This is where it is very important to not let the tax tail wag the wealth-building dog. Here is a quote that explains it well. It is written by someone that promotes business tax decuctions and is favorably disposed toward them.
"When you add up your savings in federal, state, and self-employment taxes, you can see the true value of a business tax deduction. For example, if you're in the 25% federal income tax bracket, a business deduction can be worth as much as 25% (in federal taxes) + 13% (in self-employment taxes) + 6% (in state taxes). That adds up to a whopping 44% savings. (If you itemize your personal deductions, your actual tax savings from a business deduction is a bit less because it reduces your state income tax and therefore reduces the federal income tax savings from this itemized deduction.) If you buy a $1,000 computer for your business and you deduct the expense, you save about $430 in taxes. In effect, the government is paying for almost half of your business expenses. This is why it's so important to know all the business deductions you are entitled to take -- and to take advantage of every one."
(Source: Deduct It! Lower Your Small Business Taxes by Attorney Stephen Fishman)
There is no question that business tax deductions are beneficial IF you need the item you are buying. If not, it is foolish to spend money to get a tax deduction.
In the above example, if you already have a computer that does the job, you do not need to spend $1,000 to buy a new one. That means you will pay $430 in taxes. It also means you will keep $570 of after-tax income in your pocket.
That gives you two choices:
1. Spend $1,000 out of pocket for a computer you do not need and save $430 in taxes.
2. Save $1,000 by not buying a computer you do not need, keep using the computer you already have, pay $430 in taxes, and keep $570 in your pocket.
As I see it, the person that buys a computer he or she does not need is spending $570 (after the decuction is accounted for) to save $430 in taxes.
The person that continues using the good-enough computer he or she already has is keeping $1,000 in the bank, then paying $430 in taxes when the taxes are due, and retaining $570 in after-tax income.
There is another VERY, VERY important point to consider. The lower your make your taxable income by ramping up your tax deductible expenses, the lower the amount will be that you can deduct for contributions to qualified retirement plans like SEP-IRAs.
I would much rather generate tax deductions by maxing out retirement plan contributions that are based on higher income levels than by generating deductible business expenses by buying things I do not need.
Yes, there are the increased truck maintenance costs to consider if you are running an older truck instead of buying a new one every three years, as many owners do. But how much can the difference really be? New trucks have maintenance costs too. If you buy and run one truck for ten years, common sense tells you that you will spend less on trucks than someone that buys and runs three trucks (one at a time) in the same ten years.
On a new $200,000 truck, the FET tax alone costs almost as much as a whole new engine would. If you buy three new trucks in ten years, you are paying to the IRS the equivalent of three rebuilt engines; and you are doing it before you even drive your brand new trucks off the lot.
The $200,000 new truck with FET tax scenario does not apply to everyone. I'm simply sharing the above to provide food for thought. The business tax deduction information shared above does apply to every self-employed truck owner. Think twice before justifying your next equipment purchase on tax-deduction grounds alone.
