Sunday, March 8, 2009

Is this what they mean by "do the math?"

In response to my post
To deduct or not to deduct. Jamie sent back the following really good question:

Thanks for responding June.

In regard to your comment about it being a confusing question, let me explain. Say my business grosses $100,000 a year. After payroll, vendor bills, utilities, supplies, and other business related expenses, I'm left with $40,000.

The government is going to say "Okay, you have $40,000 left over. We're going to take a percentage of that." My concern is choosing between lowering my taxable income, and saving the money that I make.

So if I buy tissue paper for my office bathroom, should I be conservative and get the cheaper brand? Or should I buy the name brand because any money I would have saved getting the cheaper brand will be taxed by the government?

Or if there is a business convention coming up and the entire trip costs $3000, should I take the trip and not get taxed on the $3000? Or should I "save money" but still get taxed on it by the government?

I guess it's like a catch 22: If you spend more of your income, you may not have much left over for other interests. But if you're "saving money" by not spending it on legitimate business deductions, then the IRS will take a larger percentage of the unspent money.

I hope this made some sense. If it does, then my question is: Is it wiser to spend more through your business to reduce your taxable income than to try to save money and get taxed on the unspent money?

Thank you.

OK, all you indies. Follow this for I hope it will give you insight into answering your own questions because I think Jamie could answer his own question were he to simplify it.

What if I said to Jamie: Would you want me to give you $100 to deposit into your savings account or would you prefer I give you a percentage of $100 for you savings account?

Or if I gave Jamie, or you, the following choices, which would be the better pick? Keep in mind that you pay approximately 30% of your net income to taxes or reduce your tax by 30% of every business deduction.

OK, Jamie. You've got $200 in your pocket.

First choice: Spend $200 on a large supply of soft expensive toilet tissue. You save $60 in taxes. You put the $60 into your savings account.

Second choice: Spend $100 on a large supply of scratchy cheap toilet tissue. You save $30 in taxes. You put $130 -- that's the $30 tax savings + the $100 you did not spend -- into your savings account.

The smart shopper or the smart indie-business chooses to buy the less expensive toilet tissue -- the second choice -- unless there is a business reason to buy the more expensive toilet tissue. The Hilton buys the more expensive the Heartbreak Hotel buys the cheaper.

Jamie mentions a $3,000 conference. You do the arithmetic. If you choose to attend the conference there better be a really good business reason why that conference will make your business more successful or more productive because if you go it's $2000 out of your pocket. [Did you get the correct answer?]

OK. Math lesson over. By the way, I used to tutor math in the old days back when they thought girls could count but weren't quite up to multiplication and division.


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