Heads up: this is not a political post… I like my Business same as I do my Church: separated from the State.
The news lately has had a lot of talk about tax obligations, tax filings, and tax avoidance. TAX, TAX, TAX. It’s hard for me NOT to address this issue. After all, I’m a financial strategist for wedding businesses. And I spend about half my time looking at people’s numbers.
Let’s get through the terminology first:
TAX AVOIDANCE – totally legal; avoiding taxes at all costs by taking advantage of the tax laws (and the reason why you want a good tax accountant) –
TAX EVASION – totally illegal; lying on your tax return about your sales and expenses in order to fraud the IRS into NOT paying taxes
EVERYONE should try to avoid tax – as long as doing so doesn’t make you broke.
LOSING MONEY is NOT a good business strategy.
Let’s assume we are all avoiding taxes legally. Here’s the thing: TAX AVOIDANCE is good… but only to a certain degree. You never want it to become your overriding strategy. Losing money is losing money… even if you are able to avoid taxes to do so.
I’m bring this topic up because I see this a lot… businesses who spend A TON of money to avoid paying more taxes. In fact, there are some of my clients who have (sadly) been advised to do so by their tax accountants. We need to stop doing this. Less money earned, is less money in our pockets. PERIOD.
Let’s look at the numbers, plain and simple. For this example, let’s estimate the business is a sole proprietorship or LLC and taxed ~30% on net income.
If you have..
– EXPENSES $20,000
NET INCOME $80,000
you as an owner can withdraw up to $56,000
– EXPENSES $50,000
NET INCOME $50,000
you as an owner can withdraw up to $35,000
– EXPENSES $80,000
NET INCOME $20,000
you as an owner can withdraw up to $14,000
I don’t know about you… but I rather have $56,000 in my pocket than $14,000.