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Omni Resources Client Newsletter: Get More from Your Business Investments and Pay Less in Taxes

Updated: Oct 17, 2023

When you invest money in your business, you're not only giving it more opportunities to grow, but you can effectively lower the amount of taxes that you must pay at the end of the year.

Common deductible expenses include employee salaries, rent, loan interest rates, utilities, office supplies, marketing costs, travel expenses, and more!

Here's what future investments in your business can look like:

Employee Benefits: Providing benefits like health insurance and retirement plans not only help your employees but also reduce your taxable income.

Saving for the Future: As a business owner, contributing to retirement accounts such as a Simplified Employee Pension (SEP) IRA or a solo 401(k) can have two-fold benefits. Not only do you save for your own future, but these contributions are generally tax-deductible, reducing your taxable business income.

Section 179 Deduction: In some tax systems, there's a provision called the Section 179 deduction that allows you to deduct the full cost of qualifying business equipment and assets in the year they were purchased, rather than depreciating them over time. This can provide an immediate reduction in your taxable income.

Turning Losses into Gains: If your business isn't doing so well, you can use those losses to lower the amount you're taxed on other income sources.

Charitable Contributions: If your business donates to qualified charitable organizations, those donations can also be deducted from your taxable income. This not only allows you to support causes you believe in but can also help lower your tax liability.

Rewards for Innovating: If your business is working on innovative products you might get special tax credits. These credits directly lower your tax bill and encourage you to keep coming up with new ideas.

Motor Vehicle Leases: By using leased vehicles exclusively for business purposes, you can reduce your taxable income by claiming a portion of lease payments, fuel expenses, and maintenance costs as valid business expenses on your tax return.

Equipment leases: Leasing crucial equipment for your business can provide tax benefits, allowing you to deduct lease payments and associated costs, such as insurance and maintenance, as long as the equipment is used solely for business purposes.

Phones: By ensuring that your phones primarily serve business-related communication and activities, you can claim them as deductible business expenses.

Sub-Contractors: When sub-contractors are hired to perform work directly linked to your business operations, you can deduct these payments as legitimate business expenses, which can be a valuable addition to your tax reduction strategy.

Remember that each business situation is unique, depending on where you are and what your business does. To make sure you've optimized your business, talk to experts at Omni Resources.

A demonstration of how investment into your business can affect taxable income and tax liability

Let's consider a business owner with an annual revenue of $50,000 and is subject to a tax rate of 30%. We'll compare two scenarios: one where the business owner makes investments to reduce taxable income, and another where they do not.

Scenario 1: Investing in the Business Annual Revenue: $50,000 Effective Tax Rate: 30%

Without Investments:

  • Taxable Income: $50,000

  • Tax Liability: $50,000 * 0.30 = $15,000

With Investments:

  • The business owner makes investments in capital assets and deductible expenses totaling $10,000.

  • Taxable Income: $50,000 - $10,000 = $40,000

  • Tax Liability: $40,000 * 0.30 = $12,000

Tax Savings from Investments: $15,000 - $12,000 = $3,000

Scenario 2: No Investments Annual Revenue: $50,000 Effective Tax Rate: 30%

Without Investments:

  • Taxable Income: $50,000

  • Tax Liability: $50,000 * 0.30 = $15,000

No Investments:

  • The business owner does not make any investments, and the taxable income remains the same.

  • Taxable Income: $50,000

  • Tax Liability: $50,000 * 0.30 = $15,000

Tax Savings from Investments: $0 In this adjusted example, by making investments in the business that result in $10,000 of deductible expenses and reduced taxable income, the business owner can save $3,000 in taxes compared to not making any investments, which will generally leave them with a higher taxable income.

These examples are simplified and intended to illustrate the concept. Real-world tax calculations can be more intricate due to various deductions, credits, and regional tax regulations. It's advisable to work closely with Omni Resources to ensure accurate tax planning and to make the best decisions for your business.

Even if you're struggling financially, investing in your business could still be smart because:

  • Getting Funding: Investors or lenders might be more interested if they see your plans to use investments for growth.

  • Survival Strategy: Some investments can help you deal with problems and also cut down on taxes.

  • Partnerships: Partnering and working with other businesses can bring in more cash flow.

  • Planning for the Future: Even if things are tight now, investing wisely can make your business stronger later.

  • Paying Off Debts: Smart investments can help you earn more, which can help pay off debts and lower taxes.

  • Thinking Long-Term: Remember, tough times are temporary, and investing now can lead to future success.

Wrapping Up

While it's important to prioritize financial stability and make informed decisions based on your specific circumstances, it's also crucial to weigh the potential benefits of strategic investments against short-term financial limitations. As you consider this important idea, contact Omni Resources to discuss what your benefits and downsides could look like.

Chat with us to find out how Omni Resources can help your new business or your existing business get on track more efficiently. Questions? Call (888) 882-8483 This Month’s Quote:

"How can you change a person?

You can’t change a person by an action;

You can’t change a person by instruction;

You can’t change a person by direction;

You can’t change a person by aggression;

Rather, you can change only by adaptation."

- Unknown

Editor’s note: Nothing in this blog post should be construed as legal advice of any kind. Any legal, financial, or tax-related content is provided for informational purposes only and is not a substitute for obtaining advice from a qualified legal or accounting professional.

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