This article is not about tax season, it’s more about the bigger broad point of why you’re running a business in the first place and that is to get WEALTHY. Never forget that. Write it down. There’s a higher purpose to the company that might involve serving people better than anyone else but the point of it is to get WEALTHY. It wasn’t to give yourself a high-paying job, it was to get wealthy. And the only way you can do that is if your business pays the maximum amount of TAXES (after legal and responsible deductions).
Many times, when I talk to friends in small businesses, I get the impression that many don’t understand this idea: that the most important indicator of a successful business is the size of the tax bill and the tax bracket that the business owner finds him or herself in.
Let me give you an example of a real conversation I had at the outdoor dining table by my pool in Orlando on Sunday night over a glass or 4 of margaritas. (Disclaimer: we may have been a little tipsy, but the story is accurate).
Here goes: During the conversation, I asked my friend if he had any plans this week. He told me that he had his taxes to do and so he was going to be taking care of that all week. So far, nothing out of the ordinary. But then he told me that for 17 years he’s filed his taxes in a way that means he deliberately reduces his tax bill by spending on things at the end of the year.
He told me he does so because by showing little if any profit he will “keep the IRS off his back”. His version of it is that the tax man won’t come looking for him if he shows a profit and so he chooses to expense everything to bring it down.
He said that over the last few years, he’s barely shown any real profit (after his wages) because he’s always looked for ways to reduce that tax bill by buying things such as a new car, stuff for his home, or other things he can “expense” legally.
I asked him why he did it and he said “No one likes to pay tax, do they?” To which I replied in a heartbeat “I do”.
I told him my number one goal at the start of the year is to get the biggest tax bill I possibly can. I get a real kick out of it, too. In fact, I get real JOY from writing the cheque. Like my glasses of Margarita on a Sunday afternoon by my pool, I like my tax bills the bigger the better. My friend couldn’t believe what he was hearing. He told me “it doesn’t make sense” because all the accountants / other business people he knows have all told him that not paying taxes is a good thing.
I told him that I have a different view.
I believe that the real success of the business – one that is focused on creating WEALTH for the business owner – can only happen if the owner pays taxes. In fact, how well your business is doing can probably be linked directly back to the size of your tax bill.
And, how much wealth you’ve got personally can also be linked back to that.
All of the properties, other businesses, and the stocks and shares investments I’ve made in the last ten years all come from one place: The CASH produced by my operating business. Whatever is left after my wage is the profit, I INVEST in wealth-creating activities (houses, etc). It’s a really simple s strategy. I get my wage for what I do (CEO of the business and I get my PROFIT for what I own (the business).
I reinvest that profit into things (houses, stocks, etc) to spit out more cash and so the cycle continues of being able to reinvest the cash into vehicles that generate cash.
To reduce your tax bill by buying stuff you don’t really need or want, and just to lower your tax bill, in my humble opinion, is a CRAZY strategy. One, that I might add, would only ever be told to you by an accountant who knows you don’t like paying his / her fees and so makes crazy recommendations about reducing TAX by buying crap or pre-paying for stuff so that he/she can say they’ve saved you more than you had to pay them.
Reducing taxes isn’t the goal. It’s not what we’re in business for.
The point of running a business is to create enough revenue so that after all expenses are paid, there is a big chunk left over, ideally about 15-20% of that revenue. These expenses should also include your fair market salary.
That could be somewhere in the region of $75k or $100k or £35-50k. Whatever the price to replace yourself for the primary role you do, that is a fair market salary. If you’re doing 30 hours per week as a clinician – that is your primary role. If you’re doing only 10 hours then your primary role is General Manager and you should be paid appropriately. Whatever it is, that is what you’re supposed to live on, day-to-day.
The idea is that the salary you make should be enough to cover your own personal expenses and live a nice comfortable life for a few years.
What is left – the true profit of the business – is what you use to invest in other wealth-building activities such as property, stocks, or starting another business. There are two other options you can choose to spend your profit on, of course, those being…
1: Pay down any business loans/debt.
2: Reinvest into the company to produce more revenue and more profit next year. That’s it.
It’s a really simple concept that I think is lost on most people – accountants and CPAs included. The size of the tax bill you’ve got year after year is likely to be the biggest indicator of how rich you will become or currently are. If you’re in the higher tax bracket one year, but in the 5-10% bracket in the following three, you’re not likely to get rich personally (unless it’s always being re-invested into the business and you plan a big exit one day).
And that’s the goal, right?
Surely the goal of business isn’t to work out ways to save 30 cents on the dollar by buying things we don’t need? Because that is what happens a lot in business. People are constantly being advised to save tax by buying cars and other things and stuff to save tax. Fine. But that is why you won’t be as rich as you would like later in life. There aren’t many – if any – legal ways to save on tax that will eventually make you rich. Retirement contributions are excluded – but even they can only go so far as to reduce your tax and of course, you have to wait a long time for it.
The other thing with taxes is that as you approach the payment date, they shouldn’t really be paid out of this year’s revenue. You may be using the cash you made this year to make the payments, but they can’t be included in this year’s expenses. It’s not the way it works.
They should have already been allocated in a reserve account having shaved a percentage off the top of everything that was left over from last year. Your CPA will have a very good idea of the tax you will pay if you hit your profit goals – just use that percentage (15-20-25, etc) to cream off what is left at the end of the month and put it into an account to cover it when the tax people ask for it.
When it comes to taxes, in my humble opinion, the bigger the bill the better.
It is not a sign of bad accounting – it is the sign of a fabulous and well-run business by a business owner who has a goal to get wealthy by investing the free-flowing CASH available to him or her personally into other activities – ideally somewhat passive – that allows the money to compound and grow.
It doesn’t take long either.
If I can invest $5 per day from the age of 21 (the cost of a latte from Starbucks) into decent stocks and shares account, and it compounds at a rate of just 8% (typical is 10%), then by the time I am 65, I will be worth nearly $2,000,000.
Really, when all is said and done, it’s not that difficult for anyone to retire very rich. Most people spend more than $5 per day in Starbucks and yet that really is the cost of becoming a millionaire these days. It is why you should resist any attempts that your CPA has for you to “reduce your tax bill” by buying stuff – just to get the bill down. If in doubt, collect the cash and go straight to a savings account for it to sit in (even if you’re only getting 0.5%) and work out what is a good and sensible home for it.
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