I wish I owed $100,000 in taxes
I’ve been working on a sales letter for my next campaign. The letter made me start thinking about taxes in a new way.
Part of the letter discusses the idea that there is a conflict between what I do as a tax professional and what my clients want to do as business owners. My job is to minimize the tax that they pay. Their job is to maximize their profit.
“Where’s the conflict?” you may ask. “They make money and they want you to save them from tax payments.”
I recently had a client come to me with his year-end reports. He was bragging about his business growth and how he had kept his expenses down to a minimum. He was truly proud of his profit, and rightly so. Problem was, he had made no attempt pay estimated tax payments. He apparently thought that I could make this high profit disappear using tax tricks. He was surprised and angry when I told him he owed a hefty tax bill–around $40,000.
The conflict comes from this attitude. Like the example, most of my clients are small businesses–sole proprietors and professional people. Too often they share this idea that there is a distinction between the tax world and the business world. Almost as though taxes suddenly appear in April and have to be fought off like an invader.
The truth of the matter is much different. The foundational basis of the American tax system is that your profit is taxed. True, the word used is income, but businesses get to deduct reasonable business expenses from income, leaving profit to be taxed.
This has been true for over a century now, so no business owner should be surprised by this. It doesn’t spring out of nowhere.
And that brings us back to the title of this essay. If you owe $100,000 in taxes you should be thrilled. That would indicate a profit for your business in the neighborhood of a quarter of a million dollars. And that’s just profit. Depending on how good a business person you are, that could mean sales of half a million or more. That seems to me to be a good thing.
The real issue is this–no one wants to be surprised by their tax bill. And the only way to avoid surprises (big ones, at least) is by planning.
Planning is the most important part of tax work. It’s not just the taxes, but the business’s whole financial organization that needs to be planned. This is not accounting or bookkeeping, although those are a part of it. It involves analysis of historical data, then projection of what to do next, then analysis of those new results. All of this done on a regular basis. Financial goals are set, examined, revised and reset.
If this seems like a lot of work, it is. But there are ways to save time and trouble that make it less work. As a small business owner, you probably do not have large amounts of receivables and payables to keep track of. You probably don’t even know what an adjusting entry is, much less do any. A couple of simple smartphone apps can save the day for you, providing the basic data processing with little or no effort on your part. Then, by organizing your accounts in a specific way, you make the analysis part of the finance task as straightforward as possible.
Real Profitability is a system that performs a two step analysis. First, by organizing your chart of accounts in ways that make sense to you. Often using the broad categories from the IRS Schedule C, with details in areas that directly impact your business. The accounts needed by a retail store will be different from those needed by a portrait artist, and different still from a machine shop or attorney’s office.
Unless you are an accountant or bookkeeper, the standard financial reports–Profit and Loss, Balance Sheet, and Statement of Cash Flows–are probably more complicated than you need for day to day operation. What you need is to know how much income you have received, how much profit you have, how much is put aside for tax payments, how much is available to make payroll, and finally what is left for paying expenses. These five bank accounts are what you study day to day to see the ebb and flow of your business. And if you have special needs or projects, you create new bank accounts to store the money for them until needed.
This set up and preliminary planning takes most of the work out of handling your financial concerns and lets you concentrate on marketing and improved operations. You shorten the time you must spend in the details of business finance, and increase the time available to you to actually do your business, or even spend more time with family and outside interests.
With a functioning Real Profitability system in your business, you welcome a $100k tax bill because you know the money is safely tucked away in your tax account. And the profit you have made by making your customer’s lives better is available to you for distribution as a reward for your good work. No surprises, no gimmicks, no late nights of worry. Just money in the bank.
If you want to know more, schedule a consultation.
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