Martin had a very profitable year with his home remodeling business. He knows he will need to pay a lot in taxes. His accountant warned him to pay estimated taxes but Martin was too busy to listen. Over a business lunch, Martin mentions his predicament to his fellow business owners. They ask why he doesn’t buy more equipment to get a tax deduction. “Well I don’t need any new equipment,” Martin says, “but if it can save me money on taxes I might need to.”
The next time Martin meets with his accountant, he asks if equipment purchases are tax deductible. The accountant, not being fully informed, tells him that since he has had a profitable year, he can deduct the full purchase price of equipment through a Section 179 deduction. Great! Now Martin thinks he has a way to reduce his tax liability and save some money.
It’s likely that every accountant in the tax preparation business has had a client ask them if they should buy a new car, new house, or increase their business purchases in order to receive a larger tax deduction. Logically a discount should not factor into a business buying decision other than to calculate the true price. Too often we fall prey to the idea that a discount is actually saving us money. However, that is often not the case as the discount received is on a frivolous purchase.
Each time you need to make a business purchase, you should follow a predetermined process to remove the emotion and guesswork from the decision. Creating this process may take time and thoughtful consideration of many variables, but here are a few simple questions to help you develop a solid foundation for making business purchase decisions moving forward:
1. How does your business benefit from this purchase? Benefits can include saving time, saving money, or generating more sales for the business. If you are unable to identify a specific aspect of the purchase that will benefit your business, all signs are pointing to it not being a beneficial purchase. You should probably stop at this step.
2. Can you delay making the purchase? Can you wait another week, month, year? This question can often be asked first to avoid the whole process altogether. Delaying a purchase will also give you time to analyze your decision more thoroughly. This question also avoids spur-of-the-moment decisions or stops business owners from falling for the sleek sales tactics that can cause buyer’s remorse.
3 .What are the additional or hidden costs? When you buy a new product or service, some of the costs are not up front. You have to determine your annual cost. For monthly subscriptions, multiply by 12. For equipment or vehicles, calculate your maintenance and repair costs. For software, include training and setup costs. Often we focus too heavily on the upfront costs and neglect the ongoing costs. Considering costs in an annual context will give you a better idea of what you are really buying.
4. How much time will training take? Almost all products and services require training and setup. If they didn’t, we’d all be using the free version of each software. Any business owner knows that training and managing employees can be a huge expense, and one that is much greater than the upfront costs. Is there training available from the seller or a third party? How often will new employees need to be trained? Never neglect the training costs because they are usually a significant amount.
5. What is the cost of failed implementation? Business owners are familiar with this cost—this is also the natural aversion everyone has to change. What if it doesn’t work as described? What if the new equipment breaks down and production stops? Sometimes, though, the cost of failed implementation is harder to pin down. What if the implementation fails and you have to switch back? However, don’t let this fear impede you when it is the right decision for your business.
There are many emotional and financial factors that influence business buying decisions. Outside of a few special cases, the tax implications are marginal and should not impact the decision. Using the questions outlined above as a guide, create a system that works for you and stick to it. Our natural biases will push us to make illogical decisions on the spot, so do your best to work against these to ensure success in your business.
This article originally appeared on Forbes