As a tax professional, I may be a little biased when I say this but everybody should have at least a basic understand of their tax situation. Regardless of whether you’re going old school and completing your return on pen and paper, entering your income and expenses into DIY software like TurboTax, or hiring a tax professional to prepare your return for you, you should have some kind idea of how tax law, tax updates, and tax law changes may affect your bottom line on both your personal and your business tax returns.
However, in my experience, most people who aren’t tax professionals don’t care about how taxes work in general or how their own taxes work specifically. I’ve prepared thousands of tax returns over the years, and I try to always do a high level review of the return with my client so they can at least have an idea of what’s on there. More times than I’d like to admit, clients have asked me to skip this part. They only want to know what their refund is or how much they have to pay.
Even if you don’t understand the math, can’t explain all of the concepts, or don’t know where certain things go on certain forms, you should be cognizant of what’s going on with your taxes. You should always consider how your business activity affects your taxes more often than just once a year, and here are four quick reasons why:
You Are Responsible for Your Tax Return
Did you know that when you sign your tax return, you are stating that the information reported is true and correct to the best of your knowledge? Grab your tax return from last year and look at the signature block. You’ll see something that says: “Under penalties of perjury, I declare that I have examined this return and accompanying schedules and statements, and to the best of my knowledge and belief, they are true, correct, and complete.”
This means that you are “on the hook” for what’s on the return, even if you pay someone to complete the return for you, so you should ALWAYS review the return before signing. Having a grasp of your tax situation allows you to review the return and ask questions in areas that don’t make sense. If you know your business generated a profit but your tax return shows a huge loss, ask why. There may be a legitimate reason, but at least you won’t be signing the return blind.
Impact to Bottom Line – The True “Why”
We’re all in business to for different reasons. Whether it be to spend more time with family, travel more, get out of a job you hate, or to help other business women reach their financial and business goals – we all have a reason we decided to do what we do. At the root of all of our different “why’s” is usually the same thing: make more money. We want to make more money in our businesses so that we don’t have to go get a job outside of the home and we can spend more time with the kids, make more money so that we can have the means to travel more, make more money so that we can leave our dead-end job and do what we love to do and not worry about how we’re going to pay bills. Et cetera. There are two ways in business that we can make more money: increase revenues and cut costs. You can focus on one or the other, but a good strategy would focus on both.
What does this have to do with taxes? Well, one of the costs that you will inevitably have to incur is tax expense. Whether it’s income tax, sales tax, property tax, or employment tax, you’ll want to know how the tax laws are changing because you’ll want to make sure that you’re minimizing this expense as much (and as legally) as possible or at least plan for the increase in tax and offset costs in other ways. This will help you keep more money in your pocket.
You’ve probably seen in the news recently about so many Goliath level companies have paid little to no tax on the ginormous revenues they earned and profits they made last year. Aside from taking advantage of net operating losses, one reason they are able to do this is because they pay internal and external tax accountants and lawyers a lot of money for tax planning. They forecast their tax liability and then scrutinize the Tax Code and regulations for ways to reduce that liability. They structure deals and business entities in ways that have the smallest impact on tax expense.
You might not have access to an army of tax professionals, but you can still take advantage of tax planning opportunities that will help minimize your tax liability. This type of planning should be done early in the year and should occur often to adjust for changes. Even if you don’t have a tax professional prepare your return for you, you should at least meet with one quarterly to discuss your year to date income and expenses, you future planned income and expenses, and any tax law changes that might affect your return in the current or upcoming year. As I mentioned in one of my previous blog posts, you should especially consult a tax professional before you make any major business moves to ensure that the final result is the one you want. (There’s not much that can be done after the fact for that early withdrawal that you took to start your business!)
(Check out my blog post on common Tax Planning Tips for Small Businesses for a couple of ideas on how you may be able to minimize your tax liability.)
You Are The Expert For Your Business
You may have gotten to this point in this post and thought to yourself, “Okay, I can see how this makes sense if I was doing my own taxes, but I hire a tax professional. Isn’t this what you guys get paid to do?”
Well, yes and no.
Tax professionals have knowledge about a lot of things and they should know about most deductions that you qualify for as a business owner. However, not all deductions apply to all industries (for example, a service-based business typically doesn’t have costs of goods sold) and your tax professional likely has a list of common deductions that you may have based on your business, but won’t be able to go over all of the possible deductions in detail with you at tax time. Since you work in your business day-to-day you are in the best position to know what expenses you have that you might be able to take a deduction for, especially if you aren’t working with a tax professional year-round.
When do you typically think about taxes? Let me know in the comments and click here to come hang out with me on Instagram!
Don’t keep me a secret, if this article helped make sure you share with a friend!