your assessment.

    6. The purpose of the statement of assets and liabilities is purely to see whether the growth in your net worth is justified by the income you declare. Understating the assets implies that you are manipulating the numbers to lend credence to understated income and only invites undue scrutiny.

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    My comments relate to equipment used to generate income. On re-reading your post it seems you may be referring to equipment in which you trade, in other words trading stock?

    If that is the case, the expense is only recognised when you sell it, because until you do so it is an asset (stock on hand) which is only recognised as a cost of sale when sold.

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    Full Member Intothedeepbluesea's Avatar
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    Equipment purchases in a lean year?

    You guys I think are getting the wrong end of the stick, if my taxable income after all allowable deductions is well below the tax bracket(think it's R67k these days) then is it worth claiming the deductions for business equipment (equipment used to generate income) purchased during that year (equipment that will be expensed because it's below R7k)?

    Because if that equipment is later sold, when I upgrade to newer equipment, I will have have to submit the recovered funds as recoupment income. If I do not claim for the expensed equipment as a tax deduction when they are sold I will the see the benefit of the income. I am in a business where the equipment is upgraded quite regularly.

    As it stands now claiming for the expensed equipment as a deduction this year will give me no tax benefit and potentially when that equipment is sold I may be taxed on that income as recoupment. The plan is to theoretically buy the equipment in my personal capacity, which is perfectly legal and the equipment will be added to the value of my personal assets. When I sell the equipment at upgrade time the income will be of a personal nature and at a loss considering the purchase price so not taxable. I will not be trying to claim a tax deduction for the purchase of the equipment in the next tax year or at any later date.

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