The question of buying something just to get a tax write off seems to come up quite often. It’s a valid question. Should I spend money now to get a tax write off, or should I wait?
Unfortunately, the answer definitely depends on several different factors. So, you need to ask yourself several questions in order to make a good decision for your business.
1. Do you have the cash to make the purchase?
If your business is struggling and/or your cash balance is low, then this may not be the right time to finance or pay cash for a big ticket item.
Most likely, you’re considering a purchase of some kind of asset, which will bring future benefits to the business like vehicles, equipment, machinery, inventory or even a building.
Each of these assets could be a great addition to your business. In order for a tax write off to make sense, it really has to benefit your business. Not just now, but also in the long-run. Putting your business in a precarious situation just to lower your tax bill is not something you should do.
2. Does your business actually need something?
The purpose of a tax deduction is to obtain a deduction for something your business actually needs. The purchase should help grow your business in some way or give you a better chance at greater profitability and/or efficiencies.
If you purchase an asset and leave it sitting in storage, then you spent a lot of money just to save much less money than you spent. Additionally, if it’s an asset that can be depreciated, then you need to actually place it in service for depreciation to be taken. This would defeat the purpose of the potential tax write off altogether so be sure that you actually need whatever you purchase.
3. Is it considered ordinary and necessary to your business?
For your business to receive any tax deductions or write offs, the purchase in question must be ordinary and necessary. Ordinary and necessary just means that it’s something that you would obviously consider an expense of your business. It also needs to be expected or reasonable in your industry. If it can’t check those boxes, then you won’t get a deduction for it anyways.
4. Do I even need a tax write off this year?
The purpose of a tax write off is to pay less in taxes. That’s because you are able to expense something that your business needed (taking depreciation, for example). When you do this, your net income (your bottom line) is lower, and thus, you pay less in taxes.
Well, what do you do if your net income is projected to be higher next year?
You have a decision to make, and this is where tax planning comes into play.
For example, your business is considering purchasing a vehicle to increase sales. You only need one vehicle so you can either buy it this year or next. So, what do you do?
That depends on your net income in each of the years and how badly you need the vehicle now.
If your business income is actually going to be higher next year, then the tax write off would actually help you more next year than it would this year.
However, if your business badly needs the vehicle right this second, then it makes sense to go ahead with the purchase regardless of net income considerations.
You really just have to make the best decision for your business.
If you feel confident in the purchase and you see future benefits because of it, then you’re good to go. By all means, take the tax write off if it’s allowed.
If your business is struggling or you’re really only buying something just to get a deduction, then it may not be a good idea.
Either way, buying something to get a tax write off will use up some of your cash so you have to make the best decision you can for your business.
Note: This blog post is meant for educational and informational purposes only. Please contact a tax or accounting professional if you have specific questions about your business. Also note that these questions are not exhaustive.