Should You Borrow Money To Increase Year-End Expenses?

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If you’ve read Santa’s Year-End Tax Tips you know that spending money in your business at year-end is a great time to reduce your tax liability.  But, what if you don’t have the money?  Should you use a credit card or a line of credit?

Let’s look at the numbers.  Let’s say that you spend $5,000 using a credit card or a line of credit in order to increase your year-end expenses.  And, let’s say that you are in the 25% tax bracket.  The $5,000 in expenses will reduce your tax liability by $1,250.

Now, how much will it cost to borrow the $5,000?  Well, let’s say that your business line of credit charges 10% annually.  If you borrowed the $5,000 for one month it would cost you $41.67 in interest.  If you had to borrow it for 1 year it would cost you $500.  Since you would get the tax deduction the following year anyway I don’t think it would be worth it to finance the purchases for an entire year.  Of course, you’ll need to crunch the numbers to see exactly how you would come out.

As you can see, it could be worth it to borrow the money to increase your year-end expenses for your business on a short term basis.  If it ends up being a long term debt it could end up costing you more money in interest in the long run than the short term tax savings.  And, you should only do it if the items you purchase are necessary items for your business and you plan on purchasing them anyway.