Labradoodleductions
Labradoodleductions
Assets etc
Assets etc
Print Full ArticleLast Reviewed: Feb 2011
Last Modified: Feb 2011
It is very important for any business owner to have a good understanding of the difference between assets, expenses, and inventory. The three are treated very differently for tax purposes and should be tracked separately.
Expenses are the day-to-day costs of operating a business. Dog food, vaccinations, office supplies, business phone calls, etc. are examples of expenses. Deductible expenses will be different for each business, so the tax code simply states that "reasonable and ordinary" expenses may be deducted. If the expense has a reasonable chance of helping you generate more income, it is generally deductible. Lavish or extravagant expenses, or those that are completely unrelated to the function of the business, are not deductible.
Items purchased for business use which are expected to last more than one year are considered assets. Breeding dogs, carrier crates, office equipment, and whelping boxes are examples. These items are listed individually on the business tax return and are depreciated rather than expensed (see Depreciation section for more detail). One pitfall to be aware of is that assets become depreciable when placed in service - this means that buying an immature breeding dog at the end of the year will not generate a tax benefit until the following year when the dog reaches breeding age. A dog does not necessarily need to be a breeder to be considered an asset, however. Guard dogs, companion dogs, and surrogate mothers (insert obligatory "my step-mom is such a bitch" joke here) are all assets.
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Items purchased or produced for sale are considered inventory. In the case of a dog breeder, this would include the puppies as well as supplies (collars, etc.) intended to be sold with the puppies. The puppies have no cost basis, as all the costs of producing them are deducted as operating expenses. Collars, bedding, and other items purchased for resale, however, should be tracked separately and deducted when sold, *not* when purchased. This is why you frequently see end-of-year "inventory clearance" sales. The easiest way to track inventory is to simply track the purchases throughout the year and perform an inventory count at year-end. The difference between what you started with (last year's end count), what you purchased, and what you end up with is the cost of what went out the door. This is known as the Cost of Goods Sold and is deducted against the income.
