Question

Jane’s Air Conditioning Service decided that this year was the year to “take over” the air conditioning business in her town. Beginning in January, she started advertising her business (even though there was snow on the ground), bought a supply of Freon, updated her vehicles and bought new uniforms for her service technicians who were making house calls. Jane comes to you to determine how to optimize her deductions in order to reduce her tax liability. What advice would you give her as to the expenditures above (assuming they all took place in the same year)? Be sure to also explain what may (or may not) be capitalized and/or deducted.

Answer 1

The advertising expenses incurred are charged to the profit and loss account and can be claimed as deductions.

The supply of Freons bought would add to the inventory and increase the current assets. Since they have not been used to generate revenue, so they are not charged as deductions instead they are shown in the balance sheet.

The transaction would be recorded as:

Debit Inventory

Credit Cash

Updating vehicles could be considered as incurring capital expenditure to ramp up fixed assets. These fixed assets can then be depreciated based on the ramped up value including the costs to update the vehicles.

The new uniforms would again be charged to P&L and shown as a marketing expense.

Thus:

The expense would be: Advertising & Uniforms

Depreciation: Cost of updating vehicles.