The truth about taxes and deductions

I was once intrigued by the lure of tax-deductions in business...

Buy this and buy that for your business and deduct it from what you owe on your taxes next year.

The real estate world loves tax deductions. They go on and on about them, but for many inexperienced folks, the ones who have yet to do a deal or really begin to build something of value, they don't quite understand what this actually means.

Tax deductions are great when you're making money. A tax deduction is a portion of money subtracted from your total, taxable income. So the idea is that you spend money in certain ways that are more tax friendly. Certain tax classifications allow you to deduct more, so it is better to "spend" in those areas.

For example (these are fictitious and are for illustration purposes ONLY):

Meals and Dining for business = 50% deduction

Local travel = 100% deduction

That means that if you spend $200 on local travel for business, all $200 can be used as a tax deduction.

Now if you spend $200 on meals and dining for business, only $100 can be used as a deduction.

Therefore, how you spend your money matters. CPAs are paid large sums of money to go through financial data to figure out how to classify expenditures, and to plan for future ones, all to avoid paying more taxes in the end.

Yes. People actually plan how they spend, invest and hold their money based on how/when/why they want to use it and again, to avoid paying hefty sums of money in taxes.

And, as an FYI: I am not a CPA. You should speak to a CPA if you're a business owner, are considering going into business or want to better understand money (and you should want to do all 3, especially the last one). Consider learning about some basic personal finance here and here.

My sole goal in this post is to share with you that tax write-offs are great... when you have income to actually deduct from.

The lesson here is to not spend recklessly on the belief that it wins you something substantial in the end (i.e. a massive tax break) or that you'll be so rich in a few months that it won't matter. Your spending habits matter...

P.s. There are ways to deduct past expenses in your business if you are now profitable. Talk to your CPA to find out more.