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It's an accounting trick. 1) Make tons of cash. 2) Invest the cash back in the business. 3) Record this investment on the financials as an expense. 4) The e
by harry8 2y ago
It's an accounting trick.
1) Make tons of cash.
2) Invest the cash back in the business.
3) Record this investment on the financials as an expense.
4) The expenses inflated by investment spending means you declare no profit and probably pay no tax on that profit you just hid.
The alternative is:
1) declare profit
2) Pay tax on it
3) Reinvest what's left after the taxman took a cut.
Which would you choose if you were raking in loads more money than it was costing you to run the business and you had growth opportunities?
Should this be a choice?
If not, how would you "fix" it?
- lotsofpulp 2y agoAre these troll posts? “Investing cash into a business” is an expense, no different than any other business expense.
- harry8 2y agoAdvertising, to grow sales can be expensed, for example. Buying new plant, not so much.
- tr_user 2y agohttps://www.thomsonreuters.com/en-us/posts/tax-and-accounting/section-174-expenditures/ https://www.thomsonreuters.com/en-us/posts/tax-and-accountin...
- Nursie 2y agoI mean, it's not even profit hiding is it? Corporation tax is pretty openly an incentive for companies to invest in growth and people, rather than either sitting on cash or paying out to their owners. It's entirely normal and above board. Desirable even.
- WheatMillington 2y agoSorry but I'm an accountant and I can't abide such a terrible and incorrect description of how this works. Dunning Kruger in full effect on HN today.
- harry8 2y agoShame you couldn't manage an explanation and just went with abuse.
- deleted 2y ago[deleted]
- blindriver 2y agoI came in to say exactly the same thing. What OP is saying is literally a lie, accounting is much more sophisticated than that.
- harry8 2y agoEverything on this earth is more sophisticated than a 4 point thumbnail sketch of a general principle. You also have not managed any explanation at all, which is a shame. Could be interesting.
- NegativeLatency 2y agoCare to explain what’s wrong/inaccurate with it?
- deleted 2y ago[deleted]
- svnt 2y agoThe accountants can’t be bothered because your comment isn’t even using basic terms correctly. Your comment suggests that reinvested cash is being "hidden" as expenses, but in reality, these reinvestments are usually recorded as capital expenditures (CapEx) rather than operating expenses (OpEx), depending on the nature of the investment. While CapEx can be depreciated over time, it is not typically expensed immediately in the way operating costs are. The implication that companies can completely avoid taxes by reinvesting is misleading. Even though reinvestments may reduce taxable income through depreciation or other deductions, this is a legal and common accounting practice, not necessarily an attempt to "hide" profits. There are also tax laws in many jurisdictions which limit the extent to which such deductions can offset income. Your understanding also conflates profit with cash flow. Profit is an accounting concept that reflects the net income after all expenses (including taxes). Cash flow, on the other hand, reflects the actual cash generated by the business. Reinvesting profits does not "hide" cash flow but rather allocates it to future growth. Companies don't simply choose between declaring profit and reinvesting to avoid taxes. The decision to reinvest is often driven by strategic goals, such as expanding operations, developing new products, or acquiring other businesses. Reinvestment reduces the company's taxable income and thus the taxes owed, but it does not eliminate taxes or "hide" the profits. The company benefits from reinvesting by potentially generating more revenue in the future from the new product, which should generate more tax revenue down the road instead of restricting growth now. Here is an approximation of your comment translated from accounting into software development, minus the part where you misunderstand essential terms: > It’s ridiculous that software developers waste so much time writing tests for their code. If the code is written correctly in the first place, you wouldn’t need tests at all. Instead of wasting time on tests, developers should focus on just writing perfect code from the start. It’s clear that the whole idea of ‘unit testing’ is just a way for developers to justify their jobs and take longer to finish projects. Shouldn’t we just hire better developers who don’t need to write tests?
- harry8 2y agoThis is the whole point: When you’re expanding rapidly and want to grow market share above all. Growing that market share with customer acquisition is economically an investment in the future revenue of the business. Advertising is one example of how this might be done. You can classify investing in your business through advertising spend as an operating expenditure for accounting purposes. And potentially for tax purposes as well. Now your large positive cashflow does not generate an accounting profit. Because you spent it on something that won’t be capitalised on the balance sheet. There it is, the answer to OP’s question. Note you can’t do that buying property plant and equipment (but some structured finance and leasing people might like a word - airlines don’t own their aircraft.) Perhaps you can think of some examples where you’ve seen huge, massively cash-flow positive businesses in our field that weren’t generating accounting profit. Facebook, Amazon, ..? The only other way you could sustain repeated loss ina new, growing business is capital raising. Someone else on the thread mentioned Aswarth Damodoran’s “Free cash flow to equity” IMHO it’s worthwhile avoiding jargon when explaining things simply and concisely.