The Conservative Cat

This is one of those human habits that never made any sense to me. Let's say Bruce buys me a high-quality scratching post for $60. If he could convince the IRS that it was a business expense, then his tax bill would be reduced by 25% of the $60. This means that he will pay $15 less on his taxes, for a net scratching post cost of $45.

Bruce would still be $45 poorer than if he hadn't bought the scratching post at all. The tax deduction reduces the cost of the post, but it doesn't represent any sort of income. In fact, if the money had not been spent on me, it would have been a dead-bang loss.

It is amazing how many people do not get this point. Every day on the radio about twenty different charity outfits claim you can make money by donating your car and deducting it on your taxes. If a car is worth $500 and you donate it to charity, you might save $125 on your taxes. On the other hand, if you sell the car for $500 you get $500. Donating your car to charity is no different than donating cash to charity, except when you donate the car you have to do more paperwork.

Another myth is the idea that if you have a money-losing business you should keep it running for tax reasons. If you're losing $100K a year, you might save $35K on taxes, but you're still down $65K. The reason you keep the business running is because you're hoping it's going to turn around, not because it's saving you any tax money.

Because apparently even members of Congress have trouble grasping this simple fact, many types of losses are limited so that you can only deduct $3000 in one year. This is another of the many idiotic situations where you might have to borrow money to pay your taxes. Bruce is not quite at that point, but it is true that he'll probably be dead for several years before he is able to deduct the last of the money he lost when his various businesses went bust in the Nineties.

In a sane universe, we wouldn't have this morass of complicated tax deductions, but as long as they're here, it's important to understand how they work so you won't get tricked by sleazy political types. A tax deduction is a reduction in expense. It's not a benefit.

Respectfully submitted,

Ferdinand T. Cat