Talk­ing with a prospec­tive client recent­ly, I received an all too famil­iar response to my ques­tion, “Do you cur­rent­ly obtain annu­al tax plan­ning advice?” The almost uni­ver­sal answer is…. “My tax per­son tells me how much I need to spend on new equip­ment to pay no tax each year.”

In the last two years, the client had spent $200,000 on equip­ment to avoid pay­ing cur­rent income tax. That’s $200,000 of cash out the door. Now he finds him­self in the mid­dle of a glob­al health pan­dem­ic. Due to a gov­ern­ment-ordered shut­down, his busi­ness had to close its doors. He’s laid off his entire team and has strug­gled through to pay reduced rent and oth­er essen­tial costs so as not to lose his busi­ness.

If instead of $200,000 of new equip­ment, if he’d only spent the $50,000, he real­ly need­ed to replace his old machin­ery, his cash account would be $150,000, less the tax cost, high­er. So how much would he have paid in tax? Dur­ing 2018 and 2019 his tax com­bined rate, fed­er­al and state, was only 18%. So not spend­ing the $150,000 would have cost him exact­ly $27,000. The bank account boost pos­si­ble with­out unnec­es­sary spend­ing? $123,000! Enough to save his busi­ness.

This kind of non­sense dri­ves me crazy.

So why is this kind of bad advice so uni­ver­sal?

It’s all about what ques­tions we ask. The CPA and the busi­ness own­er are caught in a trap, that says, the best out­come is not to write a check. CPAs and busi­ness own­ers are focused on one ques­tion, how big a check must I write?

But how can this lead to a great out­come? No check to the IRS means no income. No income means no wealth cre­ation. No wealth cre­ation means short- and long-term goals are on hold, maybe nev­er to hap­pen. In addi­tion, it leaves your busi­ness cash-poor, unable to weath­er the winds of change that come with hard times. By ask­ing the wrong ques­tion, you jeop­ar­dize your most pre­cious and valu­able asset, your busi­ness.
The ques­tion you need to ask is, how do I cre­ate the most wealth?

From this ques­tion, the finan­cial health of the busi­ness and the own­er are para­mount. Of course, your goal is to pay the least tax pos­si­ble, over your life­time. We are in one of the low­est tax envi­ron­ments of my 37-year career as a CPA. The deficits cre­at­ed pre-2020 were already approach­ing insan­i­ty. Now add the increase in the deficit from COVID spend­ing. What direc­tion do you think tax­es are head­ing?

It is impos­si­ble to build wealth with­out pay­ing tax­es. Tax­es are on sale, so buy now. Focus your time and ener­gy on mak­ing your busi­ness as prof­itable as pos­si­ble. Then engage a CPA who looks at your tax expense through a wealth cre­ation lens and enjoy watch­ing your wealth grow.