CEO, Nth Degree CPAs. a not boring financier helping purposeful entrepreneurs achieve financial security.
Spring concluded what many consider to be official tax season. Is that a collective sigh of relief I heard? I thought so.
We are halfway through the year and while last year’s tax milestones have just been completed, it is already time to start thinking about next year. Is that a collective groan I heard? I thought so. But it doesn’t have to be.
Spring is one of the biggest financial rhythms for individuals and entrepreneurs alike, and one of the most important times of the year for the CPAs and financial advisors who help them navigate a seemingly never-ending sea of tax codes, deductions, and more.
It is also one of the most stressful times. A study by Freshbooks from earlier this year found that 80% of small business owners in the US feel stressed during tax time. The long time frame leading up to the big April deadline comes with all kinds of stress and, for many, the weight of digging up last year’s financial history to help optimize this year’s tax situation.
It’s a common burden and one that’s especially hard on those who work with CPAs or asset managers who operate as archaeologists. What I mean is that an archaeologist is, by definition, a detective of the past. Archaeologists are experts in the field of history who gain expertise through experience with historical documents and artifacts.
You can see the comparison with the typical CPA. CPAs are experts who look at a year’s financial history, documents, and even artifacts (receipts, income statements, W-2s, all the greatest hits). Both archaeologists and CPAs look back at historical records to understand patterns, trends, or problems. Archaeologists use artifacts to reconstruct past societies and cultures, while CPAs use financial data to assess past performance and compliance.
Architects play a different game. Architects are visionaries, inventors and innovators. They shape futures and transform ideas and theoretical concepts – actually dreams – into reality. Inspiring, isn’t it? Architects are also mapping out all their plans for next year – for years, actually –now. They are not waiting for next season.
The reality is that many small business owners and individuals have archaeologists, while sophisticated investors and large corporations have architects. As a result, those who work with an archaeologist may pay more in taxes. Part of the reason for this is, well, historical.
Historically, although tax rates have fluctuated over the last 100 years, they have remained the same on average. As a result, many view and approach tax season the same way they have for decades.
Of course there are always new benefits, rules and laws that affect how much you can pay or save in taxes. As new benefits change, increase, ebb and flow, those adept at the tax rules and jargon adjust their behavior. But the average taxpayer or small business owner doesn’t know the rules. Again, they usually work with archaeologists. The people dig into the past year, looking for bones of past expenses.
But taxes can and should be forward-looking. If you want to pay less, you need to work with someone who is forward-looking. You need a consultant who acts more like an architect than an archaeologist – someone who will help you build the future.
Cliché or not, the future starts now. Not next winter. Here are three things you can do right now to think like an architect and move forward:
• Work smart to get all the deductions and credits you’re entitled to. For example, are you familiar with the R&D deduction? It’s a federal benefit that gives companies of any size dollar-for-dollar cash savings for activities related to development, design, product improvements and more. If you are a business owner planning to develop or create something new this year, take a look at 26 US Code §41 now.
• Turn existing parts of your life into deductions. A way to think about this if you own your own business, you pay your children to do legitimate work for that business. You can then deduct their (reasonable) wages as a business expense, which can reduce your company’s income tax liability. Let’s say you fall in the top tax bracket of 37%; using this tactic can save you $4,500 on your tax bill. The law on tax cuts and employment increased the standard deduction up to $12,200 in 2019, so if you employ your children in the family business, they can enjoy a 0% tax rate on that income (at least for federal tax purposes). If you have a child, consider how you can give them reasonable and legitimate chores this year – the upcoming summer vacation is a good time for that.
• Implement home run strategies. Home run strategies are strategies that can lower your tax bill by up to 100%. In other words, these are strategies that can get your account to zero. One way to do that is to look at tax losses on paper from short-term rentals. Under current rules, short-term rental losses can be used to offset 100% of your business income.
Taxes aren’t just about what happened last year – that’s what you get from your archaeologist CPA. If you want to pay less tax and use that money to fund your goals faster, consider working with an architect who will look at your goals and show you how to align them with the tax code.
The information provided here is not investment, tax or financial advice. You should consult a licensed professional for advice on your specific situation.