It is common to hear the phrase “tax write-off” when you hear companies or individuals looking to lower the amount of taxes they must pay during tax season. Taxes are not fun. I have made some mistakes when it comes to writing off items to lower my tax payment that have ended up costing me a lot of money and opportunity in the long run.
At the time of starting a new business in 2014, I was uneducated about many things when it came to finances, investing etc. I was running a sport performance business where I normally accepted payments in cash which felt great at the time, but hold on. It was not until a few years later that I was looking for a bank to loan me money to open up my very own facility. I was denied by multiple banks, including the bank I had been banking with for years. At the time, I had my Master’s Degree, 6 years of experience in my area and a very high credit score (upper 700s). I had never been late on a payment. Those all sounded wonderful, but when I showed my tax returns from the previous years, it showed that I was making 10k-12k per year. I did not claim any cash and I deducted all training equipment from cones to dumbbells etc. Nusenda was the only institution willing to loan me money, of course if I put up my brand-new truck up for collateral, you know, just in case I did not pay it back.
Year after year, I would continue to write-off as much as possible and claim as little as possible, which most small business owners and entrepreneurs do. I began to realize that if I ever wanted to own real estate, have multiple investment properties, qualify for multiple loans in the near future or be marketable for investors, I would need to change the way I thought about write offs and how it actually is costing me more in the long run just to save a few dollars in the short term. In saying that, I completely understand why people do it. It does not feel great to write a big check at the end of the tax year for something you will not see again, or you may not even have the money to begin with.
Here are the major pros when writing off everything:
- Paying less to the government: You may save a few thousand dollars per year and have a little more in your pocket, but if you are still renting where you live or do not own many assets, is it worth it?
- Qualifying for very affordable health insurances: This may be the only true benefit. I know every place I had lived, I actually had decent health coverage for VERY cheap. However, I was hardly ever sick or had hospital visits besides regular checkups.
Here are the CONS:
- Qualifying for a home loan, investment property, equipment loan; This is a nightmare. If you cannot qualify for a home or investment property, you will continue putting money into something with no equity. Every month you are paying for rent. If you owned the actual property, it would be going towards something you will eventually own outright. This alone will save you thousands and thousands of dollars in the long term.
- Difficulty of setting a monetary “value” of your business. (You may think your business should be worth more, but the numbers do not show that.) If investors or other interested parties wanted to buy your company or invest in you, how will you show them what your company is ACTUALLY worth? You must show real numbers with real balance sheets. You cannot say your company is worth 1 million dollars when it makes you 30k per year. Based on what?
Before next tax season, I want you to ask yourself these key questions. You may save yourself literally thousands of dollars, time and effort.
- Do I plan to buy a house in the next two years?
Find out what this entails. (Two years of tax returns, credit score, down-payment, pay stubs etc.)\
- Do I plan to open up my own business or brick and mortar?
Find out what this entails ahead of time. (Tax returns, credit score, balance sheet and projections, loans, interest rates)
- Do I plan to sell my business?
Find out what you will need. (Proper evaluation, contracts, financial statements, profit and loss statements)
It took me a very long time to understand that writing off everything was losing me money. I did not have the most forward thinking. I wanted to have as much money in my pocket and pay as little as possible which most of us do right? However, this is why developing and planning is a critical piece of any business. It is not simply just writing down your short term and long terms goals. It is about connecting all the dots and pathways between them. There are so many great resources on YouTube that discuss these topics, and I strongly suggest you take some time to educate yourself as much as possible. Of course, not everything on YouTube or the internet is always true, so it is important to do research on whoever is putting out this content.
Last thing I will leave you with. I cannot stress this enough, HIRE a professional accountant. Do not do this all by yourself. You will never see your own blind spots. A professional who understands your accounting and tax goals will help you save time and money in the short and long term. The last thing you want is to lose an opportunity of owning real estate or qualifying for a loan because you are behind on your taxes, did not account for gross receipts taxes, etc. Do not make this mistake, you have been warned. If you need an accountant, mine is great (no, I do not make a referral commission for sending people to him, although I should ha). Any questions you may have for me, feel free to reach out!
Jared Saavedra, MS, CSCS, PES, CPT
Founder, Athlete Ready Global