The end of the year is right around the corner, and holiday spending is going to ensure a tidy chunk of profit for a lot of businesses.
What I’m often asked by new business owners, is if they should spend that little nest egg, or save it. Now, I understand that most people would immediately say spend it. After all, you could deduct these last-minute purchases when you file your tax refund.
But is it wise to go out looking for new things to buy? Or should you hold onto that money instead?
Conventional wisdom says to spend
Read nearly any article written on this subject, and it will probably recommend that you buy whatever you need by the end of the year so you can maximize your tax refund. But before you start writing checks, remember that most of the time you will not be getting a dollar-for-dollar deduction.
The rule of thumb for business expenses is that every dollar you spend on something for your company only saves you around 40 cents on your taxes. So if you’re blowing through your money, know you likely won’t be getting it all back through your refund. Needless consumption will bleed your business dry before it even has a chance to really get going.
But should you save instead?
If your business is new, then yes, you should probably save.
I’ve long been a proponent of bootstrapping and making everything last for as long as possible. By all means, invest in vital equipment, software and other purchases, but do so judiciously, and without taking any extra loans. In fact, you should put away enough cash to cover wages and other operating expenses for three months.
That may sound like a lot to save, but that bit of financial breathing room is what lets you make big investments later, without having to beg the bank for money. But, obviously, if you’re struggling to pay yourself, then you really shouldn’t be buying anything big.
Be a penny-pincher
As the end of the year approaches, don’t just spend money for the sake of spending money. Again, you likely aren’t going to be able to get it all back through your tax refund. Look first to smaller assets and consumables — printing supplies, marketing material or accounting software.
If you do need to invest in something larger, see if it qualifies for a Section 179 deduction, which could allow you to deduct the full cost of certain purchases, up to a limit. And, if your business is profitable and you’re pulling in a decent wage, you can also shelter income in a qualified retirement account.
Just make sure you meet with an accountant to make sure all of your deductions, credits and deferments are in order. ●
