Last tax season, the average direct deposit tax refund was more than $3,000. If you are expecting a tax refund this tax season and you’ve been thinking about starting a side hustle or self-employed business, that kind of money can come in handy.
It may be just enough cash to help you launch the self-employed business you’ve been thinking about starting. Sometimes, a few thousand dollars makes all the difference.
How can you use your tax refund to start your business?
No matter what type of self-employed business you plan to go into, you’re almost certain to need specialized equipment. At a minimum, you’re likely to need at least a computer, since it’s almost impossible to run any type of business these days without one. You might even need to use some of the cash to launch a website and marketing campaign, particularly if a large amount of your business is expected to come from the web.
But even beyond a computer, there’s other equipment you may need to use on a more direct level. For example, if you plan to start a landscaping service, you’ll need a lawnmower, a truck, some rakes, and other lawn maintenance equipment.
Stocking Up on Inventory
Though many self-employed businesses today are service-related, you’ll need to purchase inventory with other types of product-related businesses. Since it can be almost impossible to get financing for inventory, paying by cash may be the only way to get the products and items you need.
That will be true whether you’ll need raw materials to make a finished product, or your purchasing already made merchandise from a manufacturer. Having either materials or finished products available in-house will enable faster sales and a quicker buildup of your cash flow.
Making a Down Payment on a Business Vehicle
Many types of businesses require a specialized vehicle. A mobile dog grooming service or a food truck are excellent examples. And if you’re going to be involved in any type of service business, like home repairs, you’ll likely need a pickup truck or a van.
But even if you don’t need specialized equipment, you may need a new vehicle specifically for your business. Many businesses require significant time on the road, either selling, delivering a product, or even if you are a rideshare driver. While you may be able to do that with your current vehicle, you may also need to trade up to a vehicle that’s more appropriate for the business you’re going into.
Not only can using your car for your business assist you in making more money you can deduct business use of your car on your taxes. If you buy a new car for your business, you may be able to deduct depreciation of over $40,000 in the first four years of business use.
Keeping a Cash Cushion
Probably the single factor most underestimated by new self-employed business owners is the length of time it can take to create reliable cash flow from your business. In some businesses, that may happen in a matter of weeks. But months are a far more common outcome.
You’ll need cash to cover your living expenses until your cash flow is available to get the job done. An average tax refund may not be sufficient to cover several month’s living expenses, but it will certainly help when added to existing funds.
This can turn out to be the single best use of your tax refund. After all, you may be able to purchase equipment through manufacturer financing, and even inventory using a credit card.
But you’ll need a healthy amount of cash available to cover living expenses.
Parting Thoughts on Your Tax Refund
Some people think of a tax refund as “found money” and use it to do something fun.
That may mean buying entertainment or paying for a family vacation. While those uses are fine, it may be better to recognize your tax refund as a windfall and use it to generate more income.
That’s exactly what you’ll be doing if you invest it in a new self-employed business. Once you have it up and running, it can provide additional cash flow to supplement your household income or something you can do full-time.
When you think of it that way, using your tax refund to start a business may be the single best purpose for your tax refund possible. And, remember that many of these business expenses are tax deductible.
If you’re just starting your business, you can use QuickBooks Self-Employed to track your income, expenses, and mileage year-round. Your self-employed information can then easily export to your TurboTax Self-Employed tax return. TurboTax Self-Employed has an industry-specific deduction feature that will uncover industry-specific deductions that will help you increase your tax refund and save more money for your business.
If you have tax questions, you can connect live via one-way video to a TurboTax Live Self-Employed CPA or Enrolled Agent with an average 15 years experience, to get your tax questions answered. TurboTax Live Self-Employed CPAs and Enrolled Agents are available in English and Spanish and can even review, sign and file your tax return.