Why this myth causes a problem: The normal business owner believes that their work is done once they hire a tax preparer. They don’t do anything to control tax costs. This leads to them being surprised when they get their tax return and having to pay a much higher tax liability than smart business owners.
So they blame their tax preparer and find a new one. Of course, this doesn’t change anything, since they took the source of the problem with them to the new tax preparer.
The truth successful business owners learn the hard way! Uncle Sam is your partner. But he is a bad partner! He does little work in the business and demands a third or more of the profits. Smart business owners understand that income tax is an expense like any other. Thus, it can be planned for and managed.
Smart business owners cut their income taxes in the following six ways:
- Smart business owners take year-end tax planning seriously. After the first of the year, there is very little that can be done to reduce taxes. Before year-end is the only time a business owner can effectively reduce their tax liability.
- Smart business owners call their tax advisor before doing any major transactions. They call before selling assets, opening a business, or taking money out of retirement accounts. Since they know in advance the tax consequences of their actions, they don’t “shoot the messenger” when they get their tax return and discover how much they owe.
- Smart business owners keep good accounting records. They don’t drop off shoeboxes full of receipts to their tax preparer, and they understand that good accounting records ensure that they can deduct everything they spend in their business. With the current technology, there is no good reason not to have good records in order to prepare your tax return.
- Smart business owners get their records to their tax preparer early. I prepared close to fifty returns in the last two weeks. There is no way that they received the same amount of attention to helping them reduce their taxes that I was able to spend with clients earlier in the year. Smart business owners understand this, and make time to meet with their tax preparer as early as possible.
- Smart business owners save for taxes as they earn the income. Uncle Sam’s motto: Pay me now, or pay me more later. Smart business owners make their estimated payments. The smartest business owners put an amount into a savings account weekly that represents how much they will owe. (Hint: Divide your total tax liability last year by your total sales from last year. Put this percentage amount into a savings account weekly.)
- Smart business owners get a basic understanding of the income tax law. They don’t become experts, but they do learn how the system works and how to use it to their advantage.
Lesson learned: Income taxes can be reduced like any other expense with proper management and planning. This allows the smart business owner to use the savings to grow their business, support their family, plan for retirement, take a vacation, etc.