When a Business Tax Write Off May be Hurting you Financially

Today I had an email come into my inbox with the subject line "Tax write-offs to save you $$$? Yes, please!". As a tax girlie of course I opened it.

What I found inside was an email about buying more products/services this time of year in order to get the tax write off. This immediately made me think of David from Schitt's Creek.

While she is not wrong, there is more to consider than just buying something to expense it on your taxes.

So here is what you really need to know.

It does NOT always make sense to buy things for your business in order to get write off and pay less tax.

I always advise my clients to first think about what the business truly needs and if this purchase will help them or if they are just buying it to spend money so they can pay less tax.

When you purchase something for your business you're able to expense that (aka subtract the cost of it) from your business revenue. This is called a business expense or tax write off. The less revenue you have the less tax you pay.

Essentially a business expense is a dollar for dollar deduction from your business revenue. So if you made $60,000 in revenue and you had $10,000 of expenses you only 'made' $50,000 of taxable income. This is similar to how an RRSP deduction works.

Great, so if I want to reduce my taxable income I just buy more things I can expense right? Not exactly.

Let's say you buy a new computer for the business. This new computer is $1,000. Although you get a deduction of $1,000 it only saves you $340 in taxes. So you still have paid $660 out of pocket that you won't get back.

Now, for things you need for your business, this is great. You had to buy it anyway and you effectively only spent $660 for this $1,000 laptop.

However, if you're just buying things to get the tax deduction it's a very bad strategy. This is because you will still pay significantly more out of pocket than what you would be saving in taxes.

You will always be out more money buying something for your business than what you would have paid in taxes on the same dollar amount.

While yes, it's annoying paying 30-50% of your income back to the government in taxes you still keep the other 70-50% of your income. When you spend that income on a product or service 100% of the money is gone. Think of it this way. On zero dollars of income there is zero tax, BUT you also made no money.

Even though it's tempting to buy things to reduce our tax bill, in order for you to 'save' $1,000 on your taxes you would need to spend $3,000 or $5,000.

For that reason, it only makes sense to spend the $3,000 or $5,000 for things you really need - not just for a tax break.

As we near the end of the year I would recommend you consider what the business needs and what is worth spending your money on and not focusing on the tax deduction you could get from it.