I spoke recently with a friend who is a professional affiliate marketer. We got to the subject of taxes and mentioned a certain CPA that our Tax Patriots greatly admire and see as a authority on tax information. The irony was that the information he mentioned was the Section 179 depreciation which was one of the “bonus depreciation” provisions available in 2009 where a small business could deduct the full cost of most depreciable purchases such as heavy machinery or furniture.
Thanks to the passage of the “Tax Relief Act of 2010” in December these provisions remain. The irony is that this does not affect him as an affiliate marketer unless of course he had an office with expensive furniture or a server room since practically all of the furniture and computer equipment of a standard home office can be written off as “Office Expenses” on either a Schedule C or K-1.
The relevance of this discussion goes to show that businesses are very concerned with deductions, some to the point that they will justify an unnecessary expense by stating “oh, it’s a tax write-off.” Well if you make enough of these purchases you’ll have another issue to deal with- BANKRUPTCY.
I know this is over-dramatic, but the reality is that some businesses care more about deductions than profits. An example would be if you were on the fence about purchasing new computers because there’s a great sale going on where you can pickup ten $1000 laptop computers for $500/ea, however, you won’t need them until you expand next year. You buy it, knowing that you can deduct this expense, but tax time comes and you realize that the $5000 you spent on laptops have put your company in the red and you will have to close up shop.
Again, this is a theoretical example, but it goes to show that deductions need to be weighed against revenue forecasts. If you see a need for the item in question in the next year or so, the deal is too good to pass up and your revenue forecasts show that you’ll be able to cover the cost of the equipment then go for it! Otherwise, hold off.
Another example would be a subscription service where you are billed monthly, whether it is web hosting or a merchant account. Both of which are rather minuscule, however, can add up and put a business on a shoe-string budget in jeopardy. A better example would be leasing an office. In today’s economy, it’s a buyer’s market and office space can be had for next to nothing. When your business has no revenue, “next to nothing” is still something. In addition, there are great alternatives such as “virtual offices” where you rent a shared office at a much lower monthly rate than typical office spaces until you can justify the cost of a traditional store-front or office space.
Bottom line is check your own bottom line before making purchases. Talk to a JFTS Tax Patriot who can help advise on the expected tax savings of business purchases. This way you can weigh costs and tax savings against your revenue projections so that the next purchase you make is out of necessity, not impulse and certainly not because “it’s deductible”.