fbpx
Blog Post

December 31st is Coming Up. Do I Need to Spend Any Money?

December 31st is Coming Up. Do I Need to Spend Any Money?
https://youtu.be/enuzMvlmRko

December 31st is just around the corner. Before you ring in the new year, it’s time to go on that epic last-minute shopping spree so that you can maximize your deductions!

… right?

Let’s lead in with a piece of accounting wisdom, and then we’ll unpack it below:

The key is to maximize your after-tax profit, not minimize your taxes.

Maximizing Your After-Tax Profit

Let’s use a basic example to show how all of this works. You have spare money in your business checking account, and you really want (but don’t actually need) to upgrade your office coffee machine.

The coffee machine costs $200. Your marginal tax rate is 35%.

So, the obvious choice is to buy the coffee machine right? Everyone’s coffee will taste slightly better, and you will save $70 in taxes! ($200*.35=$70)

But wait a moment. Even with the $70 in tax savings, you’re still out $130 that you didn’t need to spend at all! Sure, you can “stick it to the IRS” and keep them from getting 70 of your hard-earned dollars, but you’re unnecessarily handing an extra $130 to the coffee machine company. Perhaps business is good right now, but in a few months you might be wishing you had that $130.

Why not just upgrade your coffee machine every two years, or even every three years? The machine still functions, and everyone except Dave the coffee snob thinks the coffee is perfectly fine. But you know that Dave is going to find a problem with the new machine and just go to the local artisan cafe every morning anyway, so why pay for the upgrade in the first place?

But I Really Want a New Coffee Machine!

Let’s think about why you want a new coffee machine. You got your current one last December as part of last year’s shopping spree, but clearly it’s not still giving you true happiness, otherwise you wouldn’t be so excited to replace it right now.

If the machine was broken, sure, it needs to be replaced. Perhaps it’s just a coincidence that your coffee machine broke on December 29th, or maybe Dave the coffee snob sabotaged it in hopes of finally achieving that perfect cup of workplace coffee. But in our experience, most of the time when businesses go on a year-end shopping spree, they’re replacing equipment that works just fine just to get a tax write-off.

TL;DR: In the end, this is your business. You have the power and prerogative to make purchasing decisions as you see fit (as long as they’re reasonable, ordinary, and necessary). But we at TL;DR Accounting are in the business of advising you to make sober, practical decisions, and we’d be remiss if we didn’t advise against gratuitous end-of-year shopping sprees. Remember this:

 

The key is to maximize your after-tax profit, not minimize your taxes.

Related Posts