Why BBQ Grills Raise Your Tax BillTax Planning
One of my favorite hobbies is making BBQ and smoking meats. I just love it, my family has a tradition of it (even a BBQ restaurant back in MO) so you could say it is in my blood.
Last month, I decided it was time to make an investment in my BBQ and I purchased a $2K grill called a pellet smoker. Since then I have had it up and working just about every weekend. I love it.
However, when I purchased that grill, I knew I was creating a taxable event. That purchasing this grill was going to raise my income taxes.
You might be saying “What? How does spending money raise my taxes?” and I would agree that on the face it might not seem like a tax issue, but let me explain what I mean.
Why Are My Taxes So High?
Each month I have at least 1 or 2 clients that call me up or send me an email asking me why their taxes are so high.
Usually they have a time in their life (when they were just starting their business or worked as a W-2 employee) when their taxes were next to nothing or they even got a refund.
And I know why that is: refunds are easy when you are an employee (the govt holds more of your money than they need) or when they were just starting out (the business didn't make any money) and now that their business is becoming more and more successful, taxes are a problem.
I always respond with the same question: “What all did you buy this year? How did you spend your money?”
That is never very satisfying for my client, but I want to lead them down a road so they understand how this works. And in the future, maybe their tax bill will not be high.
Tax returns are basically a scorecard. At the top we put what people paid you, and at the bottom we put what you paid other people.
The difference between those 2 amounts, as you know, is profit and the closer to 0 your profit is, the less tax you will pay.
In reality this is much more complicated than it sounds, because business owners have fixed expenses in their personal life AND variable expenses.
Fixed expenses are your house payments, car payments, loans, etc. You have to pay those every month in the same amount.
Variable expenses come in 2 flavors:
Discretionary and Non-discretionary: That is just fancy for stuff you have to pay, and stuff you just want. Discretionary is like your utility bill and cable bill at the house. Non-discretionary is like the BBQ grill.
The Problem With Spending
All of these fixed and variable expenses are a problem for your tax return. Because you are pulling money out of the business that is not a business expense. When you do that, the scales of money in vs. money out tips toward profit.
A better way to say this is that for you to have low taxes, you need to have NO PERSONAL EXPENSES. No house or rent payment, no utilities, not anything. That way, all of the money the business makes is available to be paid out as some kind of business expense...
But you will say: “Chris, then how do I live? I need a house and a car and a BBQ grill..”
And that is where the TaxMan always gets his pound of flesh. You HAVE to pull money out of the business to live, and thus in 99% of businesses- it is almost impossible to avoid taxes.
But, in some cases you could.
Your house payment, car payments- those can be deductible in certain instances (like mortgage interest, etc.).
Also your health insurance can be deductible, some meals and entertainment too.
But then we are back to the BBQ grill.
This purchase, as cool as it is, will never be tax deductible. By getting it, I was saying that $2K cannot be deducted on a tax return. That means I am going to pay tax on the money, indirectly, but I will.
This can be extrapolated out to everything you spend:
School Tuition (K-12 at least)
All your personal spending means your taxes are going up.
From now on, when you think about how much tax you have to pay, I want you to add up all the money you pulled out of your business for yourself. In most cases, that is very close to what your taxable income is going to be.
Good tax planning means you need to always keep in mind how money flows in and out of your business.
Tools like Tax Planner Pro can help you do that.
There are 2 ways to think about all of this:
The good side: it means you are making money. As much as you think someone else is getting away with paying nothing, I promise they don't do it forever. It just means they don't make much money right now.
The bad side: is that every time you look at that BBQ grill at the store, remember the TaxMan is standing right next to you saying: “Buy it, you will love it!”