Investment of time- deduction

[crobertson]

Our buiness receives computers and we invest several hours in rebuilding the machine and only sell them for 180.00 or so.
My question is can we, or are we capable of claiming the labor as an investment?
What form do we use or what is the name of the investment?

[jamesray50]

I'm going to say no if you didn't pay anything for it. I have never seen this done. And I can't figure out what the entry to your books would be. The credit side of the entry would be to and equity account, but I don't know what the debit entry would be. If you paid someone for their time it would be an expense. At the end of the year all the expenses would close out to the retained earnings account. I suppose at this point you could do a journal entry to move that amount from retained earnings and into an equity account, maybe called Investment. If you did this, you could make the new Investment account a sub-account of retained earnings.

But, I'm not sure about this. Hopefully someone else will reply.

[nealrm]

If you are using a paid employee to do the work, then their salary is deducible in that it reduces your profits. If you are incorporated, then your salary would be treated the same way for the business. (But you would be personally pay taxes on the income) If you are a sole proprietorship and are doing the labor yourself, then no. Allowing that would basically mean that all sole proprietorship's could easily have zero profits for tax purposes. While that might be nice, I really doubt the government would allow that.

[Freelancier]

Time is not deductible. If you pay money for the labor, that is deductible, but that means the money is then income on someone's tax return, so you don't pay taxes on it, but someone else will. But unpaid-for labor is worth what you paid for it, which is nothing, so the IRS requires you use that value for it.

[Business Attorney]

The above posts are right about your own time - it is not deductible if you don't also recognize it as income. The comments about salary being deductible are not entirely correct, however. A business which creates inventory needs to add the labor costs to the material costs and deduct it as cost-of-goods sold when the inventory is sold (or write it off if the inventory is thrown away). If inventory turns over almost immediately, there is really no difference. If you build up inventory, however, those costs need to be carried.

Many small businesses do write off all salary costs immediately, but the fact that they do it does not make it correct from either a GAAP or tax accounting standpoint.

[Evan]

I agree with what David stated (and echoing earlier comments). Generally speaking with the income tax code, only actual costs paid out would be deductible, not something self-created. So for a cash-basis taxpayer, if you were selling services for $1K and never were paid, you don't get to claim a loss of $1K, because you never claimed it as income. With this situation, if you're to recognize an expense, you DO have income to somebody.

Similarly for this reason, you can't "donate" your services and claim a charitable deduction for the value you attach to it, among a bunch of other things. If you understand this conceptually, I guess a lot of things in the tax code can make sense... to some degree. Not that tax law has ANY logic to it whatsoever -- but this is probably one principle that is consistent.