Year End Tax Savings – What You Need To Know

Check to IRS for all my money

While engineering has been my life’s work, accounting was my formal training. At year end, taxes becomes an issue to consider as the 2016 tax season ends. Today we’re going to run through the tax consequences of purchasing equipment and/or materials before the end of the year.

While tax┬áissues are not the top of the list for most of the year as most of us are just trying to make a buck and pay our bills. If, and this is a big if, you made money this past year and are showing and projecting a profit for the year you are going to want to read his. As we all know, the more you make, the higher the tax rate. So let’s explore what tax does to the cost of equipment you may purchase this tax year and pay for part of it with tax savings. If you made enough money that your tax rate is 15%, every dollar you’ve earn has to be paid in tax to the IRS at that 15% rate. So, if you can reduce your net taxable income by purchasing equipment or materials you will offset the purchase price by the equivalent tax savings. As an example, if you make a $30,000 purchase of equipment or materials before the end of the year, you will pay $30,000 to your vendor and gain back $4,500 in a reduced tax bill. If you are “lucky” enough to be in a 30% tax bracket, that saving in tax would be $9,000, meaning your purchase of $30,000 would only cost you $21,000 in actual cash outlay. Why? If I reduce my tax bill by $9,000 that I don’t have to pay the IRS, I’ve effectively bought $30,000 worth of stuff for only $21,000.

Now, before you go off the deep end and spend all the money you’ve made this past year to save tax, check with your accountant to determine your impact. You can save yourself cash poor and potentially broke if you go overboard.

All of that said, consider what purchases could increase your bottom line, what equipment you currently have needs replacement, and what expansion could benefit your business. Buying for the sake of savings tax isn’t a good business plan, but buying things that make sense is a good reason to invest and save tax. And don’t buy the most expensive because it saves more tax, buy value. Use all of your business skills to buy the right things and not because someone tells you you’ll save more tax. Buying right trumps tax savings. Remember that tax planning is now, not after January 1. In most cases, trying to back into the last year after the calendar turns a page is too late.

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