Most people who have financial statements prepared for them don’t realize that regular accounting for your business is different that accounting for taxes.
One of the main differences is Section 179. Normally, when a business purchases a major item such as equipment, vehicles, furniture and fixtures and the like, the business can only depreciate it over it’s useful life (see coming article about GAAP Depreciation) but, in tax accounting the government allows you to write off the entire amount even if you didn’t pay off the financing of the item.
So for example, if you bought a piece of equipment for 10,000.00 and it’s being depreciated over 5 years, that’s 2,000.00 per year you can show on your P&L. Assuming you financed it and are paying for it over 3 years you may have actually paid 3,333.34 in any particular year but for taxes you can write off the entire 10,000.00 in that year.
How much you can write off varies from year to year as tax laws change.