Just because something is tax-deductible, it doesn’t mean it’s a good or smart buy, or good or smart debt. Quite often, business owners and consumers alike fall into a trap of buying things they really don’t need based upon the fact that it’s tax deductible. Moreover, some people choose to carry debt because it’s tax deductible. But is this the right thing to do?
Consumers across the world wonder; Does it make sense to pay off my mortgage early and lose the tax deduction? What about student loans? How about paying for dry cleaning for work uniforms, that’s tax deductible, so why not? The government is offering tax credits for buying new windows, appliances, or whatever else, and they’re tax deductible so it makes sense, right?
Business owners ask questions such as; Should I buy season tickets to take my clients out, it’s tax deductible right? Should I buy my staff new cell phones every year, it’s tax deductible?
Buying based upon tax savings should be avoided. Below, I hope to change your thinking by showing why that logic is flawed, and show you what you should base your decision making on, instead of making that choice to buy something or to carry debt simply because it’s tax deductible.
You should be questioning whether or not you really need the product or service in the first place. If you determine that you have a real need, then the question should be can and should you do it yourself based upon the time and cost. Leave tax deductions out of your analysis, at least to start.
So, what about the consumers whom get advice to not payoff their mortgages because they would lose the tax deductions? Should they iron their own uniforms or pay the local cleaner to do it for them? Heck, new windows would look really nice, after all it’s going to be a tax deduction right? Wrong, if you’re having to pay interest of say $10,000 per year on your mortgage to get a tax deduction of $2,500, you’re wasting $7,500, not saving $2,500. The same could be said for doing your own ironing, or deciding whether or not to buy new windows. You must look at in total, what am I spending to save? Am I really saving anything? The reason you should consider buying new windows would be because you believe there will payback on your investment, for example you will be lowering your heating and cooling bills enough to recoup the costs in 5 years, or through the sale of your home in the future. On the other hand, sometimes it does make sense to outsource portions of your life, if others can do it more cost effective than you and you don’t have the time or would be losing higher earning potential elsewhere, you might want to pay to have others do things for you, and the tax deductible nature of the expense should come into consideration at that time .
So, the small business owner wants to wine and dine their clients because the tickets are considered tax deductible (and they like going to the ball game too)… But this type of expense is only 50% deductible on the owners taxes. What else could he spend that money on though that would be 100% deductible and drive more business? It’s nice and all to have those seats to take your clients to, but do you really need to layout the expense of all those season tickets when you could easily pick and pay for the games you really must take a client to? Instead of tickets, advertising your business may pay more handsome rewards. But until you do the analysis, basing your decision to buy season tickets for the ball games because they are tax deductible is only looking at a part of the equation you need to. The same thing is true for buying cell phones or anything else, the question should be is it business critical, or are you just wasting money because a portion of the expense is tax deductible? Remember, if you have to spend money to save money – you’re not really saving any money at all.
In summary, just because something is tax deductible does not mean that it’s saving you money, quite often that’s not the case. Take the time to really decide if you must buy something, consider the payback on your investment, instead of the ability to deduct on your taxes. In the long run, you’ll be much better off.