Business owners with a high income possess significant tax saving and financial planning tools. While most business owners believe they execute most of the reasonably efficient tax minimization strategies, they really just scratch the surface. Which means they turn over more hard earned cash to the IRS than necessary and miss out on the full gamut of rewards for business ownership.
What if you had the ultimate guide for mitigating your income taxes--the taxes you have the most control over right now? What if you were missing one, two, or three strategies that could reduce your taxes by enough to cover your house payment for the year? Or allow you to purchase a new car? Or reduce the time you need to grind in the business by several months or years? Or allow you to make a previously unfathomable gift to your favorite cause?
Growing, profitable business owners need to know about and implement more strategies to unleash the wealth-building and world-changing power of their business.
WHY MINIMIZING TAXES MATTERS MORE THAN YOU THINK
Many owners feel like they pay more than their share of taxes. Try to read through the following list without your throat tying a knot: sales tax, property tax, unemployment tax, payroll tax, value-added tax, foreign tax, capital gains tax, estate tax, gift tax, corporate income tax, personal state income tax, and, wait for it, personal federal income tax.
In fact, if you listed all the taxes you will pay this year as one line-item on your P&L or in your household income statement, you may find this number to be your single largest expense. Just income taxes alone share a stomach-churning portion of your profit and income.
Here’s something else to keep in mind. $1 of tax savings is better than earning $1 of additional income because you have to pay taxes on that additional $1 of income! At an assumed total federal and state income tax of 40%, you need to earn $1.67 of additional income and pay taxes on that amount to be left with $1!
Therefore, you cannot ignore opportunities to minimize taxes whenever possible. At this point, you should be motivated to declare absolute war.
First, review the following summary of five ways to ensure you minimize your taxes this year and every year. Then, read on for all the details.
1. ENGAGE A PROACTIVE CPA
- Why just having a CPA doesn’t cut it
- How to know if you have a proactive CPA
- Where to find a proactive CPA
- How to prevent poor decisions, minimize regret, and maximize flexibility
- When the optimal time of year peaks to plan for taxes
- Who’s more important to your planning: CPA or CFP®?
- How to get your CPA and your CFP® on the same team and why it’s harder than you think
- Why a “Financial Summit” is the key to short-term tax savings and long-term goal achievement
- Why most business owners tend to under-inform their advisory team
- How to set the right tone so you can share just the right information without getting “too much” advice
- Which two pages of your tax return help you make the best decisions
- Which two line items on these two pages are crucial to understand
- How to learn when you’ll climb into the next tax bracket
- Why cash is possibly the least effective asset to give a 501(c)(3) organization
- What type of asset is better and when to know it’s the right time
ALL THE DETAILS 1. ENGAGE A PROACTIVE CPA
Note the key word here: proactive. Proactive CPAs are worth their weight in gold.
Unlike proactive CPAs, many CPAs simply strive to keep you in compliance with the IRS. While a noble baseline objective, compliance alone should not satisfy the successful business owner.
What if your favorite sports team hired their next head coach and later discovered that the coach only wants to help the team commit no penalties or errors? Oh sure, the coach will give a few pointers after the game that would have helped and might be effective in the future.
However, to win the game, the coach's advice stopped short. To provide guidance and strategy before and during the season and before and during each game the team would find a new coach in a snap.
And so should you when it comes to income taxes.
If you don't have a great tax professional, in your heart of hearts, you know it for one of several reasons. For example, you could finally realize that their primary motive is compliance alone, not proactive planning in addition to table-stakes compliance. Or, even a cheerfully helpful CPA with a cycle of rudimentary advice reveals that you’ve outgrown your tax professional. Or, on the opposite spectrum, your CPA has been acquired or merged or otherwise grown and you no longer receive the attention and service that inspires confidence in your crucial war on taxes.
On the other hand, if you have a great CPA, you realize your good fortune. These CPAs proactively reach out to you with planning strategies and new ideas. The best CPAs are willing to bring ideas to you even if you may not execute on every opportunity.
Now, you may think finding a new CPA and the process to change from one relationship to another would be insurmountable. However, countless business owners make the switch and flock to valuable counsel because of the increasingly complex and constantly changing tax system.
Consider the following minor--but telling--gut check. If you receive helpful counsel from a proactive CPA, let them know you appreciate their effort right now by a quick email or phone call. However, if you can’t bring yourself to express gratitude because you know it would not be sincere, switch to a proactive CPA as soon as possible.
Your other professional advisors and business owners like yourself can offer up several suggestions to guide you to a proactive CPA. The process can be smooth, enjoyable, and well worth the effort to experience increased peace of mind, more cash flow, and expedited financial independence.
2. INVEST MORE TIME PLANNING FOR TAXES IN THE 3RD & 4TH QUARTER THAN WHEN TAXES ARE DUE
Proper prior planning prevents pitifully poor performance.
This loosely translated military adage applies to the time of year you plan for taxes. Many tax strategies and planning moves require at least some forethought to decide and execute effectively.
For example, absent tax planning motivations, you might make certain purchases, attempt to close on revenue or make certain investments and other transfers sooner or later than if you truly understood the tax implications.
Every year business owners make poor decisions as the clock ticks down to year-end. Others live in regret the following year because they did not take time to look at further options while the window of opportunity hung wide open.
November presents a perfect time slot to check in with your professional team. Some business owners may have a clearer picture of income and other decisions for the year prior to November, and others may have to wait until December. For most, November means that about 85% of the year is in the books and decision points can come into focus clear enough for valuable planning.
3. MEET WITH A FINANCIAL PLANNER FOR A “FINANCIAL SUMMIT”
For tax minimization, your CPA should be the go-to professional. As a bonus, a team with a CFP® (Certified Financial Planner™) on board can also provide actionable, valuable input from a different perspective.
Besides your CPA, a financial planner will have the most well-rounded view of your financial picture and understand your long-term objectives. On one hand, good financial planners don't allow the tax tail to wag the dog. On the other hand, they value tax planning and work closely with your CPA to brainstorm and advocate for you to implement strategies with material impact.
A word of caution here: many CPAs and financial planners do not see eye to eye. Oftentimes, the financial planner believes they are (or tries to become) the quarterback of your financial situation. But for business owners, their CPA most often is the most trusted advisor and quarterback of planning.
Either way works well (and usually depends on who you've had the relationship with the longest), but no matter what, your financial planner and CPA must work together on your behalf without getting into a power struggle.
We recommend letting your CPA and your financial planner know they can share pertinent information back and forth while keeping you in the loop. This ensures that you receive fully integrated advice and holds each of them accountable to work in your best interest.
A great financial planner with an ongoing two-way relationship will offer an opportunity to meet in person or virtually to provide updates to each other on progress toward financial objectives, understand your business, family, and other initiatives, plan for taxes, and set financial goals. You can call this a sort of Financial Summit.
The goal of a Financial Summit is to connect “just because.” Even if you feel like there’s nothing new worth discussing, you will be pleasantly astonished how quickly the planning time passes and how valuable the discussion will be to your bottom line this year--not to mention your long-term goals.
4. INFORM YOUR PROFESSIONAL TEAM MORE THAN EVER
Have you made any big purchases/hires/investments/strategy changes in your business? Even better, do you plan to make any?
Business owners often under-share updates about their business or family because they don't want advice on what they feel are “small decisions.”
If you set the right tone and provide the right updates, your professional team won't analyze every word you say or feel like they need to respond to every little item. They'll simply look for the key linchpin moves that can save you significant tax dollars.
The point here is that you should lean toward over-sharing with your professional team. Ask questions when you need to, but certainly keep your advisors in the loop even if you aren't looking for immediate feedback.
5. UNDERSTAND THE BASICS OF A 1040 AND THE GRADUATED FEDERAL INCOME TAX BRACKET SYSTEM
No, you don't need to take a tax prep course or prepare your own tax return, but understanding the two most telling pages of your tax return can open your eyes to the key indicators of your tax liability.
Once you understand the lay of the land for those two pages, you'll be conscious of where tax planning decisions impact your tax expense on two of the most important lines: Adjusted Gross Income and Taxable Income. When considering a tax planning move, if you begin by asking yourself, "Does this decision affect Adjusted Gross Income (which subsequently impacts taxable income), or just taxable income," then you have arrived at a cursory tax mastery.
Tax brackets. Marginal tax bracket. Effective tax. Etc. All terms professionals throw around like they are as well-known as pop culture. You don't have to become super familiar with them, but you should know roughly where you fall in the brackets--especially if you are barely into the next one or bumping up against it. Knowing this will help you evaluate the tax impact of your next dollar of income or your next dollar of expense, deferral, or deduction.
BONUS TIP: GIVE SMART
Most people have one or more causes their family loves to support. Most of these gifts are made to 501(c)(3) organizations and can be tallied up for an itemized deduction. But did you know that in many cases from a tax perspective, cash is one of the worst things to give?
A much better way to fund causes is utilizing a Donor Advised Fund to gift your appreciated stock, real estate, or even business interests so that you can avoid capital gains. If you give over $10,000 / year to charity and have assets or investments held outside of retirement accounts, ask your CPA or financial planner about this powerful strategy and how to set up a Donor Advised Fund.
The article and opinions in this publication are for general information only and are not intended to provide specific advice or recommendations for any individual. We suggest that you consult your accountant, tax, or legal advisor with regard to your individual situation. The above summary has been obtained from sources we believe to be reliable, but we cannot guarantee its accuracy or completeness. Past performance is no guarantee of future results. Investment advisory services offered through Catalyst Wealth Management, LLC doing business as Ridgeline Private Wealth. Catalyst Wealth Management, LLC and Ridgeline Wealth, LLC are not affiliates. The opinions and views expressed here are for informational purposes only. Please consult with your tax and/or legal advisor for such guidance.