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Comment by nickff | Hacker News Reader

If you sell the inventory at a loss, you can 'write off' the 'lost value', which reduces your profits on paper in that fiscal year (and the corresponding taxes), but you did already pay taxes on holding that inventory.

These taxes reduce the amount of money you can spend on capital equipment, inventories, and facilities, which reduces your maximum rate of growth.

All of these are the reasons that software businesses are so heavily advantaged by the tax code. They don't have to pay taxes on (much) capital equipment or inventories, and the smaller facilities are also beneficial from a tax perspective.

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>These taxes reduce the amount of money you can spend on capital equipment, inventories, and facilities, which reduces your maximum rate of growth.

I mean, yes, but not really. They're not a meaningful portion of their revenues. Typically it's around 1% of the acquisition cost of the item inclusive of any fees required to get it in your inventory. This is akin to complaining about paying BWC taxes which are about 1% of your payroll. If they're a real hardship to your business, your business has more problems than holding excess inventory.

I’m not sure where you’re getting your “1%” from, but corporations are liable for full income tax (21% in the USA), on the (depreciated) increase in the value of their assets.

The original start of this thread by jxramos was referring to how inventory was taxed. "curious, who's taxing for inventory?" You responded:

>Corporations are taxed on assets that they accrue (increases in total holdings are taxed as 'profit'). This applies to inventories, capital assets, and real estate.

and

>you did already pay taxes on holding that inventory.

Inventories are taxed as property which is, in general, about 1% of the cost (to the company) of the item.

You're conflating income and property taxes. What your describing in your previous posts is an income tax, which is the tax paid on the net income associated with an asset. However, you have to dispose of the asset to pay that tax. Until then the asset is property and it's only subject to property tax.

Normal accounting disclaimer applies. Definitely get an accountant and don't take accounting advice from the internet.

>"Inventories are taxed as property which is, in general, about 1% of the cost (to the company) of the item."

Most jurisdictions don't have the asset taxes you're describing. Some do, in which case inventories cost extra to hold each and every year.

>"You're conflating income and property taxes. What your describing in your previous posts is an income tax, which is the tax paid on the net income associated with an asset. However, you have to dispose of the asset to pay that tax. Until then the asset is property and it's only subject to property tax."

No, when a company uses its revenues to buy stuff and hold onto it, the government counts the value of that stuff as profits, and taxes are paid on that 'income' in the fiscal year of acquisition. The assets are then gradually depreciated (with the depreciation treated as a loss). If the assets are sold off, income taxes are assessed against sales in excess of the depreciated value, and losses are assessed (along with corresponding write-offs) against sale values below the depreciated value of the asset.

>"Normal accounting disclaimer applies. Definitely get an accountant and don't take accounting advice from the internet. "

I completely agree with this, especially since tax law varies widely, even between Canada and the USA.

>No, when a company uses its revenues to buy stuff and hold onto it, the government counts the value of that stuff as profits

This is not quite right, though it is mostly correct in describing depreciation. When you purchase a depreciating asset it has a book value that is depreciated over time. That book value is not counted as income and definitely not as net income (profits), though it will appear with other assets on the balance sheet. You've essentially converted one type of asset to another, there is no gain or loss there to tax.

For depreciating assets, the depreciation is deductible because it represents a loss in value of the asset. In general, this can be taken when the depreciation is realized. If you dispose of the asset you pay taxes based on the deprecated value, like you've described.

It's important to realize that corporate taxes are almost exclusively on net income, that being the money left over after the business has done all of it's financial activities.

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