There's a myth among business owners that you can largely eliminate income taxes in your business if you just plan properly. Especially by spending money near the end of the year in order to reduce your taxes.
But it's not true.
It's a myth perpetrated by people who make little to no money… and have little to no money in the bank.
But Philip, I Need a Tax Deduction
Maybe the best example of the problem starts with how people think about having a mortgage on their home.
Most people believe that one of the reasons not to pay off your mortgage is you will "lose" the tax deduction. Paying off their mortgage will make their taxes go up.
Surely that must be a bad thing, right?
Or is it?
If you pay $10,000 in interest on your mortgage, then the mortgage interest deduction will reduce your taxable income by $10,000. If you are near the highest tax brackets, your taxes would go down by about $4,000 (40% of the $10,000 "write-off").
So you gave $10,000 to the mortgage company so you could save $4,000 in taxes.
That's a BAD trade!
Same concept applies in business.
If you go out and spend $10,000 at the end of the year to "reduce your taxes" you are making the same mistake. You save maybe $4,000 in taxes.
You spent $10,000 to save $4,000.
That's called purposefully losing money.
Remember that income taxes are what happen when you make money.
The secret is to spend more time making money! And less time listening to bad tax advice. J
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