During the day to day running of your company you may from time to time purchase equipment for use during the course of business. This may be as simple as lap top you need to run the business or in fact more specialist equipment such as a printing press. This blog post will identify and explain the two separate impacts that such a purchase will have on both company profits and the calculation of the company’s corporation tax bill. The two effects are very different and this is something that is often overlooked and assumed to be the same.
Aside from the cash needed to purchase a piece of equipment for your business the impact on both tax and profit needs to be considered. The impact on the company’s profit and loss statement is unlikely to reflect the full amount of the equipment purchased. This is because of the effects of depreciation. Depreciation is an accountancy technique or transaction that allocates the cost of the equipment across the useful life of the equipment. This means that if the equipment is expected to be used during the course of business for five years, then the actual cost reflected within the company’s profit and loss account would be 1/5 multiplied by the cost of the equipment. The depreciation impact is very different to the tax impact.
As you can see within the paragraph above, the impact on profit or loss is affected by depreciation which allocates the cost of equipment across a number of years. This is a different treatment to that used when calculating corporation tax. When calculating how much corporation tax is due for a period, a company is able to use what are called capital allowances. For the sake of simplification, this article assumes that the expenditure on equipment falls within the capital allowance threshold. Capital allowances permit a company to recognise the full cost of the equipment purchase against company profits within the year of acquisition. This means that the tax treatment is very different to the treatment of the expense within the company profit and loss account.
It’s important that companies get this calculation right so as not to under claim their respective tax deduction against corporation tax. This poses a further problem for accountants to deal with since reported profit within the company accounts will be different to that used within the corporation tax computation. The difference here is dealt with by recognising deferred taxation. An adjustment for deferred taxation is made to recognise the timing difference of utilising the full cost of equipment in year one for tax reasons and then attributing the cost of equipment over a number of years when calculating reportable profits. The adjustment effectively adjusts both outcomes to create a like for like comparison.
All of what has been discussed above can be quite technical in nature and business owners may well rely upon the assistance of an accountant for this reason alone. A cheap accountant can certainly help you with your company taxes and www.WaveApps.com is a great option for helping your accountant manage your accounting entries.