Don’t spend money to lower your tax bill

Hey! The good news is, this is the most popular blog I’ve ever written on this site! The bad news is, it’s going away. I’m in the process of rebranding this site to focuse solely on connecting with freelance writing clients and I’ll be taking my blog down. But don’t worry. I recently updated this topic and moved it over to my new site that’s all about taxes and small business accounting. Check out Should I Spend Money to Lower My Tax Bill? over there at Life & Taxes. Thanks for reading!

Last night I was deep into one of my favorite pastimes – watching Instagram stories – when I came across a small business owner asking for tax advice. Like many small business owners coming up on another year-end, she was worried about her tax bill and wondering if there is anything she should do before year-end to lower it. Specifically, she asked whether she should spend money to lower her tax bill before the end of the year.

best bistros (1)This small business owner had posed this question to her accountant, asking if there was a “sweet spot” for the amount of money she should spend so that she doesn’t have to pay too much in taxes. According to her story, the accountant answered yes, there is a sweet spot and more expenses are always better. But the accountant never told her where exactly that sweet spot is.

I sent her a short message with my thoughts on the subject, but because I know so many other small business owners and freelancers may be asking the same question right now, I thought I’d expand on it here.

Should I spend more money to lower my tax bill?

In a word: No.

Let’s consider a fictional scenario: Justin runs a small consulting business. He’s had a great year, landed several new clients while keeping the existing ones happy. Justin is concerned about his future tax bill, so like my friend above, is considering whether he should invest in his business before year-end to lower his tax bill.

The costs he’s considering include:

  • A new car (his consulting work has him driving his personal vehicle for business quite often)
  • A new laptop
  • Office supplies such as paper, pens, notepads and ink cartridges for his printer
  • Registration for an upcoming conference and airfare to travel there

If Justin came to me with this question, I would ask him what he NEEDS for his business today or what he will definitely be purchasing in the near future. Perhaps Justin is running low on office supplies and would probably put in a big order sometime in the next month anyway. In that case, if he has the money to buy the supplies now, it definitely makes sense to accelerate those expenses into 2017 so he can get the tax benefits now.

Likewise with the conference registration. Maybe it’s a conference Justin attends every year where he makes great connections that help propel his business to new levels of success. Buy those tickets!

But what if Justin’s current car and laptop are working just fine? He wasn’t really in the market for either a new car or a new laptop, but he’s considering buying them now just to lower his tax bill.


Some of you reading this may be saying, “That’s crazy! Who would spend money on stuff they don’t need just to avoid taxes?” But I can’t tell you how many times I’ve had clients in my office posing questions just like this.

When I worked in public accounting, we told our clients, “Don’t let the tax tail wag the dog.” In other words, don’t let the least important part of something control the more important elements.

If you’ve had a record year, first, celebrate! Then, face the fact that taxes are a cost of doing business. Paying taxes means you’re making money. Of course, we all want to do what we (legally) can to reduce the amount we have to pay, but spending money on stuff you don’t need is not the solution.

Plus, you don’t get a dollar-for-dollar reduction in your tax bill for every dollar you spend.

Going back to Justin, let’s say Justin is in the 25% tax bracket. For every $100 he spends, he’ll save about $25 in taxes. So Justin can go buy a $1,000 MacBook and save $250 in taxes, but unless he actually needs the MacBook, he’s probably better off keeping the $1,000 and just paying the tax. Don’t you think?

Smart ways to reduce taxable income

There are a couple of ways you can spend money to reduce your taxable income, while actually keeping the money for yourself. This includes:

  • Contributing to a retirement account such as a Traditional IRA, SEP IRA, or 401(k)
  • Contributing to a Health Savings Account (HSA)
  • Making an S-Corporation election

I’m not going to go into the nuts and bolts of an S-Corp election because it’s complex and it’s not the right decision for everyone – talk to your tax advisor if you’re interested.

But if you’re eligible to contribute to an HSA and if you haven’t already maxed out your contributions to your retirement accounts, you may be able to lower your federal income tax while keeping the money in your own pocket. It won’t be quite as accessible as it is in your business checking account, but it will be yours. That’s a smart way to lower your tax bill.

Disclaimer & disclosure: While I am an accountant, I am not a lawyer, nor do I know your individual situation. This advice comes from my personal and professional experience, but your circumstances could be very different. I recommend that you seek the help of qualified professionals. Also, some of the links included above may be affiliate links. If you click through and enroll or make a purchase, I may receive a commission. Thank you!


Get Organized for Tax Season with Expense Categories

Working with freelancers and new small business owners, a question I hear often is “What can I deduct?”

Image: via Stock Snap

The short answer is any ordinary and necessary expenses of running your business. Ordinary expenses are ones that are common and accepted in your field. Necessary means those that are helpful and appropriate for your business.

I recently wrote a post for Freshbooks that covers common deductible expenses, differentiating between assets that need to be capitalized versus expenses, and how to set up expense categories in Freshbooks.

An Easy Solution to Organized Taxes: Business Expense Categories

If you’re wondering what you can deduct or just trying to get your expenses organized before tax time, give it a read. I hope it helps!



How to Find a Small Business Friendly Bank

As a small business owner, finding a small business-friendly bank was actually one of the more challenging aspects of setting up my business! When I began my search, I quickly discovered that many banks charge hefty fees unless you keep a large balance on your account. Others make small business owners jump through hoops to prove they’re a legitimate business. That’s why I was excited to tackle this assignment from FreshBooks – How to Find a Small Business Friendly Bank.

Photo by Tim Evans on Unsplash


If you’re looking for a bank to handle your small business checking, savings, investing, and financing needs, give it a read.

Let me know in the comments: what’s your #1 concern when searching for a small business bank?