Which is better?

Tim, you also need to understand that if you are self-employed (not incorporated) self-employment tax at the rate of 15.3% will have to be factored in along with the Federal and possibly State income tax.

Wayne Brasch

Wayne,

Sure. But assuming for this argument only, a flat 25% tax rate (on whatever I earn), am I further ahead being taxed on what I didn't spend, or *not* being taxed on what I spent?

- Tim

I guess it depends on how badly you need a new waste-basket. If you buy it through your business and have a tax rate of 25%, the government will contribute $12.50 of the cost of that $50 waste-basket.

Wayne Brasch

obviously if you don't spend anything you are left with more money no matter what the tax rate is. Paying for something will not get you more money no matter what the tax rate- (your question/example is difficult to follow)

There are several ways to look at your scenarios. Like a prior posting asked, how badly do you need the wastebasket? If you didn't need it, then I would pose the question to you: Why spend a dollar to save 25 cents? (I pose that question to clients who want to justify buying something just because "it's deductible.")

If you did need the wastebasket, then it would be a good investment... especially if you have to pay $10 a week to a cleaning service to pick up your trash.

If you are looking to grow your business, then it would be prudent purchase. Even if you spend the cash and expense the wastebasket, you are adding assets to your business... not in the GAAP sense, but in the market value sense. Look at this comparison:

1) You don't spend any of the $200. After tax, you have $150 in cash. = or 2) You do spend $50 on a wastebasket. That leaves $150, which after taxes, you have $112.50 in cash. But add to that cash, the $50 wastebasket and you have $162.50 in assets.

Just a thought

Russell Tuncap, CMA, CPA

Russell,

I think you've hit the target. The key was, "...spend a dollar to save 25 cents."

In a similar scenario, if I have a choice between charging $50 in long-distance calls to my client (and keeping the $200.00 income taxed at

25%), or deducting the $50 in calls as a business expense (and being taxed on $150.00), I'm better off (everything else being equal) charging the client.

Thanks for a thoughtful reply. It's just one of those questions that pops into my head every time I contemplate an expense, and I've never been able to put it into perspective. Thanks again.

- Tim