East Bay Business Daily

What is better to pay taxes on, income, inventory or buy assets?

If I had $10,000 in income at the end of a year, which would be wiser to do. (1) Purchase more inventory and if so, would I have to pay taxes on that? (2) Pay taxes on the income. (3) Purchase assets? This is based on a company in Florida which buys and resales merchandise that is shipped mostly out of state.

Public Comments

1. Purchasing more inventory would not reduce your taxes. You can only deduct the cost of items that you actually sold during the year. If you purchase assets, you can depreciate them, thereby reducing your taxable income from the business. However, you have to depreciate it over the asset's useful life, so you would not recoup the cost of the asset in the year purchased unless you were to elect to fully depreciate it in the year of purchase under Section 179.
2. If you purchase an asset worth $10,000 used in your business you most likely will be able to expense it (Section 179) and avoid paying income tax on that amount. There are a few exceptions, see IRS Pub 946. Purchase of inventory for resale will have no effect on your taxes, in other words, you still have to pay taxes on the income you used to purchase inventory.
3. The previous posters are both correct. Buying inventory only increases the assets on your balance sheet, it's not a cost of goods sold until you sell the inventory item. So, you should think about purchasing some new assets (computer, furniture, equipment) or prepay some expenses by 12/31/06 (rent, utilities, etc.).......assuming that your business is on a cash basis.