Is that Tax Write-Off Actually Good For Your Business?

How Do You Know When to Go For A Tax Write-Off?

Nobody likes taxes, but we all have to pay them. There’s a lot of talk about tax write-offs as a way of getting out of taxes, but that’s not actually a very useful way to look at it. It’s very easy to end up spending more money than you can afford to actually pay trying to get tax write-offs and that will hurt your business.

What Are Tax Write-Offs?

There are two ways to reduce your taxes: deductions and credits. It’s important to understand the difference.

A deduction reduces your taxable income. A credit, on the other hand, applies to the taxes you pay and directly reduces that. As a business, you can get both, but only on business expenses. An expense must be ordinary and necessary to run your business, as outlined in IRS Publication 583. Knowing how to make use of deductions and credits is critical for maximizing your tax write-offs.

But how do you avoid costly mistakes? There are some questions to ask yourself.

1. What Will A Deductible Actually Save?

Deductibles have different amounts they remove from your taxes. If a $1000 purchase has a 24% deductible rate attached to it for your business, you will reduce your taxes by $240. Knowing how much money you save is important to determining if it will be worth it.

2. Would I Buy This Without the Tax Benefit?

It’s really not a smart idea to buy something just for a tax write-off. Because the amount you get off your taxes is never 100%, you are still spending money and then still paying taxes, just less taxes overall. If you buy something for your business just to get a tax write off and then never use it, you’ve spent money in a way that doesn’t help your business. So, before you go for a tax write-off, make sure it’s something your business actually needs.

3. Can My Business Afford the Cash Commitment?

Can your business actually afford the purchase that gets the deduction in the first place? The tax deduction can make buying it more affordable, but you’re still paying for it up front to get a reduction in costs later. It’s not good to buy $1000 of office equipment for a 24% discount if you don’t have the $1000 to spare in the first place. Of course, it’s rarely going to be that straightforward. You have to ask yourself about things like RIO, how much expenses you might have to deal with in the future, and how important it is to your business to make sure the expense is really worth it.

4. Is This The Right Time to Buy?

When you buy can make a difference. Depreciation can affect tax deductions over time, and it usually begins once the equipment is available to use. If you buy now for the deduction, but don’t actually have a need, then the equipment will go through depreciation before you start using it. In many cases, it’s better to wait until you actually need the equipment first to maximize the deductions and credits, depending on the equipment or supplies purchased.

5. Is Buying the Best Option?

Buying, leasing, or renting equipment all have associated tax deductions. Knowing what’s the best for the situation can help you maximize your tax write-offs. For example, buying a car for your business has a higher up-front cost and long-term commitment, but you can build equity in the asset during that time. Leasing the car would have smaller monthly payments and no down-payment, making it more budget friendly in the short-term, but will cost more in the long run. Knowing what you need the car for, how much your business can afford, and how long you’ll need it makes all the difference as to whether buying or leasing the car is better for your tax deductions.

Consider Asking A Professional

Taxes are always annoying and frequently a little big confusing. Nothing ever seems to stay the same from year to year and you may not have time to keep up with everything while you’re trying to run your business. In these instances, it’s often a good idea to ask a certified tax planner for assistance. Expert accountants make it their job to know these options and keep up to date on the important changes in tax code. Hiring one to help you with your planning can save you a lot of time, allowing you to focus on making more money in your business.

Author Bio

Terri Stapley is the founder of Stapley Accounting, an Enrolled Agent, and a certified tax planner serving small business owners headquartered in Logan Utah serving customers virtually. Stapley Accounting focuses on planning-first tax work, bookkeeping, and small-business advisory.