Everyone's Favorite Subject...Capitalized Labor

• By Tom Millitzer on April 03, 2007

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Well its tax time in the US, so let's discuss one of everyone's favorite subjects...capitalized labor."CAPITALIZED LABOR means all direct costs of labor that can be identified or associated with and are properly allocable to the construction, modification, or installation of specific items of capital assets and, as such, can thereby be written down over time via a depreciation or amortization schedule as capitalized costs." (How elequant, I almost want to read that again).Capitalized labor is a tool that often goes unused by independent business owners. It may be something you want to consider. Example of how it works: Last year you expanded your data center. Your lead engineer and a couple of assistants spent 4 months designing, ordering and installing. The salaries were expensed on your operating statement. The P&L reflects the costs and your profits were down an amount equal to that expense. Let's just say it's allocated at $100,000.If however you capitalized the labor, the $100,000 goes on your balance sheet as an asset, and is appropriately depreciated.Downside: Now since capitalized labor is on the balance sheet rather than operating statement you should have higher profits. This will probably leave you with a higher tax bite. So how does this benefit? Banks.This should be looked at as business strategy. Web host companies are subscription based. Your major asset is your subscribers. Banks like hard assets and profits, for some reason subscriber lists are nebulous to them. This puts hard assets on your books, banks understand bricks and mortar. It also increases your profits, banks like profits. When you go to get a loan you are giving the bank more of what they want. Now borrow some money and start the cycle over again. Your company gets larger. Conversely you could minimize your profits and not get the business loan. You saved some minor personal income taxes a few years ago.This is just an idea for strategy, talk to your accountant and capitalizing labor may not be the avenue for you. It should however be in your quiver. ========== MORE ABOUT TOM ==========New Commerce CommunicationsE-Mail Tom Direct

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