Demarest: Why Write-Offs Shouldn’t Drive Your Business Decisions

As an accountant, I am often asked by my clients for recommendations on equipment purchases and capital improvements to offset tax liabilities. The situations and clients surrounding this all vary widely, but the general theme is consistent among them: they are all searching for write-offs and often want me, as their accountant, to guide them on what choices would be best for their business. It would be foolish to run your business without considering the tax implications, but it is equally foolish to run your business based on (often incorrect) tax implications.

In today’s tax code, you can generally write off almost anything you purchase for an automotive repair shop in the first year, including scan tools, parking lots, alignment machines, and trucks. Tax codes are often written to change people’s behavior, and the changes in Section 179 expense and bonus depreciation rules in the last 10 years are a very good example of that. Buying equipment has become most business owners’ knee-jerk reactions to minimize tax liability.

The Timing Problem

The issue with this line of thinking is twofold: it assumes that you will get all of the perceived benefit you imagine, and while it could be a positive move for tax liability, it could be a negative move for your business. To address the first issue, you have to consider the timing of the conversation. If you have it too early in the year, you won’t be able to accurately forecast your taxes; if you wait too late, you’ll have fewer choices at your disposal. As you might imagine, committing to buy an alignment rack in April because you are having a record start to the year could leave you with that same alignment rack in December with no tax value—because you had a poor end to the year. Now you are left with a piece of equipment bought for tax savings, but you can’t save tax if you don’t owe tax.

Business Decisions First, Tax Savings Second

This leads us into the second flaw in the logic—basing your business decisions too heavily on tax consequences could lead to the wrong decision. When I have this conversation with my clients, I respond with a question of my own, and I encourage you to do the same for yourself. Instead of asking, “How much will this save me on taxes?” ask yourself, “Will this make my life or my employees’ lives better or easier, and/or will this make my business more money?” I would argue that replacing the fridge in the break room is a good business decision because it will improve your team’s morale and overall workplace environment. If steered only by tax savings, though, that $100 write-off might not seem as attractive. From a strictly tax-savings perspective, the purchase of a new alignment machine for $100,000 would be just as useful as a new truck for $100,000. However, when viewed through a business-purpose perspective, the alignment machine would be the clear choice. One purchase makes us money and the other costs us money, yet they both save us money on taxes.

When Taxes Should Influence Your Decisions

If the world were this simple, my life would be much easier. But the reality is that you cannot ignore taxes, and all of these factors should be used in making the right decisions for your business. There are often cases of extraordinary income in certain years that should definitely influence some of your decision-making. If I were a shop owner and I got a large spike in income due to ERTC credits or gains from selling an asset, I would be much more inclined to buy equipment than in a normal year. There are very few events that should change your mind altogether on purchases, but a spike in current-year income should accelerate most business owners’ timelines on equipment purchases. For example, if you are a towing company that just received $800,000 of ERTC credits this year and were planning on buying a new heavy-duty rotator next year, I would probably accelerate that timeline to offset the current income. Again, the initial decision should always be based on business purpose, but timing could—and often should—be affected by taxes.

The Hidden Risk of Write-Offs

The strangest twist in tax planning that a lot of clients discover is that just because we can write off the entire amount or take the full deduction, the smart move is often to delay some or all of these deductions. There is often a balance between minimizing current-year deductions and saving deductions for future years. In addition, a lot of shops have found themselves in a cash-flow crunch by front-loading their depreciation deduction—leaving them with no write-offs for future years, but saddled with debt. All situations have their own variables, but I will almost always write off an asset purchased with cash, while in some cases with a lease or loan, we may choose not to. As you might imagine, I will almost always take the full write-off if you are in a higher tax bracket than normal, but I might not if income is similar to previous and expected future years. The issue I find is that some owners search for the largest refund, which leaves them using deductions for 10 cents on the dollar, whereas patience could leave them with 20 to 30 cents on the dollar savings in future years. If this is the most money that you are ever going to make, then your decisions should reflect that. But if you expect similar or better results in the future, those decisions probably look a bit different.

The Bigger Picture

In short, there is no “right” time to start thinking about taxes—because you should never stop thinking about taxes. However, the tax effects should be part of your larger plan that not only looks at short-term impacts but also ensures that these decisions and your tax plan align with your company’s long-term goals. A business owner who uses all of these tools to guide their business on the right path will always beat the owner searching for their last write-off on December 31. Which one are you?