By Levi Lapp, founder and CEO of Atlantic Outdoors, an outdoor living company that builds structures for your lifestyle.
Tax stress can make the ill-prepared small business owner want to leave their business behind. In fact, according to NFIB’s 2020 Small Business Problems & Priorities, four of the top 10 problems faced by small businesses all relate to taxes: federal taxes on business income, property taxes, state taxes on business income and tax complexity.
One of the worst-case tax scenarios is unexpectedly owing thousands of dollars to the government, cutting into your profit. Given that business income is critical for the majority of small business owners’ household income, business taxes become a personal matter.
But let’s be honest: Business taxes were always a personal matter. On top of having their household finances impacted, it seems that small business owners often feel personally beholden to a standard of patriotism or legalism when it comes to taxes. Trying to pay less in taxes might feel immoral, greedy or even illegal. While tax cheaters exist, aiming to decrease your tax bill does not mean you are one of them or that you’re unpatriotic or unjust. It might mean the very opposite.
What if reducing your taxes helped you become a generous business owner who gives back to society? What if reducing your taxes was not only possible but written into the tax code itself? The following six insights explain why this might be so—while showing you how to incorporate year-round tax planning (with the specific goal of minimizing taxes) into your accounting strategy.
Consider that the tax code might be designed for your benefit.
“The tax laws are written to reduce your taxes, not to increase them,” emphasizes Tom Wheelwright on page 5 of his book Tax-Free Wealth. He points out that 5,770 pages of the total 5,800 pages of tax law are dedicated to reducing your taxes. Only 30 pages discuss raising taxes.
That same tax complexity, which is one of the top 10 problems faced by small business owners, may also be there to help them. It provides tax incentives to entrepreneurs who invest in pursuits that create jobs, provide housing or stimulate local energy production or agriculture.
When it comes to navigating taxes as a business owner, first consider that the tax code might not be there to chastise you but to instead reward you for investing your time and resources in ways that build up society and the economy.
Understand the tax law (or keep a professional in your corner who does).
Taxes prepared with a deep understanding of the tax law can be the difference between thousands of dollars. Deferring or expediting income, or increasing or decreasing depreciation, are all ways in which you may be able to adjust your tax bill. Another example is donating money or resources strategically. This is always a good thing to do, but doing so through vehicles such as a donor-advised fund may help you reap tax benefits.
Implementing tax strategies correctly (and knowing about them at all) requires a working knowledge of the tax code. If you don’t have the time or inclination to dig into the tax law yourself, work with a seasoned tax professional.
Keep detailed, easy-to-access records.
Your business expenses play a direct role in net taxable income, affecting how much your business owes in taxes. The more business expenses you have, the less your taxable net income will be. Be vigilant about tracking your expenses. Even small items, like the gas required for transportation related to your business, may be deducted and can add up over the year.
Conduct a bi-annual review of your finances.
Proactive reviews paired with an understanding of the tax code can help you make adjustments throughout the rest of the year to lower your tax liability. But many tax planning strategies require you to take action before taxes are due, so being proactive with your accounting is necessary if you want to have a leg up.
Get more aggressive with leverage after your financial basics are covered.
There are many high-level tactics to build wealth as a business owner. However, getting the basics down for your business finances is always the first step. Only once you have an organized system for bookkeeping, forecasting and the like does investigating advanced strategies like accredited investing or real estate investing make sense.
Decide on your identity as a business owner.
“How much do I owe?” isn’t a question you should have to ask and be surprised by the answer to at crunch time. It’s a number you should know ahead of time and even have control over. Your money doesn’t need to be haphazardly subject to the tax code. Instead, you can wisely work with the tax code. That’s just the beginning of going from defense to offense with your business finances.
As you get a stronger handle on your business finances, you can move on from questions of what you owe to new perspectives that are even more fruitful. My family and I believe tithing is a requirement with our money, and we strive to approach our finances from a perspective of generosity. The next more fitting question for us, then, would be, “How much should I give?”
But perhaps an even better question to ask is one that John Cortines and Gregory Baumer, two Harvard MBA graduates, pose in God and Money. These two individuals challenge the way even well-meaning people see money as a self-oriented means of comfort and security. Instead of asking “How much should I give?” they started asking, “How much do I need to keep?” And it’s a lot easier to answer that question when you’re not riddled with thousands of dollars in taxes that you owe.
After all, focusing on generous output may be exactly what we’re called to do as business owners, anyway.
Disclaimer: The statements in this article are for informational purposes only. This article does not take the place of professional financial services or advice and should not be taken as such.
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