This blog post is for my friends and blog followers with small businesses. I want to help you avoid making some bad financial decisions in the name of "saving on your taxes".
People tend to think that when they "write it off" on their tax return that they have somehow just made an expense go away. Like it didn't cost them anything because they "wrote it off". Like they basically got the money back through reduced taxes with the IRS.
Reality check… that's not how federal income taxes work.
A "write off" just means you had a business expense that you are allowed to deduct from your taxable income. All legitimate expenses incurred in your trade or business are deductible.
If you spend $1,000, and deduct it as a business expense on your tax return, then your taxable income will be reduced by $1,000. If your marginal tax rate is 30%, then the taxes you pay would go down by $300.
If you were able to avoid spending that $1,000 in the first place, then you would have the $1,000 in the bank AND you would not have the "write off". Oh no!! The "write off" is gone. So your taxable income is a little higher and your actual tax expense is $300 higher.
You saved $1,000 by avoiding the business expense and paid $300 more in taxes.
You are still $700 ahead. That's how income taxes work.
Greg Crabtree wrote a wonderful book for entrepreneurs Simple Numbers, Straight Talk, Big Profits: 4 Keys to Unlock Your Business Potential.
Here is a quote that applies to taxes:
"One thing I say to my clients all the time is that if you're not paying taxes, there are only two possibilities: You didn't make any income or you're cheating. Paying taxes is a good thing. The higher your tax bill, the better your business is doing. This is your number one key performance indicator.
You can't create legitimate wealth from an operating business unless you pay taxes.
Your business's number one key performance indicator is this: How big a check did you write to the IRS this year?
… Don't focus so hard on not paying taxes. Focus instead on increasing your profits."
He hit the nail on the head.
Focus on increasing your profits. And focus on smart cash flow management.
That's the ticket to financial success in business.