The first year that you start your business, you can write off a maximum of $5,000 in business start-up costs and up to $5,000 in organizational costs. For example, you can write off expenses related to researching, hiring a business consultant, and any initial supplies that you need to start the business. In addition, licensing fees and legal fees can also be written off as part of your organizational costs. Also, any start-up expenses that you cannot write off because they exceed the $5,000 maximum amount can be amortized over 180 months. It may take you longer to see these deductions, but they are still available as long as they relate to your business start-up costs.  

You may also be able to write off equipment that you need to start your business. You can take a write off for all equipment that you purchase and use for your first year. The amount you can write off changes yearly, so check with your accountant to determine the exact amount of asset purchases you can write off as part of your business start-up costs. 

If you need to purchase a vehicle for your business, you may be able to write off part of the expense. However, the car must be reasonable and necessary for your business. For example, if you are starting a plumbing business, you will most likely need a truck or van to drive when you are out visiting clients' homes.The maximum amount that you can write off in a year is a little more than $3,000. In addition, you might consider deducting mileage instead of writing off the purchase of the vehicle.

If you have any questions about what start-up costs you can write off, contact an accountant or tax professional to determine whether your expenses qualify for a tax write off.

Items are given a specific lifetime for depreciation purposes. There are two current lives for assets. There is a regular depreciation cost, and then there is also an accelerated depreciation cost, which is the number used by MACRs. The life of an asset will be determined by what the asset specifically is. Something like land will depreciate over 15 to 20 years, while pieces of technology are typically depreciated very quickly. Personal property has a depreciable life range from anywhere between 3 to 20 years. For more specific tables, the IRS website would be an excellent source.

MACRs was created in order to entice businesses to invest in newer, modern products instead of using old, outdated technology. This increases business efficiencies and will also produce better products for the consumer. It can also allow you to profit more by making higher quality products. By having newer equipment, this can create competitive advantages against your business competitors, who may still be using older equipment. There is also a time element involved. In the early years of your asset, you will have an increased time value benefit by getting more value out of your assets. In the years when the asset has already finished its depreciation, any income earned from it will be "fresh" and will create even more profit for your company.

Before you calculate depreciation, calculate the asset's salvage value. The salvage value is the value of the asset at the end of its useful period. For example, if you have a piece of equipment that you plan to use for its useful life of five years, will you be able to sell the asset at the end of its useful life? Depending on the type of asset it is, you may be able to sell it for a good price, or it may be worthless at the end of its useful life.  

Straight line depreciation is the easiest way to calculate depreciation. The straight line depreciation method calculates an asset's depreciation by spreading the cost evenly over the life of the fixed asset. To calculate straight line depreciation, you must know the cost of the asset and the expected life of the asset. Next, subtract the salvage value from the cost of the asset. Then, divide this number by the estimated useful life of the asset. For example, a machine for a business is purchased for $6,000. The business expects to use the machine for five years. The business expects to sell the asset at the end of five years for $1,000. Therefore, each year the machine will cost the business $1,000. This is the yearly depreciation value of the asset, and the business will list this value as the expense for the asset. You can also calculate depreciation monthly by dividing the asset by the number of months you estimate it will be in use instead of the number of years.

Most small businesses use the straight-line depreciation method. Straight-line depreciation is so popular because it is the easiest method to use. Before you calculate the depreciation of an asset, you must anticipate how many years you will use the asset and whether the asset will have any salvage value at the end of the its life. Salvage value is the amount of money that you anticipate recovering from the asset, by either sale or trade. For example, if you anticipate using a car for five years, the car will likely have value at the end of five years. Since you cannot predict the exact amount you will receive for the car after five years, you have to make an educated estimate. Next, to calculate straight-line depreciation, subtract the salvage value from the purchase price of the asset, and divide this number by the amount of useful years for the asset. This amount is the depreciation expense your small business will take each year for the use of the asset. 

If your small business is a manufacturing business that utilizes machines to create the product, it may make sense for you to use the units of production depreciation method. Again, like the straight-line depreciation method, you need to determine what the salvage value of the machine will be at the end of its usable life. Subtract the salvage value from the purchase value. Next, divide this number by the machine's total units of production to calculate the machine's per-unit depreciation value. Finally, multiple the number of units the machine produces each month by the per-unit depreciation. This amount is the depreciation expense your small business can take each month.

If you have an asset with a short life span, consider using the declining balance method of depreciation. By using a declining balance method of depreciation, your small business can deduct a larger amount in the beginning stage of the life of the asset. To calculate the declining balance of an asset, determine the percentage of the asset you will use each year. Then, multiple the percentage of the asset you will use each year with the asset's value. You will need to do this every year you use the asset to determine the asset's depreciation.

A pro forma balance sheet discloses all of a company's liabilities and assets at a designated point in time and uses these numbers to predict how the company will do in the future. When creating the pro forma balance sheet, a business may choose to include or exclude outside factors that may affect the business. For example, a pro forma balance sheet may include future costs of products or services or current costs. Pro forma balance sheets are not recognized as financial statements in accordance with Generally Accepted Accounting Principles, or GAAP.

Pro forma balance sheets benefit businesses in a multitude of ways. First, a small business owner can examine a pro forma balance sheet and see clearly how the business is most likely going to perform in one, five, or ten years ahead of time. A pro forma balance sheet is a great tool to show a small business owner or investor what money is tied up in a business' assets or inventory. The small business owner can then make adjustments to the business to make it more profitable based on the predictions. Pro forma balance sheets also allow a small business owner to see areas of the business that need improvement or will be affected by changing conditions. For example, a pro forma balance sheet can be used as a tool to show the financial soundness of the business. Pro forma balance sheets also show small business owners how a new business venture or product will change the profitability or assets of the business. In addition, a pro forma balance sheet lets small business owners manipulate assets and potential products to come up with the best plan for their business.  

In the past, businesses were manipulating pro forma balance sheets to show that the business was profitable, when in fact the opposite was true. In reaction to this phenomenon and other securities activities, the federal government passed the Sarbanes-Oxley Act. Now, a business cannot intentionally mislead an investor by using a pro forma balance sheet. In addition, since the pro forma balance sheet is not created in compliance with GAAP, the United States Securities and Exchange Commission requires that businesses disclose this to investors and make available the business's GAAP financial statements.

Pro forma income statements operate by utilizing your current income statement. Current income on your income statement is used as a baseline for future income. To create a pro forma income statement, evaluate each item on your current income statement. For example, evaluate all sales income, operating expenses, equipment, losses and taxes for the current year and consider factors that may cause a change in these areas. You should create your pro forma income statement before the end of the year. Most are created in the fourth quarter of the current fiscal year. You will need to estimate costs for the remaining term of the year, so use an average of the previous months' totals. It is beneficial to do a pro forma income statement that will predict the following year's income, but you do not want to try to predict the income too far in advance because that will affect its accuracy. Also, continuously update your pro forma income statement as new information becomes available. This will ensure that your pro forma income statement is as up to date as possible.

First, predict how you think sales will change the following year. For example, if demand is growing in the current quarter for a certain item, then it may be realistic to predict an increase in sales next year. In contrast, maybe an external factor is changing demand. If you assume sales are going to increase by 20 percent next year, then multiple this year's sales by 20 percent to determine future revenue. If the cost of goods is increasing, you can predict how that will affect future revenue as well. Then, subtract the cost of goods sold from the pro forma revenue.

In addition to predicting revenue, a pro forma income statement can also assist your business in predicting future expenses. Changes in expenses can include an increase in wages, operating costs, and employee benefits. To predict future expenses, multiply your historical expenses by one hundred percent plus the percentage increase you expect. You then determine your pro forma total expenses by combining all the pro forma expenses together.

If you have questions about pro forma income statements or how to use them to help your small business, contact a business consultant. Remember that pro forma income statements are just one tool for a small business to use and should not be relied upon for anything more than predicting future income.