According to a 2018 Clutch survey, 30% of small business owners think they’re overpaying their tax bill. A few weeks ago, I ran a (very un-scientific) survey on LinkedIn and 60% of respondents said they thought they overpaid.
The truth is, that number is probably even higher in reality. The tax code is complicated. I’m not saying I like it that way, but that’s how Uncle Sam has decided it will be. It’s really easy to miss something or mess your return up.
I always say that it’s not actually bad to pay taxes, because it means you’re making a profit. I think people get so worked up about saving a little bit of money on their tax bill that they forget about what matters – the health of their business. That said, when you run a business, your tax bill can add up quickly. If you’re overpaying your taxes, then you’re stifling your business’s cash flow.
If you’re overpaying your taxes, you’re stifling your business’s cash flow.
Signs you might be paying too much in taxes
Your tax accountant doesn’t take the time to really understand your business. A lot of tax accountants (but not all!) operate under a model where they take on as many tax returns as they can. You might get to talk to them once or twice per year for 20 minutes and you might feel like all they do is transfer your numbers onto a form. How can they understand all the ins and outs of your business and make sure you’re saving the most money you can?
You don’t want to pay for a CPA – but then miss out on credits and deductions. The tax code is really complex, especially for business taxes. This makes it really easy to miss out on deductions and tax credits if you don’t know what to look for. A good CPA will pay for themselves!
You’re so scared of the IRS, you’d rather overpay than take deductions you’re entitled to. I’ve met a lot of business owners who are afraid to write off too many expenses because they think it will trigger an audit. Here’s the thing – even on the small chance you are selected for an audit, being audited doesn’t automatically mean you did something wrong. You’ll have the opportunity to support and validate your deductions, and worst case, the IRS disagrees with something you wrote off and you have to pay some more taxes. I never advocate for being sketchy with the IRS, but you probably have some room to find more write offs.
Your books are a hot mess, so you miss out on deductions. This is a really common cause of business owners overpaying, and is so easy to fix with some simple business habits. If your books are a mess, then you won’t be able to tell me everything you spent money on in your business. Which leads to not being able to take deductions for the money that already went out the door, which causes your tax bill to be higher than necessary. Keep up with your books on a monthly basis!
You don’t run things by your CPA to make sure things are structured favorably until it’s too late. If you wait until January to think about the last year’s taxes, the only change you’re going to be able to make is probably making retirement contributions. Once the ship has sailed, it’s difficult, if not impossible, to make sure transactions are structured for favorable tax treatment. Therefore, it’s best to find a CPA who can help you think through your plans ahead of time. For example, you can structure things like travel and vehicle purchases to get the most write-offs possible as long as you plan ahead.
You don’t have a proactive tax or business plan. This is where we talk about things like entity structure, equity, investment decisions, owner compensation and retirement. You can read about S Corps on the internet all day, but you need someone qualified to help you make the decision about what’s best for your unique business. Everyone has different goals, personal stories, and plans for their businesses, so there is no one-size-fits-all best business plan.
How a Tax Strategy Can Save You Money
Here are some real-life examples of how a tax strategy can save you money.
I have a client who owns an LLC and, as the business grew, gave some equity in the business to employees. We assessed the entity structure and elected to switch from partnership tax to corporation tax to take advantage of lower federal and state corporate tax rates.
Estimated tax savings: $60,000
For another client, we assessed their owner compensation structure. This owner had some personal deductions that could be leveraged to reduce overall income, so we optimized the amount paid out as a salary vs. distributions.
Estimated tax savings: $32,000
Here are some other ideas you might be able to implement in your business:
- Electing S Corp status to reduce your self-employment taxes.
- Optimizing your owner compensation structure and leveraging retirement contributions.
- Structuring your travel in a way that allows you to write expenses off as business deductions.
- Timing your expenses to hit a lower tax bracket.
- Deciding whether to lease or finance a vehicle to take advantage of an up-front depreciation deduction.
- Implementing strategies like the kiddie tax or renting out your personal residence to take (totally legal) business write-offs.
A Good Accountant Will Pay For Themselves
The more money your business is bringing in, the more you could potentially save in taxes. And a good accountant will pay for themselves by helping you understand your financial picture so you can make the best decisions for your business, in addition to being proactive with your taxes.
So once you’ve figured out your business model and start to bring in profits, you need to think about your tax strategy and overall business plan so you aren’t throwing your hard-earned money down the drain. There’s nothing I hate to see more than a business owner who pours their heart and soul into their business, but at the end of the day, isn’t meeting their financial goals.
At Young + Co, we offer virtual CFO, accounting, and tax services designed to help driven small business owners make their businesses more profitable through financial visibility and clear strategy. All of the services we offer include tax support, so we can help you create a business and tax plan to meet your goals and maximize your personal wealth. We’re here to help you feel confident that you’ve got your finances under control. Contact us to see how we can help!