It’s the end of November, and the year is almost over. Time to get your taxes in order.
Hopefully your screen printing business did really well this year. You made a whole bunch of money.
Well, if you made a bunch of money – you’ve got a good problem: you owe the government a bunch of money!
One shop has been facing a projected tax liability of around $20,000 according to my profit & loss statement and projected net profits. So naturally, they’ve been scrambling to figure out how to reduce their tax liability.
Reducing Your Shop’s Tax Liability: Section 179 vs. IRA/401k
I’ve learned that there are a couple of solid ways to reduce your taxes.
The first is to leverage Section 179 – commonly known as the R&D tax credit – and buy new equipment for your shop.
The second is to contribute to your IRA or 401k accounts.
Personally, I’d much rather buy new equipment. Why?
Because IRA & 401k contributions – while great – reduce your available cash. Every business survives on cash. As the old adage goes:
Cash rules everything around me.
Actually, it’s “cash is king,” but I can’t resist a little Wu Tang reference.
Winner: Section 179 is better than a 401k
If you’re contributing to your IRA or 401k, the cash that you’ve contributed will be tied up in those accounts until you’re almost 60 (unless you want to pay a huge penalty for early withdrawal, which eliminates the whole point of this exercise).
For me, waiting until I’m 60 might as well be a lifetime! That’s money I can’t use to pay bills. Worse, it’s going to reduce my available cash going into the slowest time of the year (winter is coming).
Secondly, I can really leverage financing the new equipment to be favorable to my cashflow:
- Initiate financing new equipment for a few thousand dollars
- Get a ~$20,000 tax break
- Wind up with a few thousand dollars in cash from my tax return
Yes, I’ll have to continue making payments on the new equipment. But – that equipment will pay for itself quickly (and then some).
Make Your Cash Work For You
By using financing, I’m basically letting the finance company and the government invest in my business – and wringing more value out of my cash.
The equipment will help you to generate more revenue in the coming year, which in turn allows you to continue leveraging Section 179 to keep investing in your shop.
See Your CPA
This is not legal advice and I’m not an accountant.
It should be obvious, but you need to consult with your CPA about your specific predicament if you’re facing a big tax burden & aren’t sure how to deal with it. Only they can evaluate ways to make your money work for you.
Don’t get crushed by a big tax bill: get the right advice for your shop!
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