Most tax planning advice given to small business owners is based on spending money.
- “Buy new equipment before year-end.”
- “Prepay next year’s insurance policy.”
- “Buy the heavy duty truck for your new ‘business vehicle’ so we can write it all off in year one.”
Is this the best we can do?
This annual ritual is a huge distraction for businesses. And it leads to all kinds of bs.
Don’t get me wrong, if you are going to spend money, do it tax efficiently. But spending money just to lower your taxes?
Let’s look at the numbers and see how absurd the spending strategy can be.
If you decide to spend an extra $10,000 at year end to increase your expenses, it might save you $2,500 in taxes. So net-net you are $7,500 OUT of pocket.
This is a situation where you can spend the money and use the purchase in your business OR you can choose not to spend the money and it won’t have a negative impact on the business.
If you decided not to spend that money, your profits would be $10,000 higher and your tax bill would be $2,500 higher. So after paying your taxes you would be left with $7,500 IN your pocket.
You see the math, right?
When you employ the spending ’strategy’ you give up $7,500, but if you sit tight and pay more taxes you KEEP $7,500.
Think about it.
Why do business owners stress out when it comes to taxes?
Could it be they do not trust the advice they are getting?
Could they be over the ‘status quo’?
I think we have been socially wired to loathe paying taxes. People get emotional and crazy when they are required to cut a unexpected check to the govt.
The ‘status quo’ of “Do this and your taxes will be lower” ENDS TODAY.
It’s so short sighted.
Truth: Most true strategic tax saving strategies require CASH. And the best way to accumulate cash is to not spend it.
Next week on the Tax Tip Tuesday I am going to share 4 steps that ensures a brewery owner has enough cash to pay taxes, avoids spending, and allows us to stockpile cash for use in future tax saving strategies.
It’s for real.
-cf