Small-business owners discover some tax deductions aren’t worth it
For small businesses, it sometimes makes more sense to be more frugal or defer tax deductions.
Lower taxable income could also hurt a business owner’s personal goals.
GreenPal CEO Bryan Clayton spent years deducting every possible business expense on his tax returns. When he sold his former company, Peach Tree Inc., in 2013, he discovered that probably wasn’t the greatest idea.
“I was penalized for taking all of those not-quite-necessary deductions,” he said. “Had I taken a better approach, I would’ve made a lot more money in the long run when my business was acquired.”
That’s because the commercial landscaping company’s value, which was grossing more than $8 million annually, was determined on earnings after interest, taxes and expenses. Smaller taxable income meant a lower sales price.
Self-employed professionals and business owners (there are over 15 million, according to the Bureau of Labor Statistics) may be tempted to spend freely and take as many deductions as possible in any given year, yet there are circumstances where it makes more sense to be more frugal or defer deductions, tax and financial experts say.
It’s important for the self-employed to know the rules. Businesses must report all earned income and expenses. There are cases where businesses claim items that aren’t actually legitimately deductible.
“They think that their personal cellphone that they may use for a few business calls, their home internet, their only car which they claim 100 percent for business, and other personal expenses can be business deductions,” said Abby Eisenkraft, an enrolled agent and CEO of Choice Tax Solutions Inc. in New York.
Not only does that cause a problem if they’re audited by the IRS, it could also hurt their cause when it comes to a sale, qualifying for a loan or making a retirement contribution based on taxable income, she said.
However, there are times where it makes sense to defer making purchases, and be a spendthrift in any given year.
Consider the following circumstances:
When you want to amp up retirement savings
Self-employed Texas designers Pablo and Beverly Solomon tried for years to limit their taxable income by spending on their businesses, which held down how much self-employment tax they had to pay for Social Security contributions.
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