If you’ve filed your small-business tax return and received a refund or are expecting one, there are many things you can do with it. Obviously, your options can depend on the size of the tax refund and your business's needs or goals.
Here are five ideas for putting your tax refund to good use.
1. Buy new equipment.
You can upgrade your equipment, such as buying new tablets or smartphones. You may be able to write off the cost of your investments (even if you must finance some of the cost because the refund won’t cover it all), while improving your operations.
2. Pay down debt.
If you have outstanding loans, such as a line of credit, you may want to pay them off, or at least pay them down. This is especially true if the loans have variable interest rates. Early this year, the Federal Reserve made the first increase in the Federal Funds Rate (the rate banks pay to borrow money overnight), and this rate can impact the rate your lenders will charge. While not a significant rate hike, there may be additional increases this year. Overall, higher interest rates can mean more challenges to your cash flow in order to meet your loan obligations.
Reducing your debt exposure now can mean more cash may be available for your other business needs. Remember that any business interest you pay is fully deductible.
3. Invest in marketing.
A Roman playwright around the first century B.C. stated, “You must spend money to make money.” Consider using your tax refund on marketing activities, such as:
- Engaging a marketing firm to create and execute a marketing program.
- Paying for advertising, such as on local radio stations or online sites.
- Underwriting the cost of a social media concierge to handle your online and mobile campaigns.
4. Go green.
You can apply your tax refund toward changes to reduce your energy consumption and improve your carbon footprint by undertaking a variety of actions, including:
- Changing your lighting systems so you use compact-fluorescent (CLF) or LED lights. You can use a calculator to see how much this can save your business.
- Replacing equipment with energy-saver items. You can find a list of energy-saving certified office equipment from EnergyStar.gov.
- Buying an alternative fuel vehicle if you’re in the market for a new one. Biodiesel, hydrogen and electric-powered vehicles are only some of the alternatives to gasoline. Find a listing of cars, trucks, vans and other vehicles powered by alternative fuels from the Department of Energy.
- Using alternative energy sources. Consider solar panels and other alternative energy to power your facilities. Energy Star can help you build an energy program.
These actions can cut your utility and fuel costs and may even entitle you to federal and/or state tax breaks. For example, you can deduct $1.80 per square foot for your commercial building if you achieve certain energy efficiency goals. Find a listing of state incentives for renewables and efficient from DSIRE.
5. Save it.
Consider creating your own rainy day fund by saving your tax refund. You’ll be able to use the money at your discretion and may be able to avoid future borrowing.
Even better, consider saving your tax refund in a qualified retirement plan for a double benefit: You can have the funds on hand for your retirement and get a current tax deduction for your contribution (up to set limits). Find the best type of qualified retirement plan for your business in IRS Publication 3998.
While there are many good things you can do with a tax refund, you shouldn’t be celebrating too much. Your refund represents an interest-free loan that you made to Uncle Sam. If you received a substantial refund, you’re overpaying your estimated taxes. Work with a tax advisor to set your quarterly payments for this year at a more accurate amount so you don’t have to wait until you file your return to receive your money back and can have the use of it throughout the year.
For more tips on how to help ease your way through tax season, access our exclusive guide, It’s Tax Time: A Business Owner’s Survival Guide.
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