renee thanks for replying and so quickly .!
id like to explain it back to you to see if a simple guy like me understands it.
1) joe’s business looks like it will show a profit of $10,000 at the end of the year. joe thinks if he buys a machine for $10,000 he can avoid paying taxes on the $10,000 profit so he does and then the government says “ haha joe , its nice that you made money and want to buy that pretty new machine for $10,000 but you made money and we want our share......but .....since we know this machine wont last forever you can deduct it from your taxes over 5 years” ($2,000 each year x 5 = $10,000) so joe had to pay tax on $8,000 the very first year.
2)scenario 2 same machine same story except in this version there was $0 profit at the end of the year .joe decides to lend the business $10,000 to purchase the machine . the money that went into business was NOT recorded as sales or income it just gets entered outside on a balance sheet . the business still records the acquisition of the new machine as an asset and at the end of the first year the same $2,000 is a deductible as a depreciating asset .
3) in scenario 2 the first year is over , the machine does well and in the second year joe makes the money back to repay himself. so joe writes a check for $10,000 to repay himself and since joe did NOT record the loan as income joe can NOT deduct the loan repayment as an expense . therefore in year 2 if joe profited exactly $10,000 and paid himself back in full his business account would say $0. but government again would step in and say “haha joe, even though your account is at zero we still want our share on $8,000 profit”
4) now ....... in example 3 here the reason why the government wants a piece of $8,000 instead of $10,000 is because in the second year joe is deducting $2,000 in depreciation off income that year as well. (plus the $2,000 credit the first year. and the $2000 the next 3 years) my issue has been that it appears i am loaning already taxed money to the business and then paying tax on it when i get it back but thats NOT AT ALL whats happening it just appears that way .
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did i get it ?
i really hope i go it cause this has been bugging me.
