ChApter 6 | YOUR PROFIT AND LOSS FORECAST | 117
CAUTiON
You can’t write in the entire loan
payment amount on your Profit and Loss
Forecast, because the IRS does not consider
principal repayments fixed expenses that can
reduce your taxable income.TiP
Note of sanity: You don’t need to
be perfect in forecasting your interest costs.
Just make your best informed guess. You can
also check with your banker, CPA, realtor, or
bookstore for loan repayment tables. Make
sure the sum of your interest payments here
and the principal payments from Chapter 7
equal the total loan payment.4h. Depreciation. Depreciation is a gift to
the businessperson from Uncle Sam. Ask
not what your country can do for you—
this is it. Depreciation is an amount
you can subtract from your profits
when you pay taxes. It compensates
you for the fact that your business
equipment and buildings are wearing
out. The government allows you to
assume that your fixed assets wear out
over some period of years, meaning
that for tax purposes, your assets are
worth less at the end of that period.
Your depreciation allowance simply lets
you show a percentage of this wear as
an expense on your tax return each
year. In a sense, it is a sinking fund for
equipment replacement, or would be if
you put the depreciation amount in the
bank. In actuality, the stuff usually lastslonger than your depreciation shows,
which is why depreciation can be seen
as a friendly federal gesture.
Often, equipment is depreciated over
three to five years and buildings over
15 to 30 years for tax purposes. It’s not
your choice, however; the IRS publishes
very explicit rules and lists of what can
be depreciated and how fast. These lists
and rules change frequently, so you’ll
probably need to check with your tax
advisor about depreciation and fixed
assets.
You can depreciate all fixed assets that
last longer than one year. Remember,
you don’t show the purchase price
as an expense on the Profit and Loss
Statement if you depreciate an item.
If the asset will last less than one year,
you simply show the entire purchase
price in the expense column for the year
you bought the equipment and do not
depreciate it. Inventory of goods available
for resale and consumable supplies are
examples of purchases that are expensed
immediately because they last less than
one year.exAmple:
Chuck Leong expects to spend $20,000
for fixed assets to open his business.
Items include a new toilet, several new
walls, a cash register, a small computer,
and store fixtures. Assuming Chuck’s
accountant agrees that five years is the
proper time frame to use for deprecia-
tion, he can take $333 as an expense for
depreciation each month ($20,000 ÷ 60
months).