If You Were a Tax, What Kind of Tax Would You Be?

If You Were a Tax, What Kind of Tax Would You Be?

When I meet with business owners, I hear a lot of things. I hear about how they love their business; I hear about how they're making changes in the world; I hear about their children; and I hear about their challenges. One of those primary challenges is understanding the tax code, and the different types of taxes to which they are exposed on a monthly/quarterly/annual basis. This leads most business owners to utter these words:

"I hate taxes."

I understand. You, as a business owner, hate taxes (except when you get in your car and drive on a newly paved highway; or visit the local museum; or drop your child off at the public school you love more than life itself….but I digress). 

You hate them so much that you’ll attempt to make decisions for your business that are solely driven by this hatred.  It is my job to talk you down when you are making a rash decision, or to agree with you and help you structure the decision in the most beneficial way possible.  After all, not everything revolves around taxes.

Yes, I said that.  My position on taxes is this:  I will never advise you to spend money solely to generate a tax deduction.  Period. 

But I will also work to make sure you pay as little taxes as possible, and keep your hard-earned profits. Another Period.

Here are a few of the taxes you will have to contend with as a business owner:

• Income tax
• Self-employment tax
• Payroll tax
• Sales tax
• Use tax
• Property tax
• Franchise tax (sometimes)
• Luxury tax (if you’re playing Monopoly)

You should be focused on cash flow and tax reduction simultaneously, working to find the correct balance between the two concepts.  

Taxes and cash flow should go together, and getting tunnel vision about ONLY reducing taxes can be detrimental.  Business decisions and tax-related decisions sometimes go hand-in-hand.  I say “sometimes” because I don’t like for all business decisions to be governed by “how much in taxes can I save by doing this.”  Sometimes a decision is good even though it costs you some tax dollars.  Remember that after you pay your taxes, you get to keep what’s left.

Here is a comprehensive list of business expenses that need to be examined in light of cash and tax-focused outcomes (in no particular order):

• Rent – at some point, you may decide that owning your own business location is better than leasing it. This decision really needs to be closely analyzed in light of cash outlay and tax ramifications.  The timeline for paying a mortgage is so different from paying a short-term lease, and while the same space may cost less with a mortgage than with a lease, it doesn’t always work out to your advantage long-term.  There’s a bunch to consider here.
• Automobiles – this causes business owners more heartburn than anything else. There are many ways to deduct expenses related to autos….
  • Mileage
  • Actual expenses
  • Lease
  • Ownership...and the tax structure of your entity also plays into this decision.
• Health insurance – the second most-asked question. There isn’t enough room on this page to comment on all the important aspects of health insurance, so this is the textbook “case-by-case” discussion.
• Other insurance – the most overlooked element of your business expense make-up. Insurance is hated by most, but it’s a necessary evil.  The most overlooked and misunderstood insurance line items are:
  • Life insurance (why can't I deduct this?)
  • Disability insurance (both long-term and short-term)
  • Disability overhead insurance
  • Long-term care insurance
  • Worker’s compensation insurance
• Equipment and Fixtures (including Automobiles) – the accounting term that hardly anyone understands. These are purchases of items used in your business that last for a while….such as desks, computers, printers, scanners, etc.  Since they last for longer than one year and cost more than your standard paper clip or box of paper, per IRS guidelines, you must spread the cost over several years.  This is called depreciation (another term that no one really understands).  The timing of these purchases is important, because not only do they impact your wallet, they impact your taxes.

Tax reduction is a great thing, but I feel that cash flow considerations are primary. The great thing about working with us is that given the opportunity to weigh in, we won't suggest tax strategy and ignore the cash flow considerations.

Written by

Jonathan Godwin