Episode 19: How Can Investing Affect Your Taxes?

Michelle: On this episode of Profit Points, we talk about how investing can affect your taxes. We come at it from the angle of a small business owner and how different ways of investing can have different implications. You can have implications on your business and it can have implications on your taxes. So we look forward to having this discussion with you. 

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Michelle: Welcome everybody to this episode of Profit Points where we talk to businesses, industry leaders and other professionals about being in the crazy world of running your own business. And today, Shawn and I are going to talk about how investing affects your taxes? This is going to be a little bit of a strange conversation, I think, because we’re going to talk about what investing means. And some people think, oh, well, investing is like taking my money and putting it into the stock market when in reality there’s all different kinds of ways of investing, especially as it relates to businesses. So that’s what we’re going to talk about today and hope to get some really good information out there. 

Shawn: Yeah. This is an interesting topic, an interesting concept, because, you know, like you said, most people think it’s just investing is just putting money out in the market someplace. But, you know, there’s all kinds of ways a business can invest. 

Michelle: Yeah. So let’s talk about what those ways are as a small business owner. 

Shawn: So, you know, number one is investing in business assets. So, you know, your company may require equipment, vehicles, and real estate. 

Michelle: Software, for example, like how to automate things. 

Shawn: Yeah, websites, a lot of different ways where you kind of lump all of those into the business assets. And what does your company need to operate and run as efficiently and as productive as possible? 

Michelle: Right. So when a business is first starting out, you invest in your business to acquire all of the things that are needed to run your business. You know, if you’re a service based business, you probably still need some kind of software. You need some sort of computer, or tools for your trade, whether it’s service based or if it’s like a construction or something like that, all that has to get done and purchased upfront. But then as the business changes and evolves, you kind of have to plan for those additional influxes or investments into the company because things change and tools wearout, technology changes, people change. So you find yourself in a different position than what you were in when you first started. 

Shawn: Right. And as you grow, you may add new employees. And those employees need those tools to also, you know, do what they need to do. Or you may shift the responsibility of different tasks. So say you were the business owner, you’re the doer of everything. Now, maybe you’ve hired some people, so maybe you’re shifting those tools to them to use and where now you’re acquiring different sets of tools or technology to use to manage. 

Michelle: That’s a great point that you say about employees, because employees are also a form of investment. Right. You’re investing in additional people or additional time or even additional contractors to do things for you that maybe initially you didn’t need. Right. Or you did realize you needed it, but you did it yourself or just something’s changed within your business and you’re looking to do something differently. So an investment in people is also a type of investment. 

Shawn: Right. And then, you know, then there’s the typical what we talked about earlier, Richard, earlier is investing in the market. So whether that is taking the, you know, your extra cash and investing directly in the market or through some sort of retirement plan for the company, for your employees investing in that way through employee benefits. 

Michelle: Employee benefits can also be like health insurance if you want to help supplement your employees or something to that effect as well. Not all businesses need to do that, but that may be something that’s a priority to you. 

Shawn: Exactly. Exactly. 

Michelle: So all of these things have implications. Yeah. 

Shawn: Yeah. So. Yeah. So with investing in business assets, what you’re trying to do is you’re trying to improve efficiency. You’re trying to, you know, be as productive as possible with that. So as you mentioned, technology changes constantly. I know for us in our firm, we’re constantly evaluating new technologies and how we can improve and you know, not only internally but externally with our clients and how they, you know, get information from us. 

Michelle: Mm hmm. Mm hmm. Exactly. So, you know, efficiencies also can then lead to the growth of the business. You know, these are the kind of implications that we all hope to have happen. You know, you see efficiency. You see growth, you see prosperity. Is very well likely that sometimes by investing in things, things might slow up a bit or may see a little bit of a downturn. Not every decision that we make when we are investing in our businesses is going to produce the result we want. 

Shawn: So yeah, you do have to allow for, for some learning curve or on, on these new technologies or even even if it’s a new, you know, new piece of equipment, how do you know you may not be as efficient with it or as it will be, but, you know, knowing that you’re going to have to invest that money and that time it’s investing time is critical to maximize what you’ve just invested in these new technologies. 

Michelle: Yeah. So, you know, with that we’re, we’re hoping that our businesses run better. We make more money, we are more profitable if we’re investing money into the stock market. We’re hoping that the stock produces a gain. Right. And you know, when we’re talking about stocks, one has to be careful. Remember that if you’re investing in stocks, you don’t necessarily have a gain until that stock is sold. Now, if the company decides to issue interest or dividends on any of the holdings that you have, that income is picked up as income and would be kind of a gain in a sense for you. But the actual gain on the stock itself doesn’t get recognized until it’s sold. 

Shawn: Yeah. So you’re talking about taxes, you know, the income that is earned during the year, dividends and interest that’s taxable in that year that you receive that or it’s reinvested into the market for you. But like you said, the gain hopefully there is a gain, right. Um, this isn’t recognized for income tax purposes till you sell it. So, you know. You want to, you know, try to wait for a long term because long term capital gains rates are better than short term capital gains rates. So you want to hold on for the long haul, for the long term, if that’s the strategy that you’re looking at. But yes. So the tax implications and all this stuff, you know, we’re talking about investing in business assets and employees and some of these other things. You could have expenses related to that reduce your taxable income as you pay out for these new technologies, at least these investments. And then hopefully that growth eventually will lead to more profit for you down the road. But you will have additional outlay. 

Michelle: Sure. Well, I’ve seen people that have been on the fence about hiring a new person, knowing that that person would produce potentially more income depending on the type of employee it is, of course. But initially, there is a period where there’s a little bit more outlay of expense than what the employee is generating because of them just getting acclimated to your business and to your clients or customers and just getting used to things. It takes some time to kind of ramp up someone’s full capacity or efficiency. And so there could be instances in the beginning where you may see a decrease in your gross profit or your net income because of putting extra funds out for people or tools that have yet to find their full efficiencies. 

Shawn: Yeah, I think what is what’s really important in any of these investments is have a plan in place of, how you’re going to integrate these new investments into your business, whether it’s new assets, new employees as to, you know, for training for for, you know, implementing these these new technologies or assets and, you know, allow for that that, you know, proper planning upfront will help you once these things come into play and put in place into your business so that maybe that employee is more productive, quicker, you know, with proper training, with proper tools, all that stuff. So getting a plan in place upfront on how this is going to get integrated into your business is really important. 

Michelle: Yeah. So one thing I do want to mention about when you’re purchasing fixed assets for your business, you know, many fixed assets have useful lives and the IRS kind of dictates those useful lives based on what the type of asset that it is. So for instance, I’ll give you an example. A computer has a five year useful life, whereas maybe office furniture has a 7 year useful life. Now the IRS assigns these useful lives, and when you have an asset that has a useful life more than one year, we have to record them as assets and we don’t necessarily get them as a full deduction in that year unless we take advantage of some accelerated depreciation code sections that are within the IRS Internal Revenue Code. I don’t want to get into depreciation, but just know that fixed assets, typically with a useful life more than one year, are set as a fixed asset and don’t go right to an expense. 

Shawn: Right? Yeah. The IRS does allow up to 2500 dollars on a safe harbor rule. 

Michelle: Right. 

Shawn: So if you buy a computer that’s under $2500, you could expense it if you make that choice and then it’s treated for each different item. So by ten computers, all under 2500, all of them can be expensed. But yeah, when you’re looking at these things, sometimes we do have to look at the longer, you know, tax deduction write off period than just that initial year. And some of that may come into play with your tax situation or overall, we may not want to accelerate depreciation in the current year. 

Michelle: Exactly. 

Shawn: For various reasons. We may want to move that deduction out over the useful life of the asset. So there’s a lot of different scenarios and options for you with those that we could look at and help make the best decision. 

Michelle: Yeah, exactly. Yeah. So I think that, you know, it was really interesting to see. I think people mostly think of investing as like stocks and buying stocks and bonds in the market, but there’s other ways to consider it. Investing. And, you know, we just wanted to kind of bring to light these ways as well as the implications of them, whether it’s financially or within your company, you know, culturally. And then also the tax implications, like we said, you know what? What can happen on your taxes with some of these investments? 

Shawn: Yeah, yeah. It’s a great problem to have when you have when you are one, you are needing and wanting to invest in your business to help it grow or, you know, to maximize your productivity. So it’s a good position to have. 

Michelle: Yeah. So thanks, guys, for joining us today. And we look forward to seeing you on our next podcast. If you like what you’re seeing here, check out our other content and follow us and subscribe on YouTube and visit us at www.moderncpaonline.com. Thanks guys. Take care. 

Shawn: Thank you. 

Michelle: If you find this podcast helpful and liked, subscribe and follow us on social media.