I am often asked by my clients if purchasing items for their business such as a new car or more stock is the best way to reduce tax.
My answer is: it all depends on your motivation!
For many small business owners, the desire to save tax can drive them to unnecessary expenditure. You know the thought process: “we made a profit this year, so we better spend some of our cash to reduce our tax bill”.
Is Spending the Best Way to Reduce Tax?
When I hear this, I always ask my clients two questions 1) is this purchase really going to benefit the business and 2) will you get a return on your investment. If the answer is yes, then you should buy the things that your business needs. This is the right motivation for making the decision to spend or not to spend within your business.
Don’t get me wrong. Small businesses should always be looking at how they can run a better business and legally mitigate their taxes. Becoming more efficient, making improvements and replacing worn-out assets etc can be the best way to reduce tax and is all part of this process but more savvy business owners only do so when they need to and plan for it.
The mindset that you are somehow saving money by spending more is a false one. You can only build wealth from ‘after-tax’ income so attempting to lower your taxes this way lowers your ability to create wealth. If you need to make a purchase the possible, associated tax benefit should always be secondary to the actual needs of the business.
So, my advice to you is this: if you’re considering making purchases for your business then do so if it is needed and if its expenditure that will benefit the business. Just make sure that your motivation is right i.e. don’t spend a dollar to save 30 cents in tax!
It may well be a better option to pay the 30 cents in tax on your business profit and put the remaining 70 cents in your pocket. Rather than wasting the money on something you don’t need the after-tax dollars could be used more effectively i.e. retiring debt or providing for retirement by making superannuation contributions.
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If you need any advice on the best way to reduce tax specific to your personal circumstances, please don’t hesitate to get in touch with our team of business accountants at Taggart & Partners today on 07 3391 1188 or email: firstname.lastname@example.org
Updated 18 June 2020