We all know the phrase, ‘the only two things that are certain in life: death and taxes.’ However, business owners too often try to outsmart the system by focusing on paying zero dollars in taxes. We get it. Taxes can feel like a drain on resources or even unfair. You put in so much hard work to break even and now those profits can feel like a punishment.
What is Your Focus?
While we understand your frustration, we also understand how counterproductive this thinking can be for business owners. When you try to organize our business around paying zero taxes, rather than finding the best way to utilize their profits, it actually can harm your growth.
When you see your profits, do you then search for possible deductions? Do you brainstorm ways trying to match the two?
Do you see those profits rolling in, only to think of the tax implications? Not only will this thinking harm your drive, but it hinders your ability to see the big picture.
If you answered yes to any of these questions, you might need to rewire the way you think about your profits. It is not wrong to want lower expenses, but make sure you are productive with your time, spending, and investments.
Let’s Change Your Thinking
Rather than focusing on that possible 25% tax on your profits, focus on what you can do with that 75%. How are you going to expand? Where do you need to invest? Perform an internal audit of your business to see where your weaknesses are. From there you can to begin to make decisions that are right for your business and not focused on your tax return.
For example, take small business owner, Joe. As the year comes to a close Joe realizes he had a pretty good year. His joy is cut short when he realizes this means he will have to pay more in taxes.
To reduce those taxes down, he quickly looks around his business for ways to grab some business expense deductions. The walls of his shop could use a new coat of paint, some of the products could be restocked, and he probably has a few errands that can benefit his gas mileage deduction. Rather than spending the money on expanding his business with smart decisions, Joe focuses too strictly on grabbing every possible deduction.
When Joe holds himself (and his profits) back, in 10 years this is what the growth rate of his company may look like.
As you can see from the graph above, Joe restricted himself. He saw profits as a burden. He used his earned profits to bring his taxes down, thus bringing his own profits down. He may have sold more products, but then spent the profits foolishly to keep his taxes low.
Yes, saving money via tax deduction can help you grow your profits but not nearly as much as making smart decisions with your remaining 75%. Every moment you focus on calculating the “perfect tax return,” is time you can be spending on reinvesting that 75% back into your business.
How Your CPA Thinks (or should think)
A CPA is dedicated to helping you get every deduction you are owed. However, a good CPA’s primary goal is to help you grow your business, not to give you a zero dollar tax bill. Sometimes to grow your business, you will be paying a bit of taxes.
It is a tradeoff. To grow your business, hire more employees, and reach that next customer, you will need to increase your profits. Take your weaknesses or needs of your business and first decide how to overcome these issues if there happens to be a tax deduction associated with these expenses, great! If not, know you will still be making the best decision for your business despite having to pay taxes.
Now, let’s look at what Joe’s business could look like when he focuses on that 75%. He reinvests his profits to help his business grow. You will notice his profits grow much quicker. Do his taxes look a bit strange? Did you expect them to grow just as quickly? It is sometimes hard to visualize how taxes will grow as your business does. This chart not only looks great for joe’s profits but can make the tax expense more digestible.
Why Zero Tax Mindset Harms Your Business
The zero tax mindset is closely associated with your profits and growth. More profits mean more opportunities to expand operations, hire another essential employee, or open up that new location. When you restrict your profits by spending them in areas that do not promote growth, you are stagnant. Just as we saw in the first graph. You may even shrink by your inability to meet demand or improve products.
If you refocus yourself to a growth mindset, like that in graph 2, you will find more opportunities to grow. You will also find the tax expense is not as intimidating as you once thought. Sure, you will be paying more in taxes, but you will be making so much more as well.
Consider the profits after taxes in graph 1. In year 10, Joe went home with $30,000 in profits. Not much different from the $25,000 in year 1.
In graph 2, Joe went home with $78,400 in profits after taxes in year 10. That is a significant difference from $25,000 in year 1, all Joe had to do was change his mindset!
Create a Plan – Always
While we have stressed the importance of shifting your thinking, this does not mean you should neglect your deductions or forget tax planning. Excellent tax planning can help you manage your time properly and get every deduction due to you in a productive manner. This differs from the business owner that stays late to try and figure out how to squeeze every deduction possible.
When you create a tax plan, the focus is on proper record keeping and smart financial decisions when tax implications are involved. For example, if you are looking for someone to help with your bookkeeping there will be important tax differences in hiring an employee versus an independent contractor. If you want to learn a bit more about how to create a tax plan for next year, consider visiting this article: How to Create a Tax Plan for 2019.
This publication is designed to provide information of federal tax and accounting laws and/or regulations. It is presented with the understanding that the author is not rendering legal or accounting services.
This text is not intended to address every situation that arises or provide specific, strategic tax and/or accounting planning advice. This text should not be used solely to answer tax and/or accounting questions and you should consult additional sources of information, as needed, to determine the solution to tax and/or accounting questions.
This text has been prepared with due diligence. However, the possibility of mechanical or human error does exist and the author accepts no responsibility or liability regarding this material and its use. This text is not intended or written by the practitioner to be used and cannot be used by a taxpayer or tax return preparer, for the purpose of avoiding penalties that may be imposed.
Kristen Corey is a staff accountant at Green Ledger CPA operating out of Wichita Falls, Texas. She has a Masters and Bachelors in Accounting with experience in both the accounting and marketing space, giving her a unique understanding of what information clients need most. When she isn't calculating, she is playing fetch with her dog or traveling with her husband.