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So, Let's say I have a very small business and I make about 10,000 USD in sales. Let's assume there are 0 expenses. So, my profit is about 10,000 USD for that year.

Assume the tax rate on the company on profits is 20%, so I will have to pay 2,000 USD that year. In the beginning, I buy a car worth 10,000 USD. My cashflow in the company is 0.

Will I still be taxed at 20% of 10,000 USD? How does the depreciation work in this case?

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    Though you mention USD please confirm that the country is the United States Commented Dec 10, 2019 at 14:25
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    To be clear, is that car for business purposes? Commented Dec 10, 2019 at 14:59
  • Also - saying there is a tax rate of 20% on business profits implies there is a separate corporation you have started the business within. In which case - did you buy the car, or did the corporation? Commented Dec 10, 2019 at 15:00
  • Yes, car is for business purposes, and the "company" bought it. Commented Dec 10, 2019 at 17:10

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With vehicle expenses for business you can opt to take actual expenses or a standardized rate per mile (currently $0.58/mile). If you take actual expenses, you'd typically depreciate the vehicle cost over 5 years, but there are several depreciation options. The options front-load the deprecation expense to varying degrees, it can range from taking the purchase price in 5 equal parts to taking the entire purchase price in the first year.

If the vehicle is 100% business use, you could most likely take the entire $10,000 vehicle cost as depreciation expense in the year you purchased the vehicle. In this scenario the actual costs would wipe out all of your profit and you'd have no tax burden. Since you'd also have insurance/fuel/tax/maintenance costs associated with the vehicle you'd actually have losses. However, you'll have no depreciation expense to use against next year's revenue. If it's not 100% business use then you have to track business miles and apply the percentage of business miles against the actual expenses (including depreciation).

Choosing whether to take actual costs or the standard mileage rate is a decision you should research a fair bit first, and then if you decide to take actual expenses you'd then need to spend time deciding which depreciation option is best for you. This is an area where paying for advice from a professional could be worthwhile since pretty much any of the available options can be the right choice depending on your circumstances.

Here are a couple articles on the topic:
Actual Expense Method Versus Standard Mileage Rate Under the Tax Cuts and Jobs Act
Car Depreciation: How to Calculate Your Vehicle Depreciation Deduction

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  • THANK YOU. That was an excellent answer. Just one question - Let's say you have an asset which you CAN'T depreciate 100% of it that year. So, let's say you have $10,000 (sales) - 10,000 (asset purchase) = $0 (current cash flow at the end of the year). Then, in this case, my tax burden would not be $0, but my cash flow is $0. How do businesses usually pay taxes when there's no money in the bank (like in this case), but it's clearly a profit-making business. Commented Dec 10, 2019 at 17:24
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    @NawazDhandala Most likely they would go into debt or go out of business, can't operate without cash for too long. Typically a business wouldn't buy the asset with cash in a situation like that, they'd use a loan or lease to spread the cash outlay over years to better match expense and revenue timings. With the lease they wouldn't depreciate the asset, but with a car loan they would, while not having to pay the full $10k up front in either case.
    – Hart CO
    Commented Dec 10, 2019 at 17:40
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    @NawazDhandala If loan/lease is not an option, then realistically, with a net income of $10k the company cannot afford to buy something costing $10k.
    – TripeHound
    Commented Dec 11, 2019 at 9:01

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