Reducing your income tax expenses is a key component of profit maximizing. Remember your bottom line is your profit after income taxes. Unfortunately, very few business owners do anything to reduce their income tax bill. Most business owners assume that all they have to do is turn their records over to their tax preparer and their job is done. Then they complain when they owe the IRS up to half of their profit.
The truth is the smartest business owners focus on finding legal methods of reducing their tax hit. These business owners pay a much smaller percentage than the average business owner.
Smart Business Owners Prioritize Tax Planning
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 completely legal 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 being mice, and the fancy carriage goes back to being a pumpkin. That’s how it is with tax planning. Once it’s January 1, it's 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, in just the last two years we legally saved our tax blueprint clients $3.29 million dollars in taxes! That is $3.29 million dollars that the business owners were able to use to expand business, fund retirement, pay down debt, hire key employees, take that dream vacation, and much, much more. I’m pretty sure the business owner had a much better use for it than the federal government.
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.
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 rather than listen to their golf buddy.
One of my favorites is a gentleman who was 59 years, 4 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 the CPA who had been doing his tax return for over 10 years, 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 his CPA, this taxpayer cost himself over $5,000.
Smart Business Owners Keep Good 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 to pay more in taxes than you are legally required to pay.
Smart Business Owners Start on Their Taxes 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. This does two things. First, it takes the stress out of coming up with a large pile of money when you file the return. It is much easier to transfer $250/week to a tax savings account then to pull $13,000 out of your operating account on tax day. And by paying your taxes on time, you will save lots of money on penalties and interest for failing to pay your taxes.