In February of 2014, I wrote a blog post titled “Financing a Small Business: 4 Items to Remember.” Over the next few weeks I’m going to expand on the 4 things from that post, plus a bonus 5th item that came to me later.
At the end of each year, you’ll see accountants giving blanket advice to purchase things so you can get tax deductions. I give the same advice but with a catch:
Make sure you actually need the things you’re buying. If it’s something you need and were planning on buying, then yes, make the purchase in December so you get the deduction in the current year. BUT … don’t do something just to get a tax deduction.
(You also should consider whether a deduction will be more valuable this year or next year; if you think your income will be higher next year, it might be better to wait and make the purchase next year so you can get the deduction when your income is higher.)
Doesn’t it Make Sense to Find All the Deductions You Can?
Of course you should take every tax deduction you can find. But what I’m saying here is, don’t do something just because it’s tax deductible.
The reason being: tax deductions are not a dollar-for-dollar reduction in tax owed.
Let’s say you’re in the 25% tax bracket. A deduction saves you 25 cents for each dollar spent.
So if you buy something for $1,000, you’ll save $250 at tax time.
But you haven’t really “saved” money … you’ve spent $750 net. If you didn’t need what you bought, you just wasted $750 so you could get $250 back at tax time.
That’s a bad exchange if your only reason for the purchase was to save on taxes.
Major outlays of cash require planning and thought — something beyond just “hey, let’s do this to get a tax deduction.”
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