Reading · Happy for Mondays

What do a shoulder injury and tax deductions have to do with each other? Nothing…but one did get me started thinking about the other.

Last week, I was in a physical therapy session for a shoulder issue. My therapist asked about my week, and I told him about a professional conference I had just been to in Anaheim. It was held at Disney’s Grand Californian Hotel, and when we weren’t in sessions, I was able to fit in a little time at Disneyland.

He asked if my company paid for everything. I let him know I have my own business, so basically I paid for it (from a business account), but my expenses related to the conference are tax deductible.

Then he asked if my ticket to Disneyland was deductible. Of course not – it’s not a business expense! (Which is why I paid for the ticket into the park from a personal account.)

He ended up telling me about a former patient who worked for a liquor distributor and would share stories with him about all the partying he got to do on the company’s dime.

Me: “Well, I think sometimes you can take a deduction for client entertainment, but I didn’t bring a client with me to the park.”

Therapist: “Why didn’t you just take a client with you if that would make it tax deductible?”

Me: “Because then I would have had to pay way more!”

While a liquor distributor could potentially make the case for deducting a big alcohol tab, taking clients to Disneyland is just not part of my current sales and marketing strategy.

He's an awesome physical therapist, but he also had a common misconception about tax deductions – that somehow this visit to Disney would be super cheap or free if I simply made it a business expense. Please understand: just because something’s tax deductible doesn’t mean it’s free.

Why am I talking about deductions for business expenses when Happy for Mondays is about personal finance? As I mentioned in my newsletter a few weeks ago on home office deductions, like many of you who are self-employed, my taxes and deductions are handled on my personal tax return. And my income taxes are paid from my personal bank account, not my business account. (Though, depending on your business structure, you may have separate personal and business tax returns.) Moving on…

Let’s say you need a new laptop for your freelance work. You’ve reached out to your tax professional and confirmed that it is, in fact, tax deductible. You find the perfect model. It’s beyond what you planned to spend, but you figure, "This is a business expense. It's deductible!" Next thing you know, you’ve left the store with a computer that cost more than your first car.

Here's the thing: That potential deduction isn't a magic wand that makes the cost disappear. It's more like a discount – and not always even a great discount.

When we claim a tax deduction, we’re typically not getting all that money back. What we’re actually doing is reducing our taxable income. So, for example, if you're in the 25% tax bracket, that $2,000 laptop probably isn't saving you $2,000 on your taxes. More likely, it’s saving you $500.

Saving $500 is fantastic, but it's not the same as getting a free laptop. And remember, there’s…

You don't get that tax benefit right away. You have to wait until you file your taxes, which could be months after you've made the purchase. In the meantime, you don’t have that money anymore. And if you made that purchase on a credit card, you could potentially even lose that tax-deductible money to interest payments.

If you’re not already, seriously consider working with a good CPA or other tax professional to help you fully understand your deductions.

A lot of us have used the idea of "tax deductible" to justify spending we know we shouldn't make: "Go ahead, splurge! It's for the business!"

But really, every dollar we spend is still a dollar out of our pockets, regardless of whether it's a deduction or not. Maybe we should shift our mindset from "How much can I deduct?" to also include "How can I maximize the value of every dollar I spend?"

I’m absolutely not saying that investing in your business is wrong. Investing in ourselves and our work is important for our professional growth and for the sustainability of our businesses. Let’s just be strategic about our spending. I try to think about things like:

Will this purchase genuinely improve my productivity or the quality of my work?
Is there a more cost-effective alternative that would serve the same purpose, or maybe even be better?
Am I buying this because I need it or because I want it?

In the case of the laptop example, what if I purchased a great $1,000 computer instead of a top-of-the-line $2,000 model? Assuming I have the cash on hand and I’m not buying it on credit, I’d then immediately have that $1,000 difference to save or spend on other business needs or to take as an owner’s draw and deposit into my retirement account or maybe even put towards a vacation.

Running a successful solo business means making the financial decisions that will help us grow and thrive in the long term.

The next time you're tempted to splurge on something just because it's deductible, please take a moment to pause and reflect. To build a successful business and create your ideal personal financial life, do you really need that shiny new toy or the latest online service that claims it’ll change your life? Or are you focused on making strategic decisions that will help your business truly thrive to provide the life you most want?

Tax deductible doesn't mean free

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