The value of a tax deduction…

dollar signAs the end of the financial year approaches, the focus of many businesses and individuals turns to their taxable income…and how they can reduce it.

Of course there are two ways to reduce taxable income, either by reducing receipts/income or increasing expenses/deductions

Most of us are quite fond of receipts and income, so often the path chosen relates to deductions…

But before you rush out and spend a heap of money to get some deductions, I want you to ask yourself two questions:

1. Do you really need the item?

2. Can you afford it?

The basis behind these questions relates to the fact that for every dollar we spend on eligible deductions, we each save our relevant tax rate.  So if you are a company with the tax rate of 30%, for every dollar you spend you save 30 cents in tax, but are still out of pocket 70 cents.  The same goes for individuals, if you are in the middle tax bracket (including Medicare Levy) of 34.5%, for each dollar you spend you save 34.5 cents in tax, but are still out of pocket 65.5 cents.

It’s no secret that times are tough for small businesses, so I urge you to consider your current and foreseeable cash flow needs – it may be that you have a need for that 70 cents or 65.5 cents for something other than what you were going to spend the whole dollar on, and going without the deduction now may benefit you in the future.

Of course if you need the item and you can afford the payment, then please do everything you can to reduce your taxable income – there’s nothing wrong with doing so!



Leave a Reply

Your email address will not be published. Required fields are marked *