“Don’t tell me where your priorities are. Show me where you spend your money and I’ll tell you what they are.” James W. Frick (VP at the University of Notre Dame).
The IRS reported in early April that the average tax refund for individuals was nearly $3,500. Some taxpayers got much more. If you got a refund of federal income taxes (and maybe one for state and local income taxes as well), it’s probably a relief. But what can or should you do with the money?
Here are some areas to consider:
Build a better workforce
“You don’t build a business. You build people, and people build your business.” Zig Ziglar.
If your sales have been growing and you want to take your business to the next level, you need more help. Assuming robotics, bots, and AI can’t do the trick for you, then your choices are hiring employees or engaging independent contractors. Employees cost more because of payroll taxes and benefits, but bring things to the company that can’t be had with independent contractors: longevity, loyalty, opportunities for promotion, and in some cases, special tax breaks (e.g., tax credits for paying for health coverage, contributing to retirement plans, and paying wages while on family or medical leave).
Even if you don’t need additional employees, you can use cash to help your current staff:
- Raise salaries and wages
- Give bonuses
- Extend personal leave time (PLT) with pay (e.g., longer vacations, personal days, sick days)
- Add/increase 401(k) matching
- Support training and education
Buy needed equipment
“The mechanic that would perfect his work must first sharpen his tools.” Confucius
Technology and other up-to-date tools can help you work efficiently, leading to greater profitability. Consider replacing older equipment that may be slowing you down. Look into the use of AI and software solutions that you can use in your business. Remember that under current tax rules, you’ll likely be able to write off your entire cost, even if you fully or partially finance the purchases.
Save for a rainy day
“A simple fact that is hard to learn is that the time to save money is when you have some.” Joe Moore (TV personality)
As a small business owner, you need to save for your business needs as well as your personal retirement. With interest rates still on the high side, the cost of borrowing in the near future likely will still be pricey. If you can stash cash now, you can use your own funds for growth or other purposes and minimize or avoid the need for commercial borrowing.
On a personal front, you should be maximizing tax-advantaged retirement savings in 401(k)s or other qualified retirement plans. Doing so gives you a current tax break and the ability to build up tax-deferred income (or tax-free income depending on the retirement plan). There’s a penalty for tapping tap funds too early, which is a further incentive for leaving money in the plan to grow for retirement savings. Don’t rely on the sale of your business to provide you with a financially-secure retirement because you just never know…. If you were profitable in 2025 but didn’t put money into a retirement plan for that year, you have until the extended due date of your return to make a deductible contribution as long as you are on extension to file your 2025 return.
Review your estimated tax payments
“Next to being shot at and missed, nothing is really quite as satisfying as an income tax refund.” Attributed to F.J. Raymond (not a public figure)
Getting a tax refund may feel good, but it’s not good cash flow management. Getting a refund means you overpaid estimated taxes or had too much withheld from salary and certain other payments. In effect, you’ve made an interest-free loan to the government. It’s had the use of your money from the time you made the payment until the moment you received the refund. From a cash management point of view, it’s better to underpay estimated taxes as long as they’re sufficient to avoid penalties. Check IRS Publication 505 to see safe harbors you can rely on to avoid penalties…and keep more of your money until next year’s tax time.
Final thought
You may have other ideas about how to spend your tax refund now. Be sure to work with your CPA or other financial adviser to determine the possible tax implications and what it means to your bottom line.
