What Is a Tax-Deductible Purchase?
Any purchase that you can prove is necessary for running your business can be a tax-deductible expense. These deductions lower your reported income and, by extension, your tax liability.
For tax purposes, the official definition of a deductible is:
An expense that an individual taxpayer or a business can subtract from adjusted gross income while completing a tax form. The deductible expense reduces reported income and, therefore, the amount of income taxes owed.
To put this into easier-to-understand terms, this means that if there’s a purchase that you can write off as a necessary purchase to keep your business running, you’ll be able to lower your reported income by that amount.
The lower your reported income, the less you’ll have to pay in taxes. For example, if you made $100,000 but spent $90,000 in start-up costs and supplies, you will only be taxed for the $10,000 difference.
Benefits of a Tax-Deductible Purchase
Making tax-deductible purchases can be an excellent strategic move to lower your tax burden at year-end.
If there is something that you have been waiting to buy for your business, that purchase can help reduce your tax liability, as long as you can justify it to the IRS.
If you’re confused about what “justification to the IRS might entail,” . . . for example, you would not be able to write off “buying a bouncy house for your business” when you’re in the business of clothing alteration.
Whatever you’re trying to deduct from your income needs to be related to your business.
So long as you can reasonably justify what you’re buying and can explain how it helps your business, making a tax-deductible purchase at the end of the year can be a net benefit to you and your business.
However, you should not take this as an invitation to buy something just to lower your taxable income. Only buy things that you need. Even though tax-deductible purchases benefit your taxable income, you still have to pay for whatever you purchase.
As long as your purchase isn’t going to break the bank and so long as it’s helpful and essential to your business - again, be sure that you can justify it to the IRS - purchasing at the end of the year can be a great way to upgrade your business and downsize your tax burden.
Note: This article should not be construed as tax advice. Check with your CPA if you have questions about your particular business.
Don’t have a CPA? Write to us at Contact@BlueSparkSolution.com, and we can put you in touch with one.