Fuel for Thought
As we near the end of another year, many owner operators start to consider their impending tax implications for the year. Some will scramble until the last possible minute, while others have meticulously tracked their income and expenses throughout the year and have a firm understanding of the upcoming tax burden. Some may consider large business purchases to offset their upcoming tax burden. As business owners, we each have to decide for ourselves which purchases are sound decisions and which ones are frivolous.
Deciding to make a large purchase can be worrisome as you consider the return on your investment. Making large purchases just to offset taxes can be a wise or foolish decision.
Is the purchase something that your business needs?
Will it actually reduce your adjusted gross income enough to matter?
Do you really need it this year as opposed to next year or the next?
Is it better to spend profits on unneeded items just to save on taxes?
If I pay 30% income tax and my business had a net profit of $100,000 this year, I would owe $30,000.
If my business acquires a new widget for $40,000 then my net profit would be reduced from $100,000 to $60,000 and my tax liability would be reduced from $30,000 to $18,000.
That sounds much better, right? Who wouldn’t like to save $12,000 in taxes?
Consider also that when you had $100,000 and owed $30,000 that you were left with $70,000 and no widget. However, if you buy the $40,000 widget and only pay $18,000 in taxes, you are left with a widget that you may or may not be able to use and only $42,000.
If your business does need the widget, then buying before the end of the year can be a sound decision on two fronts. One, you need the widget to maintain or increase profits and two, spending the $40,000 now will reduce your taxes by $12,000, effectively making it only a $28,000 widget. The same would hold true for any tax year, so the timing and reason for a business purchase is critical.
Do you really need to make a purchase to save on taxes, or would you rather have more of your hard earned money and pay more in taxes?
Before making a purchase just to save on taxes, consider the outcomes from each side. Sure, it may be harder to give up $30,000 in taxes, but you net more than if you buy some widget only for the purpose of tax reduction.
If your business truly has a need for the widget, then enjoy the purchase and the tax break.
See you down the road,