Are You Going to Owe Taxes? Do This, Not That!
It’s the end of the year which means tax return season is upon us. A few of you are going to be thinking about the fact you’ve not done anything to prepare for this…
I want to drop a truth bomb for you now: Paying tax means you made money.
When COVID first hit, the government was offering relief to businesses in the form of PPP loans. But some business owners were shocked to learn they didn’t qualify.
The reason? They’d been declaring that their businesses weren’t profitable to avoid paying taxes. They were broke on paper.
The culture of the entrepreneur right now seems to be to ‘write off’ as much as they can for tax purposes. Expensing things left, right and centre. The mindset that we need to avoid paying taxes, however, is way off.
If you’re not paying tax, you’re telling the government, the IRS and lenders that you’re not making money. This is a slippery slope to be on, because profitable businesses pay taxes! By creating a paper trail that says you don’t make any money, you’re kissing goodbye to any form of lending in the future. New house? New car? Good luck!
Franklin said the only two certainties in life were death and taxes, and I completely agree. Taxes are a part of running a business, so honestly? Just pay the darn money!
Identifying how much you ow
The first step in preparing taxes is to get a general idea of what you’re likely to owe. You can work this out by taking your revenue for 2021, and deducting your expenses. My free Profit Plan tool can help you easily crunch those numbers, so if you don’t already have a copy, go grab it now!
As an example, if you were left with $100000 profit for the year (after deducting expenses from your revenue), think of that as your gross income. Back when you were an employee, you received a gross paycheck which you paid taxes on before it went into your bank account. Now you own a business, it helps to think of your profit in a similar way. That $100000 is the amount you’re going to owe taxes on.
Now, I’ve spoken about this before, but I strongly urge you to meet with your tax preparer or accounting professional ahead of filing your tax returns. If you don’t have one, please get in touch – we’re taking on new clients and I would love to help you. Your profit will be taxed at both a federal and state rate, which your tax preparer can advise you, or you can Google it. As a generic rule of thumb, I say expect to owe 30% of your profits to Uncle Sam, and I talk more about paying taxes in this blog post.
Now you owe taxes, DO NOT go out and blow it all!
If you identify that you owe $10000 in tax (for example), do not go out and buy $10000 worth of rubbish in the hopes of writing it off. This is a prevailing misconception, that spending the taxable amount eliminates your tax bill.
If you decide to spend that $10000 you owe purely to expense it – maybe on a new car – you’d likely be under the impression you no longer owe taxes. It’s not a dollar-for-dollar exchange. All you’ve actually done is get a slight discount on the items you purchased – you’ve saved your tax rate.
Looking at it logically, you’ve simply made a small reduction in the amount you need to pay taxes on, and a drastic reduction in the amount of cash you have available to pay that tax.
I want you to stop strategizing how to reduce your tax bill, and instead put that brainpower to use in building a profitable business.
Let’s think back to being an employee again. You’ve been offered two jobs: one pays $100000 annually, the other, $200000. Would you turn down the $200000 job simply because you’d have to pay more tax?
OF COURSE YOU WOULDN’T!!!
You’d take the higher paying job and simply pay more taxes. When you’re running a business, I want you to have the exact same mindset – making as much profit as possible.
What can you do instead?
I am not here to help you evade taxes. That is not my scene. Instead, I want you to consider how you can invest in both your profits and your future.
If your business has made good profits, maybe you want to reward your staff with a bonus (which will, legitimately, go through payroll). Perhaps you want to invest in training, or equipment that will definitely help to increase your profits. These are completely above-board ways to spend some of your profits, but remember you will still owe taxes on what’s left.
I have also talked before about investing into retirement funds as a way to tax shelter. This is 100% legal, and the government encourages it. After all, the more people who are investing into their own retirements, the less money the government has to pay out, right?
The IRS rewards you for investing in your future, and it isn’t only people with a 401K who end up with retirement funds! There are many ways to legally invest into your retirement, and it is never too early to start looking into this.
I have a video talking more about what you should, and absolutely should not, be doing during tax season, which you can watch on YouTube. The main thing I want you to take away from this post is that you need to be focusing on your profits, and not on avoiding taxes. Stop being broke on paper and remember: If you’re paying taxes, you’re making money!
Also, check out my website to learn more!