Of course you have to pay the tax
A dirty little secret about being successful
Now that we are at the end of the tax season, I’d like to take some time to reflect on what happened during this frantic time of year.
I’ve written elsewhere about watching your withholding because of tax brackets. I’ve also discussed the issues of losing the benefits of having children as the children grow older. But this year I was struck by the surprising number of business clients that seemed utterly shocked by the fact that they owed income tax.
First off, let me say that I remain dedicated to the proposition that taxes stink. I am committed to making sure each client pays the least amount of tax owed. I do this by watching the client’s Ps and Qs to make sure every deduction is taken, and taken in a way that maximizes its value for the client, both this year and in years to come.
But having said that, I need to say this: If your business is successful and you make more money, you will pay more tax.
Let me tell a couple of stories. First, I had clients who wanted to qualify for a mortgage. In the current credit climate you can’t get a mortgage unless you can prove that you don’t need a mortgage. You have to have assets (meaning money) or guaranteed (almost) income that proves to the lender that there is no possible way you would ever default. For those in business, these two qualifications are rare. Most business people use their assets to further the business, and no business can guarantee income. So business owners have two strikes against them already. Then, when the tax guy cuts their taxable income through the use of the legally permitted tools of deductions and depreciation and the rest, the lender says that they cannot grant a mortgage to someone who looks like they should be on the welfare roles.
So, what to do? I was asked not to be such a good tax guy so that the business owner’s income would be higher. I cannot lie about expenses and the rest, but I can put the deductions into less favorable positions in the return, or stretch them out longer, or otherwise use my knowledge of the tax code in just the opposite way than I usually do. It is hard, and I didn’t like it very much, but I did it. The ultimate result was that the taxpayer owed a large tax bill, rather than a small one. He got his mortgage, but the cost far exceeded the interest he will pay on it. Of course the IRS loved it.
In another case, a client brought me his year-end report and bragged that he had made almost double the revenue of the past year. And he also bragged that he had kept his costs down to an even lower percentage of that revenue than before. So his profits were huge. And, the consequence was that he owed a huge tax bill. He was appalled. How could he owe so much tax. I asked if he had paid the estimated amounts I recommended last year (even though underestimated, they would have lowered what he owed now). He said no. I even did some consults with him during the year and he never shared that he had had such a good year.
This is why working with your tax and accounting professional is something that really must be done all year long, every year. By consulting over what you are doing, what you plan to do and when you plan to do it can all make a difference in both the cash flow and the amount of money in your business.
Even such things as the choice of lender for a mortgage can make a big difference. I have resources which include lenders who are interested in business owners and know their peculiarities of income. They will account for certain deductions in their underwriting differently for a business than for an employee. So if you talk to me about what you want to do, I can steer you in the right direction. It’s much better than just wiping your tears when you find out there is nothing more you can do.
The two stories I told both have one moral. Business success leads to paying taxes. Do you want to be someone who is in control of the process and the outcome, or do you prefer to be someone who gets a surprise every year when the tax man comes?
Every business owner should have some sort of sounding board about the financial life of his or her business. It could be a trusted adviser, but preferably one with knowledge of business finance. There should also be consideration of profit. Profit, not income, is what makes a business, you know, profitable. Also remember that our tax code supports profitability by permitting taxable income to be less than the profits earned.
We should talk. I can learn more about your business, what you do and how you do it. We can discuss your income and expenses, and I can show you different ways to deal with the details of maintaining your business records. And if you like what you see and hear, we can discuss ways we can work together ongoing. Best thing is, this conversation won’t cost you a thing.
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