If you are self employed, an expense for an item needed to grow your business may be a good decision, and will slightly reduce the amount of tax you will pay the government. A write off, however, is typically a poor decision if you incur that expense primarily “because it is a ‘write off’”. Depending on your income level and tax bracket most “write offs” will only reduce your taxes by around 35%, which is similar to something being on sale for 35% off. It’s like giving a store $100 for something you don’t need to prevent giving the government $35 of taxes and keeping the other $65 for yourself to spend.
Have you ever heard someone say “it’s okay, ‘it’s a write off!’”? This is a common phrase used among several small business people who know they can write off certain expenses against their self employed or corporate income. However, a tax write off may not always be as great as it seems. Even though the expense may be a “100% write off”, all this means is that you can claim the full expense on your taxes to reduce your taxes owing. If you are in the lowest tax bracket you may save around 35% of the expense you incur.
Certainly if you need to purchase items to operate your business, grow it, or make it more successful, make sure you keep all your business receipts and claim every penny you pay for eligible expenses. However, if you are looking at a more expensive (not needed) option, or some unneeded expense and justify the purchase by thinking it is a 100% write off, you may be surprised.
Think of a tax write off like a store sale. If a store said they are having a 35% off sale, you would likely purchase any of the items you were already planning to get, but it wouldn’t drive you to go purchase many additional unneeded items. If you pay $1,000 for an unneeded item because it’s a tax write off think of it this way:
Bill starts with $1,000 revenue in his pocket. If he doesn’t incur the unneeded expense, he will pay taxes on this revenue of approx. 35% ($350), and is left with $650 after tax cash that he can spend however he likes.
If Bill instead follows his friends’ advice and spends his $1,000 revenue on an unneeded business expense to avoid paying the tax on his income, he has now given a store his $1,000 leaving him with nothing to use personally. Although he has successfully found a way to avoid paying the government his taxes, he has decided to give a store $1,000 to avoid paying the government $350.
Any required business expenses to grow your business should be incurred and claimed to the maximum allowed. Any expenses incurred solely for the purpose of a tax write off are typically a poor financial decision.
See the professionals at TaxTeam for more ways to pay less tax and keep more of your money in your pocket. Call 306-694-4829 or visit www.taxteam.ca