Profits vs loans - utterly confused!

[TheBigCheese]

Hi guys

I'm a bit confused with how much profit I have made due to a loan and would appreciate some advice.

Basically it looks like my business returned a net profit of around £15,000 last year but I have had family loans to finance the business over the last couple of years to the tune of £25,000 (no interest payable).
Some of this has been paid back, but the majority is outstanding still.

To my mind it makes sense that if I have outstanding debts then the business hasn't made a profit as it's owed to someone else, but apparently that's not the case, we have made that profit and we'll be clobbered in tax for it.

Is that correct? I can't understand how.


Many thanks.

 

[Williams lester]

That's correct the loan is a balance sheet item and only interest on that loan (if there was any!) would affect your profit.

You should really speak to your accountant to clarify your exact profit and tax liability.

 

[KM-Tiger]

You need to understand the difference between a Balance Sheet and the Profit & Loss Account.

I wouldn't be the best to try to explain that, and anyway it's probably more than is possible on this forum. Perhaps a combination of Google, some books, and ask your accountant.

Unfortunately yes, that profit will be taxable

 

[CassioAcc]

You need to look at the balance sheet to understand the true value of the company.

 

[elaine@cheapaccounting]

apparently that's not the case, we have made that profit and we'll be clobbered in tax for it.

or looking at it another way:

We have made a profit - that is great. We have a successful business that is doing well even in these really tough trading times.

Well done you.

Bear in mind there are two certainties in life - one of them is tax and the other means you have no life!

 

[Si T]

And remember that for every 30% you have paid in tax 70% has stayed in your business. Better than 100% of zero methinks.

 

[TheBigCheese]

Hi everyone

Thanks very much for your replies! I agree that I do need to understand more about how the finances etc. work generally.

My accountant did say that it was correct but I just wanted to check as I couldn't get my head around it.

Certainly it's better to have 70% of something and bringing a profit in is great but in my head until the loan is paid back I haven't made anything.

 

[elaine@cheapaccounting]

Certainly it's better to have 70% of something and bringing a profit in is great but in my head until the loan is paid back I haven't made anything.

To pay back the loan you must have made something - otherwise how can you pay it back?

You have not increase your net worth (financially speaking of course) until you have paid but the loan.

But all of your hard work has enabled you to pay back the loan.

 

[fathippy]

May I ask what you spent the 25k loan on. If it was viable costs or assets of the business then they should be deducible at that amount, so in theory you should be looking to bring down the net profit. I say that because the numbers look odd to me intuitively.

Whilst all of the above answers were correct, you should only be expecting to pay tax if you have built up an asset base with those funds such that the you are left with something of value - that is then the profit that has been created. If you have zero assets (incl hard cash) and an oustanding loan, then you need to talk to your accountant about how to best to present the accounts.