I’ve seen mention of classifying purchases as a business expense, and im not certain how it works. what benefit is it to have something be a business expense, and what are the actual qualifications for something counting as one? (I am in the us but it would be interesting to see how this works in other countries as well)
In: 5
Let’s say you and I both own roadside lemonade stands. I spend 50 cents to make 20 cups of lemonade and sell them for 25 cents each. You spend $4 to make 20 cups of chocolate milk and sell them for 25 cents each.
This means we had the same revenue ($5), but I had a much higher profit of $4 than your $1 because my costs were lower.
Now imagine that taxes are based purely on income and ignore costs. Tax man comes around and takes 20% of our revenue. We each have a tax bill of $1 (20% of our $5 revenue). This turns my profit from $4 to $3 and changes yours from $1 to $0.
That seems pretty unfair because you spent more money to make the same revenue. That’s where business expenses come in. A business expense reduces how much money you’re taxed on. Let’s look at the situation again with the same 20% tax rate, but with business expenses considered.
We both claim the cost of our materials as business expenses, which effectively means we’re taxed on proft instead of revenue. I had $4 of profit, so I pay 80 cents in taxes. You had $1 of profit, so you pay 20 cents in taxes, which seems a little more fair.
Latest Answers