How Do I Make a Tax Decision?
The best decision is not to make a tax decision. If you do, you have "the cart before the horse."
Forget the tax decision and make either a business decision or a personal decision.
BUSINESS DECISION
- If you have a piece of equipment that is beginning to cost as much to repair as it would be to pay monthly notes for the equipment, then the business decision is to buy a new one.
- If buying a new piece of equipment will increase profit monthly by more than the monthly notes, then the business decision it to buy the new one. (Consider a "vehicle" as equipment in these comparisons.)
- If you can buy a piece of equipment that will save more money over the next few years than it cost, the business decision is to buy it.
- Should you buy or lease? Which costs you the less money?
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CASE I: To buy costs $10,000. The unit will last 10 years. To lease costs $250 a month for 10 years. [$250 x 120 months = $30,000]. This is not a difficult business decision-buy it!
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CASE II: To buy costs $5,000. The unit will last 10 years. To lease costs $35 a month. [$35 x 120 months = $4,200]. It is close, but I would go with the $35 a month.
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The closer the two options are, the less likely you will make a "mistake."
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See worksheet.
PERSONAL DECISION
- The whole idea of your begin in business is:
- Pay your own life expenses.
- Provide for your family or similar personal interests.
- Enjoy the fruits of your labor.
- Sometimes you simply deserve something extra from your business. It is not necessary to justify it as a business expenditure.
- This seems to be difficult for many owners.
- Usually a personal decision goes something like this:
- I want to buy a boat.
- I have worked hard and I feel I deserve a boat.
- My family will also enjoy the boat.
- My business can afford to buy the boat.
- But I feel guilty making an extravagant personal purchase, so I will claim that the boat is for business use. I will claim that I make deliveries to shrimp boats and oil rigs.
- That way I will not feel so guilty.
- It should go like this:
- I want to buy a boat.
- I have worked hard and I feel I deserve a boat.
- My family will also enjoy the boat.
- My business can afford to buy the boat.
- So I will buy the boat as a personal non-business expense.
- Sometimes, though, a personal decision might actually be a business decision:
- I need to buy a new GRANDICATOR MARK-IV processor.
- I can buy one from the Keeler Company for $7,000.
- But instead I could buy the ZANZIBAR D-1616 from the Schwartzwelder Company for $9,000.
- I dislike the jerks at the Keeler Company so much that it would be worth $2,000 to me over the next five or ten years not to hear from the Keeler Company.
- This is a legitimate business decision and the $9,000 is fully deductible.
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Accountants as a profession are generally lazy. They want to stay "close to shore" by focusing only on tax issues. It is easier because there is so much available material.
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However, since most dealers are in the 30% and lower tax brackets.
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If your prior accountant advised you to go out and buy a $20,000 piece of equipment for the tax benefit that you neither needed nor personally wanted, this is what you did:
- Spend $10,000.
- Deduct $10,000 from taxable income.
- Save $3,000 at most on your taxes.
- The $3,000 cost you $10,000.
- Unless you needed or wanted the equipment, you "threw away" $7,000.
- You could have spent that on the boat.
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Sometimes there are important tax decisions that can make a significant difference. For example, if it is near the end of the year, it might make a few hundred dollars' difference whether you buy a property in December or January.
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But, if you "miss" making the right decision, the consequence is very seldom serious.
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There is no such thing as a the proverbial "Holy Grail Deduction."