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

1. 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.
2. 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.)
3. 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.
4. Should you buy or lease? Which costs you the less money?
   1. 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!
   2. 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.
   3. The closer the two options are, the less likely you will make a "mistake."
   4. See worksheet.

PERSONAL DECISION

1. The whole idea of your begin in business is:
   1. Pay your own life expenses.
   2. Provide for your family or similar personal interests.
   3. Enjoy the fruits of your labor.
2. Sometimes you simply deserve something extra from your business. It is not necessary to justify it as a business expenditure.
3. This seems to be difficult for many owners.
4. Usually a personal decision goes something like this:
   1. I want to buy a boat.
   2. I have worked hard and I feel I deserve a boat.
   3. My family will also enjoy the boat.
   4. My business can afford to buy the boat.
   5. 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.
   6. That way I will not feel so guilty.
5. It should go like this:
   1. I want to buy a boat.
   2. I have worked hard and I feel I deserve a boat.
   3. My family will also enjoy the boat.
   4. My business can afford to buy the boat.
   5. So I will buy the boat as a personal non-business expense.
6. Sometimes, though, a personal decision might actually be a business decision:
   1. I need to buy a new GRANDICATOR MARK-IV processor.
   2. I can buy one from the Keeler Company for $7,000.
   3. But instead I could buy the ZANZIBAR D-1616 from the Schwartzwelder Company for $9,000.
   4. 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.
   5. This is a legitimate business decision and the $9,000 is fully deductible.

THE TAX DECISION

1. 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.
2. However, since most dealers are in the 30% and lower tax brackets.
3. 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:
   1. Spend $10,000.
   2. Deduct $10,000 from taxable income.
   3. Save $3,000 at most on your taxes.
   4. The $3,000 cost you $10,000.
   5. Unless you needed or wanted the equipment, you "threw away" $7,000.
   6. You could have spent that on the boat.
4. 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.
5. But, if you "miss" making the right decision, the consequence is very seldom serious.
6. There is no such thing as a the proverbial "Holy Grail Deduction.".

Copyright © - 2004 Dutch Hawkins Mandeville, LA USA - All Rights Reserved

January 8, 2004