Big Truck or a Cash Balance Plan?

I recently went to a coffee shop here in Dripping Springs on its reopening day. Good to see something back open in the neighborhood. In the parking lot, I noticed a very nice, brand-new truck with a company name on the side. Let's just say the company's line of business probably didn't require a truck bed.

There can be legitimate tax reasons for a business owner to buy a vehicle. Depending on the vehicle and how it's used, accelerated depreciation may let a business deduct a significant portion of the cost. If you actually need the truck, that can make a lot of sense.

At the end of the day, you still bought a truck.

Vehicles are depreciating assets. You get the utility and enjoyment, but it's probably worth less five years from now than it is today. There are other things a profitable business owner should consider.

Let me introduce you to the cash balance plan.

A cash balance plan is a type of retirement plan that can be layered on top of a 401(k) and profit-sharing plan. For the right business owner, it can allow for significantly larger retirement contributions than a 401(k) alone.

That's particularly interesting for an owner who has a consistently profitable business, is already maxing out traditional retirement plan opportunities, and wants to build wealth outside the business.

There are tradeoffs. Cash balance plans require an actuary, come with added administrative costs, generally require ongoing funding commitments, and need to be designed carefully around the owner and employees.

What it does offer, though, is a powerful combination: a potentially significant current tax deduction, and more money working toward the owner's future.

That's an important distinction.

A $100,000 truck might create a tax deduction and leave you with a truck.

Putting $100,000 toward retirement might create a tax deduction and leave you with $100,000 invested for your future.

Obviously, that's an oversimplification. The tax rules are more complicated, every business is different, and this isn't tax advice or a recommendation for any particular strategy.

I'm not saying don't buy the truck. I'm just saying it's worth knowing what else is available before you do.

Sometimes the best business-owner tax strategy isn't buying something. It's keeping more of what you've already built.