“Do I need to buy, and expense, equipment or a vehicle before the end you the year to save income tax?” Every CPA involved in business tax planning hears some variation of that question several times, on an annual basis. Our first question back to you is, “Do you need it?”
The time to buy equipment is when the investment in the equipment will produce enough new revenue to warrant the purchase. If it will not produce new revenue, is it necessary to protect the current revenue stream? The company’s management should be challenged to see if their prospective purchase will:
- Increase throughput
- Increase efficiency
- Cut expenses
- Replace an asset that should be replaced
Theoretically speaking, if a company has the cash in the bank, spending $50,000 to save $15,000 in tax will leave $15,000 in the bank. Paying $15,000 in tax on that same $50,000 will leave $35,000 in the bank. The first scenario allows for the attractive prospect of getting a $50,000 item for $35,000. The $15,000 paid in tax in the second scenario does not provide the company any benefit, except for more cash in the bank versus the first scenario.
There often isn’t enough cash in the bank to make a large purchase while maintaining enough cash to continue operations. In this situation, debt is acquired to make large purchases. With debt comes a future obligation for repayment of principal and interest. The future principal payments do not provide a tax deduction, but the amount paid for interest does. If the equipment is expensed for income tax purposes in the year of purchase, it could lead to a cash flow issue in future years. In the future, principal will have to be paid, with no associated depreciation deduction for tax purposes. Therefore, there will be a cash outlay for principal payments and income taxes.
Contact Rea’s Ohio Cash Flow and Tax Professionals
It is common sense that cash is the lifeblood of a company. It takes cash to keep the lights on and pay suppliers and employees. If there is no cash, there is no company. Income taxes are only a part of the bigger picture. While no one likes to pay more in income taxes, some analysis is needed before making those decisions. If you need help seeing the bigger picture or need assistance with financial analysis, contact Rea & Associates. Rea’s Ohio accounting and tax professionals will look out for the big picture of your business’ finances. We’ll help you maximize your cash flow and minimize your income tax.