Value of a Business Tax Deduction

By Jason Watson, CPA
Posted Friday, November 3, 2023

Here is another concept that small business owners miss. Tax deductions only reduce taxable income. If you spend $1,000 and your marginal tax rate is 22%, then you only save $220 by spending $1,000. Every December, we fields hundreds of phone calls and emails from clients asking if they should buy something to save on taxes. Our response is a simple flowchart-

• Do you need the item you are considering? If No, then stop. Don’t buy anything. If Yes, then continue to the next question.

• Is the current year’s income unusually high, or do you expect to earn more next year?

Without sound snarky, why would you buy something on December 31 if your tax rate will only increase the following year? Wait 24 hours, buy the cool thing you need and get a better yet delayed tax deduction. And if you don’t need it, why would you spend money unnecessarily only to get a portion of that back in tax savings? Another way of saying this is- keep some tax deductions in your pocket for next year. You don’t want to be in a position where you ran out of perfectly good deductions in a year of increased taxable income.

Conversely, if your current taxable income is unusually high and you expect it to go down next year then perhaps you should accelerate your timelines for major purchases. WCG can help with the tax modeling and planning.

All too often we hear people at cocktail parties say something silly like “Don’t worry, it’s a write-off.” Remember that money is still leaving your person, and the money you are getting back in the form of a tax deduction is substantially less. Just because it is a “write-off” or a business tax deduction doesn’t mean that you are using Monopoly money. Yes, it is easy to spend someone else’s money but calling it a write-off doesn’t change who owns the money.

Tax credits are in contrast to tax deductions. Tax credits such as $7,500 for buying a cool Porsche Taycan or $13,400 for adopting a child are a dollar for dollar reduction in your tax due. For example, if the computed tax liability is $20,000 and you max out your adoption credit of $13,400, you will only have a tax liability of $6,600. However, if you spend $13,400 in office furniture you will save taxes based on your marginal tax rate- 22% tax rate equates to $2,948. See the difference?

Tax deduction versus tax credit. There are very little tax credits for small businesses, but here are most popular-

• Alcohol Fuels

• Alternative Motor Vehicle

• Disabled Access

• Employer Provided Childcare

• Reforestation

• Qualified Research Expenses (models, patents, environmental testing, etc.)

• Pension Plan Start Up Costs

• Work Opportunity and Welfare to Work

Look these up. These are like college grants and other obscure things that most people don’t chase down. There might be easy money for things you are already doing.