A sole proprietorship is a business entity that is intimately connected financially and legally with its owner-operator. Business earnings are taxed as personal income and business loss comes directly out of the owner's bottom line. A sole proprietorship is taxed on the profit it earns regardless of whether the owner withdrew these earnings for personal use or left them in the business account for future business operations. However, a sole proprietor can avoid paying taxes on reinvested profit by using this income to make deductible purchases rather than simply leaving it in the business account.

Sole Proprietorship Profit

Profit in a sole proprietorship is the amount left over after subtracting operating expenses from gross revenue. A sole proprietor must pay tax on the profit his business earns regardless of whether he withdraws this amount for personal expenses or leaves it in the business account to cover company cash flow.

Sole Proprietorship Reinvestment

A sole proprietor who reinvests in her company by leaving earnings in a business account and using the money to cover company cash flow can write off these reinvested amounts as her business spends them. Although these sums may have been recorded as income when the business first earned them, they can subsequently be deducted as expenditures that offset earnings if the expenditure occurs during the same year as the earnings. If the expenditures take place during a year subsequent to the earnings, the expenditures are still deductible, but they offset earnings during the year when the money is spent.


When a sole proprietor reinvests in his business by buying property or a major piece of equipment, he cannot write off the amounts of these purchases right away. Instead, he must depreciate them by establishing a lifespan for an item's usefulness to the company, and then dividing its purchase price over this length of time. He pays taxes in the short term on these earnings because he is only able to write off part of the purchase right away, but he can continue to take the deduction over the following years even after the money is spent.

Sole Proprietorship Equity

A sole proprietor's equity is the value of his investment in his business. Equity is made up of items that count as assets on a balance sheet such as cash in the bank or equipment and inventory. A sole proprietor who reinvests income in his business increases his equity regardless of whether he leaves cash in the bank or buys a piece of equipment that increases the value of his company.

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