Diomed

Had a bit of a brain fart the other day when a buddy of mine asked me a puzzling question.. and being that I use an accountant (as I hate crunching numbers) I was unable to answer him.

He asked me about the flat tax rate on my work, and put this question to me.. He's main concern (he is thinking about getting in the business) was that you don't get dollar for dollar on your expenses.. not sure the exact ratio, but here was his question.

If you invest $2 dollars to make $3 total, and profit only $1.. but you have to pay taxes on total earned and not just profit, along with you dont get dollar per dollar credit on your expenses from the IRS, how much money would you make?

I realize I need to lay off the nugs, and maths were never a strong point of mine being the main reason I hired an accountant even for a relatively small business (its a friend whom I trust dearly).. I had no idea how to answer him..

I know some people go after microscopic margins, and it works for them.. but I've always had a close to 50% ratio that I like to keep in terms of my investment expenses.

How would this work? Or would it?

Please bare in mind, that I absolutely dont deal with any aspect of this, if I have got something wrong please forgive me I just know I like a dollar to dollar profit ratio, or close to.

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Adraco

You are wrong. Taxes are on profit, not total revenue.
So first take your total turnover, deduct all reasonable and valid business expenses (think: what expenses do I have to be able to earn my turnover? Like hosting and domains.) and then you have your profit remaining.

Then the tax comes in on the profit, not the total turnover.

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