I know the word ‘taxes’ can send you running for the hills. This is a topic that gets under a lot of people’s skin. I’ve had plenty of messages from people saying, thanks but no thanks.
You don’t want to pay a lot of taxes. Understood.
But, you really need to, for some pretty logical reasons.
Benjamin Franklin once said ‘Nothing is certain except Death and Taxes’. You can only cheat one of those, and I want to make it clear why you really shouldn’t!
Truthbomb: Profitable Businesses pay their taxes!
I hear entrepreneurs exclaiming that they got a $1000 tax refund last year, like it’s a badge of honour. They’re proud that they got a refund from the IRS.
But what they’re really saying is ‘My business didn’t make a profit last year.’
I want you to have a profitable business, and as a profitable business owner I want you to pay taxes to show it!
Make sure you download my free Profit Plan tool to calculate exactly how much profit you’ve made!
If you don’t pay tax, you’re telling the world you’re broke
I want to think back to last year’s PPP situation (more of which in my YouTube videos here and here). A lot of you weren’t able to get a loan. The reason for that rejection was the IRS thought you were broke – on paper.
You’d been telling them that your business wasn’t making any money because you hadn’t been paying your taxes!
Your profits are your paycheck!
All of us are in business to make money, and the profits we make go towards paying ourselves a salary. Heck, I’ve even got a video on how to give yourself a raise!
If we step back from being entrepreneurs for a moment and put our Employee hats on, we can clearly see that our take-home pay was what we made after paying our taxes.
Why should it be any different just because you own the business?
Write-Offs aren’t mandatory!
A lot of the time we get it into our heads that, as entrepreneurs, we should be looking for deductions. We spend, spend, spend and claim that spend as business expenses so we don’t have to pay Uncle Sam.
That’s not how it works.
If your profit for last month was $5000, you can’t just go out and spend that $5000 to avoid paying tax. What you’ve actually done is told the government that YOUR BUSINESS DOESN’T MAKE ANY MONEY!
What’s going to happen when you want to borrow money to buy a bigger house or a car? Do you think a bank will loan that sort of money to an unprofitable business?
PPP showed us that we need to pay taxes
If you spend all your profits simply to avoid paying tax, then you’ve left a paper trail showing that you have no income.
This became really apparent during Covid when businesses began to apply for PPP. I worked with a lot of people on their applications who were only getting approved for $4-$5000, despite being six-figure earners.
This was because, regardless of how much their business actually brought in, they were broke on paper.
They’d been avoiding paying taxes and so when the time came to apply for help their business looked like it wasn’t bringing any money in. They’d shot themselves in the foot by evading their taxes.
Tax Evasion is BAD!
Your goal in business is to make money, and when you make money, you pay taxes.
I’ve worked with people who go through their profit and loss for the previous year and see just how much money their business made – and they panic.
If your company made $80,000 profit, you need to pay tax on that $80,000. Going away and ‘finding’ $70,000 worth of expenses to deduct is tax evasion. It’s going to seriously harm your future borrowing chances, and it’s just icky.
Don’t do it.
Broke on paper = poor selling prospects
Besides the impact on borrowing and just plain being unethical, not paying taxes can make your business impossible to sell.
You’re not just lying to the government when you evade your taxes through erroneous buying, but you’re damaging your business’s value.
I have seen this play out so many times when an entrepreneur has come to sell their business on; you’re doing some shady shuffling – a romantic week in Vegas written off as a business expense – and you’ve deducted thousands in taxable income. And made your business look like it doesn’t make money.
You can sell the glamorous lifestyle and weeks away to Vegas to a potential buyer, but when they ask to see your financial records, they’re going to see that YOU DIDN’T MAKE A PROFIT!
No one is going to spend big bucks on a business that – on paper – doesn’t make money and by bleeding your business dry, you’ve lost your exit plan.
A brief explanation of how taxes work
This isn’t a blog post about how taxes work in detail, but I definitely want to cover the key point.
Taxes are calculated based on
- Federal Income Tax Brackets (around 20-25%)
- State tax (say 3-5%)
Combine those two amounts to calculate the amount of tax you owe.
If you owe 30%, and you go out and spend your ‘$5000 owed to Uncle Sam’ on stuff to deduct – on paper you’ve only actually saved yourself 30%.
A lot of people will spend their taxable income on high-ticket Fixed Assets (like a new Lexus, for example).
If you spent your $40,000 taxable income on a $40,000 car thinking you’ll save yourself the taxes – I have bad news.
Your deductions won’t be taken in one hit – they’ll be taken little by little over time. So you’re now $40,000 down but you still have most of that tax bill to pay… Uncle Sam is a lot smarter than you think!
Legal ways to lower your taxes
That doesn’t mean that everything you spend business profits on is illegal, unethical or tacky.
There are some completely above-board ways to shelter your money that will also help your business going forwards.
Reinvesting:
Maybe you’re someone who doesn’t want to take the profits out of your business because you want to reinvest it. You might be looking to upgrade your equipment, undertaking research and development or building an app. Your business might not look profitable to you but there’s a paper trail showing your profits being pumped back into developing your business.
Spending $10,000 on an actual business trip to Vegas is very different to writing off a vacation as a business expense. One of these shows profit being used wisely; one makes you look broke.
If you invest your profits, you have a paper trail showing how you lowered your taxable income while still showing the IRS and prospective buyers that your business is successful!
Retirement planning:
So many entrepreneurs are so focused on TODAY that they forget to look ahead to the future. A lot don’t even realise that you can invest in your retirement if you own a business. But you absolutely can! In fact, the government incentivises you to do that!
Investing in your retirement is basically setting aside money today, for yourself tomorrow. There are so many great opportunities for retirement investment, that will also save you a ton in taxes.
Stop looking to ‘Beat the System’
If you’re simply looking for a way to get one over on Uncle Sam when it comes to paying taxes, I am not your girl. Move along, sweetheart.
But if you’re looking for ethical, legal and sensible ways to be a profitable business – and, yes, that means paying your taxes too – then I hope this has helped.
You can also watch my YouTube video on Why I Want you to Pay a lot of Taxes, and hopefully change your mindset from ‘I don’t want to pay a lot of taxes’ to ‘I want to make a ton of money’.
