How Smart Business Owners Reduce Their Taxes

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Business-1012761_1920One thing my 30+ years of preparing taxes for business owners has taught me is that some business owners legally pay less in taxes than other business owners who make the same amount.  I call these my Smart Business Owners.  Let’s see what these guys do differently.

Smart business owners take tax planning seriously

Why should every business owner take tax planning seriously?  Tax planning is one of the few guarantees a business owner will ever get.  You’re guaranteed to pay less in taxes, unless you had a loss in your business; even then, I might be able to get you some money back from taxes you paid in prior years.  But if you’ve got a business and you’re paying taxes, it’s a rare thing indeed if I can’t come up with some ways for you to save money.

What I commonly hear is, “I’m way too busy.  I don’t worry about tax planning.  I hire a good CPA.”  What they fail to understand is that there are considerably fewer things we can recommend after the year ends to cut their tax bill.  It’s like Cinderella at the ball—once midnight comes, her dress goes back to rags, the horses go back to mice, and the fancy carriage goes back to being a pumpkin.  That’s how it is with tax planning–Once it’s January 1, its history. All I can do at that point is report your information correctly in a way that minimizes your tax as much as possible.  But the number of arrows in my quiver is vastly reduced.  There are some things I can do, but not a lot.

So how much can you save? Well, here are some examples:

  • A manufacturing company reduced their taxable income by $591,000 to $230,000, and pocketed $125,000 in income tax savings.
  • A retail company cut their taxable income from $471,000 to $147,000 and saved $108,000.
  • A dentist reduced their taxable income from $299,000 to $234,000, pocketing $22,000 in income tax.
  • A consulting company cut their taxable income from $1.3 million and some change to $857,000, saving $277,000 in income tax.
  • A construction company lowered their taxable income by over $750,000 dollars and saved $325,000 in taxes.

And every single thing we did was legal and clearly outlined in the tax law.  (I like my clients, but not enough to share a jail cell with them.)

Why does tax planning work?  It works because it gives you time to do things with your business that you can’t do after the year ends.  It’s really just a matter of being proactive before the year is over, rather than reactive and just dropping your stuff off at your tax preparer sometime in the spring.

We start with what your company’s year-to-date income as of today, and estimate sales and expenses from today’s date until the end of the year.  That’s why I really like to wait until the third quarter is over.  Most business owners have a pretty good feel for how the year is going and know what’s in the pipeline for the next 30, 60, 90 days.  Beyond that, we are pushing it a little bit.

Then we create a customized plan for you, listing individual tax savings ideas and the tax savings that will result from each one.  Why the tax savings from each one?  Well, we might talk to the owners and find out they want to have a retirement plan.  So we write down, “You could put $60,000 into a retirement plan, but you’re going to have to pay $60,000 out of pocket.”  Now let’s say it’s going to save you $20,000.  You’ve got to decide, because that’s a net $40,000 out of your pocket.  Can you afford to do that, or do you have a better use for those funds?

Now, you should never make a decision based 100 percent on tax strategy.  That’s never a good idea.  Maybe that extra $40,000 would be better off spent on a marketing plan to bring in more business.  Only you know for sure.  That’s why it is a customized plan, because it has to be based on what you have going on in your business.

Of course, no one can tell you how much money tax planning will save you in advance, but my experience is that you will save on taxes every time you do year-end tax planning.

Smart business owners call their tax advisors before making major financial decisions

Smart business owners always run their ideas by their tax advisors first.  Every CPA and tax preparer can tell you a story about a taxpayer who did something and just didn’t seem to think it was important to ask us about the tax consequences because they listened to their golf buddy.

One of my favorites is a gentleman who was 59 years, four months old.  His golf buddy told him that he could take money out of his IRA without penalty once he turned 59, so he did.  Of course, he didn’t bother to call me.  Heck, what do I know about taxes, I’m just a CPA, right?  So when I did the tax return, I showed him the law.  In order to avoid penalty you must be 59 and a half.  He was about six weeks too early.  So, because he relied on his golfing buddy rather than giving his CPA, this taxpayer cost himself over $5,000.

Smart business owners keep good accounting records

If you don’t have good accounting records, I can almost promise you that you’re overpaying tax.  You’re not recording all the cash that you spent.  You’re not keeping track of items that you paid for out of your personal account.  You’re not thinking of the purchases you put on a credit card.  You can’t defend yourself if you’re audited because you don’t have any documentation to support your deductions.  Without good accounting records, you’re simply going pay more in taxes than you are legally required to pay.

Smart business owners get their records to their tax preparer early

If you plan to show up between April 1 and April 15 with a complicated return, you’re better off waiting until May or June.  You want your tax preparer to have time to prepare your return accurately.  When we make a mistake on a return, it’s almost always on a return we are preparing just a few days before the deadline.  We try like heck not to, but when you’re buried and you’re under the gun, especially before the extension deadlines in September and October, a mistake is simply more likely to occur.  I don’t even call those mistakes.  A lot of times, we are forced to make an estimate just to get a return done, and then the information comes in later.

Smart business owners save for their taxes as they earn the income

If you know you’re going pay $30,000 or $40,000 every year, there’s no good reason to wait until June to look for the cash.  You’re going to pay taxes.  That’s just the nature of the beast.  We’re not saying we’re going to eliminate taxes.  We’re saying we’re going to do our best to make sure you pay no more than you are legally required to.  We’re going to minimize your taxes.  Start saving now!  Make quarterly payments!  If nothing else, put the money in a savings account.

What I tell a lot of business owners is if they have a million dollars in gross receipts and they owe $50,000 at the end, five percent of every single dollar they bring in should be put aside for taxes.  Now if we do some tax planning and bring that down, great; they might get a refund.

Smart business owners get a basic understanding of income tax law

If you’ve ever gone to a hockey game with somebody who doesn’t know the rules, they’re totally lost.  After a little bit of the initial excitement, they quickly become bored.  You have to have a basic understanding of the game to really enjoy it.  Now I played hockey when I was a kid.  I follow it, and I know the rules pretty well, but I have no misconception that I have the knowledge necessary to be a coach.  That takes a deeper level of understanding, far beyond what the average fan has.

It’s the same with business owners and taxes.  We don’t want you to be an experienced tax preparer.  I’ve been doing this for well over 30 years, and even after thousands and thousands of tax returns for hundreds of different industries, I’m still challenged from time to time.  It’s a chore for me just to stay current, much less ahead of the curve, which is almost impossible nowadays.  So we’re not trying to do that.  But you need to have a basic understanding of how it works and structure your business accordingly.  You should know two things: what information you want from your tax preparer, and what information you should be able to provide.

Like any good CPA, I need to add a disclaimer:  Unfortunately, it is impossible to offer comprehensive tax info over the Internet, no matter how well-researched or written.  And remember, I love my readers, but reading this article or watching this video doesn’t make you a client:  Before relying on any discussed here, contact a tax professional to discuss your particular situation.