Tax Is a Long Game. Are You Playing It Right?

In general, many small business owners say they want the lowest tax bill possible. Sounds nice, right? But what if that’s short sighted?

We believe tax is a long game.

The question shouldn’t be, How do I pay as little tax as possible this year?

Instead, the correct question is, How do I pay the least amount of tax over my life?

If you’re drowning in tax paperwork and find yourself looking in the rearview mirror, wishing you’d made better strategic financial decisions at the end of last year, you’re not alone.

Here are two ways many business owners fall short come tax season:

1. Often small business owners fail to have active conversations in Q4 with an advisor or tax preparer about the financials of their business.

2. Additionally, business owners may neglect to develop an annual plan for the coming year, informing how to achieve annual impact goals and where to spend.

Lots of business owners don’t do enough — or anything at all — in either of these categories, resulting in a less-than-strategic tax experience.

And unfortunately, many small business owners realize they struck out in hindsight, when it’s too late to make financial decisions that might impact what they owe.

If this sounds like you, we say, use this current moment of frustration and act now! Don’t make a note to find the support you need “later in the year.” Make the commitment now to ensure you don’t repeat that same oversight year after year after year.

So, what are the big financial misconceptions that we see from many of our small business owner clients who are just beginning their Prosper for Business journey? MACKEY’s Director of Client Engagement, Adam Reynolds, CPA, shares the most important things to consider when thinking about finances (and tax) through a holistic lens.

1. Think Long Term

Just because you can take a deduction or fully depreciate your equipment using Section 179, doesn’t mean you should.

Like most things, it depends on your circumstances.

“If your income is higher this year than you expect it to be next year, there may be some value or validity to taking some extra deductions,” says Adam. “But, in general, most people want to continue to grow their income. And growing income means rising tax and tax brackets.”

Instead, Adam suggests it’s often better to save potential expenses and deductions for future years when your business’s tax liability is likely to be higher.

“Hold off on some of those deductions until you’re in higher tax brackets. If you can, time up your expenses and your deductions in the years that you have more taxable income.”  

2. Stop Thinking in a Vacuum

A lot of business owners make decisions in a vacuum, solely thinking about the tax implications of the financial decision and not the bigger picture. Three questions Adam says executives should think about:

1. What am I paying in taxes?

2. What is the business impact of this decision?

3. How will this affect my personal financial plan?

Tax and business decisions often conflict. After all, to lower your taxes, you have to pay for something within your business in cash. But are you thinking beyond the tax write off? Is the purchase even necessary for your business? Does the business have the cash flow to support the purchase?

Many business owners take advantage of Section 179 when they’re financing a piece of equipment or a large purchase like a company vehicle. But if you’re not careful and aren’t thinking about cash flow (both current and future), you could find yourself having a higher tax bill in future years and an increased cash outflow as you pay down the debt of your big purchase.

But it’s not just about your business’s financial health. As an owner, you must consider your personal financial health, too. What is your retirement plan? What are your personal financial needs and how does tax fit into your ability to achieve those personal plans?

One tax strategy that some use is to defer taxable income to retirement plans and retirement accounts. But to do this, you must be just as in tune with your personal finances as you are with your business finances.

If you don’t have a personal financial planner, get one. Their involvement in helping you establish and follow personal financial goals is an essential part of informing your business spending decisions.

3. Focus on Financial Health

It may seem obvious, but it needs to be said: Your spending must be intentional. Does the purchase actually help your company achieve its goals? Or are you spending for the sake of spending?

There will likely come a time or two when you need to turn to a bank for a loan. And banks are looking primarily at the financial health of your business to inform how much to lend and what rates to offer. (And whether to lend at all.)

If you’re spending with your eye on keeping your taxes as low as possible, it’s likely some of those purchases aren’t necessary, and you’re putting the financial health of your business at risk. Lenders can and will see through that strategy and it may come back to bite you.

Instead, company spending should always align with how it will drive growth. 

Putting It All Together

Financial decisions must focus on impact. Does the expense help you actually achieve your business and personal goals?

“To grow wealth, you have to generate income and you have to make money,” Adam says. “And that means if you want to grow wealth, you will pay taxes.”

Instead of viewing tax as a dreaded part of doing business, view it as a sign of growth, and as a sign of your efforts in building the successful business of your dreams.

Ultimately, spending money on your business that has a purpose, has an impact, and has a return is where you want to find yourself. And yes, some years, you may pay a little more in tax than you’d like. But keeping your eye on the holistic view allows you to build and lead a financially healthy business that endures. 

If you’re a business owner who’s currently filing their taxes and realizes you could’ve wrapped up 2022 with a sharper eye on the long play, we say now’s the time to be proactive and find a financial coach who can help you with that big picture planning.

Let us help you transform business in 2023, building plans, setting goals, and creating accountability to help you thrive. Learn about our service levels and schedule a free 30-minute consult today.