Mark Kohler breaks down why a $10,000 business write-off doesn't save you $10,000 in taxes. At a 30% tax rate, that $10,000 expense only cuts your tax bill by $3,000, leaving you $7,000 out of pocket. Before buying equipment, ask if you actually need it.
Let's say I've got a $10,000 purchase. It could be a new oven for our restaurant. It could be a new lawnmower for my landscaping business. It could be a new piece of equipment in the doctor's office. Could be a new computer system. If you're working online, doing computer work, you may say, ooh, ooh, I want a tax write off. I'm going to spend that 10 grand. This is a smart move. It doesn't mean you get a dollar for dollar tax benefit. So if you owe 10,000 in tax, it doesn't mean if I spend 10,000, I save 10,000 in tax. You have to look at what is your tax rate. So if let's say you're 25 Fed 5 state, you're kind of an effective tax bracket of 30%, which is the swath of most Americans right there. You're pretty safe saying 30%. So if I take a $10,000 expense and go buy that piece of equipment, whatever it is, I'm going to save $3,000 in tax because my profit went down by 10 grand because I spent money. So I'm going to pay tax on $10,000 less of income. Well, I'm in a 30% rate, so I save 3,000 dol tax by spending that money. Then we have to go, is that a real good use of $7,000 of mine? Did I really need that equipment?
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