The $55 Latte
I see it in almost every small business—
We as owners find ourselves in a position of wanting to use the company credit card to buy our morning lattes. If you’re hesitating to admit it—don’t, you’re not alone. Average business owners want to maximize their tax deductions, and to be honest, you’d be a pretty lousy owner if you didn’t. By paying for seemingly harmless, small purchases, here and there, we tend to believe that we are helping our bottom line. On the surface, this might seem like a great strategy to reduce taxes, while you simultaneously enjoy a cup of coffee that you were going to purchase anyway. Oh, the joys of being self employed!
So, we all know that reducing your taxable income is the equivalent of reducing the appearance of the total revenue your business generated, which ultimately reduces the overall amount of taxes you owe. For example, being able to pay for discretionary items with a 40% end-of-year discount sounds amazing, right? With the latte reducing your taxable income, it’s becomes the same as paying for the latte’s after-tax cost, coming out to a nice 60%.
Eventually, these purchases start to add up—hooray!
You’re over there scheming what you’re going to do with all your saved money, but the problem is when I say “adding-up” I don’t mean in money saved. These purchases could actually be costing you—most of the time costing more than that $5 latte itself. As the transactions mount, and the credit card statements spill onto multiple pages, the administrative-busy-work created for your office staff and accountant begin to compound.
The 30 lattes you purchased this month, along with the 25 lunch-runs, must now be reviewed, input into QuickBooks, and reconciled by you, your accountant, or your bookkeeper. These people have varying degrees of costs, whether it be an hourly-rate or salary equating with the workload.
All of this spelling-out more cost to you and the company.
If you compare these administration costs, to the non-deductible-cost of the latte, well….the tax-deduction that you were originally so proud to take, has cost more in overall administrative costs than the tax savings themselves.
To play devil’s advocate, we could argue that the labor you spend accounting for these latte and lunch costs is also tax-deductible, but you can’t deny that they are far less enjoyable dollars to see leaving your pocket. This is because these costs often increase the bookkeeping and/or accounting fees charged.
In the end though, we all want to continue enjoying those $5 lattes and the tax benefits associated, but we want to do it without complicating the accounting and bookkeeping duties. Our team at VB CPA has enjoyed helping business owners solve this common business inefficiency, and would be happy to do the same for you and yours.