As the end of the year approaches, I hear people talking about spending money in their business in order to save money on taxes. I see what they are talking about: increasing business expenses in order to offset income for the year. Therefore, lowering taxes. Great idea, right? Right? Well, as with most accounting related questions…..IT DEPENDS.
When is it a good idea to spend money at the end of the year?
- When you are in a profit position in your business you might want to consider expenses to offset your income for tax purposes.
- When you have the cash to pay for your purchases. Yes, it’s true, a business can be a profit position but doesn’t have any cash.
- When you were planning to spend money on a new items anyway! Only buy things when it’s something your business needed to begin with (i.e. computers that were needing to be replaced anyway, expensive software renewal due in January, planned employee bonuses, etc).
All three of these conditions must be met before approving a year-end purchase.
So then, when is it NOT to spend money at the end of the year?
- When you are already at a loss in your business (pss….you won’t pay taxes if you don’t make any money)
- When you have to rely on debt to buy something.
- When it is an unplanned and impulsive expense.
Some other considerations that might make you rethink that year-end business purchase:
- You are applying for a business loan, and the bank wants to see a high profit.
- You are wanting to buy a house, and your business is being evaluated as part of your income.
- You want to sell your business in the future, and you want that profit to be as high as possible for future buyers.
Just remember, it doesn’t make sense to spend $100 to save $20. Don’t go crazy in the year-end rush to buy, buy, buy! Keep your head on straight and go through my buying conditions above. Save your purchasing dollars for strategic items that will have an ROI in your business.
Need help figuring out how to optimize your spending?
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