Why Developing Your Tax Skillset Matters
Taxes are just around the corner! If you are like the other business owners I work with, I’m guessing that you have pulled open your drawer of receipts, you or your admin have begun highlighting and double checking categories in Quickbooks, and have scheduled your drop off to your accountant.
Taxes shouldn’t just be a number. Taxes are a skill. Taxes are a strategy!
Read more for a new way to think about preparing for your taxes AND a simple OSOM strategy to lean into developing the skill of optimizing taxes.
Four areas help your accountant identify your tax obligation year after year. Those buckets include your earnings, giving, savings, and investing. In all of those areas, you have the potential to design your life and map out the course that will create your desired results. Tax strategy is about transforming the facts of your numbers morally and ethically to guide your choices and decisions and strategize not only how to make more money in your business but to keep more money for your desired outcomes.
Be strategic with your taxes
Tax laws are structured to calculate a sum of a very complicated equation. The equations your accountant uses to compute your tax bill in a particular year are not negotiable, but the variables you plug into that equation can be intentional and strategic. Having a strategy in your tax preparation (not just the six weeks leading up to the big day) but a year or years in advance can drastically change your amount owed at the end of 2022’s tax preparation equation.
OSOM: Tax Preparation
I love to teach my clients how to make their financial success OSOM. (Organize, Systemize, Optimize, and Maximize.) Learn how you can make your 2022 tax preparation OSOM.
Organization
Keep your receipts.
Are you letting your bookkeeper know that the transactions have taken place?
What are the key things that took place during that transaction?
Who did you meet with, and why is it deductible?
Are you getting reports on a monthly basis that help you know what your financials are and you know what your net profit is?
Do you know that you’re paying your quarterly estimated taxes in a timely manner, so you’re avoiding interest and penalties?
For your year-end preparation, does your CPA provide an organizer? And do you use that tax organizer to make sure you’re maximizing every deduction possible on your tax return?
Systemize
If you are handling Quickbooks yourself, have you been trained to ensure you are preparing and organizing things correctly?
If you have a bookkeeper, do you receive a weekly update and a monthly report of your financial progress? Ask for an income and expense report, a balance sheet, and a cash flow statement.
Optimize
Optimize your taxes by holding a yearly and mid-year planning meeting with your accountant.
You need to have at least two proactive meetings with the CPA each year, in the fall, and at tax season. During this time, make sure that you know;
- Where you’re at in your business.
- Whether your revenue trajectory is higher than last year, similar, or below last year
- If you are paying the right amount for your quarterlies. (Overpaying means you’ve lost valuable cash flow.)
- Adjust your salary, if needed. If you’re working less, you might take less salary and take more profit. This strategy also reduces your payroll tax costs.
Tax Strategies, (eg. If you have children younger than 17 years old) you can pass money through to them by having them do meaningful things in your business. As their guardian, you might have joint control over their accounts and thereby move money out of what would normally be taxable profit to the business, to a tax-free benefit to your kids. They don’t have to pay taxes if they make less than $13,000 a year. We call that tax bracket shifting. So instead of your 32% on that income, your tax gets taxed to zero on their income.
Maximize
Maximization is when you have enough surplus and earn accredited investor status. Maximizing is when you have access to higher-level investment opportunities (like oil and gas) that other people are managing and that have tax advantages that come with it.
For example, if you’re participating in a fairly new oil exploration process, they’re looking for an opportunity for new wells. With your investment, you get a 90% immediate tax deduction. Let’s say you invest $100,000 into the well; you get an immediate $90,000 tax deduction.
As that well comes online, you have tax-advantaged cash flow. When you sell off your shares, you get capital gain treatment, as opposed to ordinary income tax treatment.
A word of caution. Some people get into this opportunity too quickly. Again, it creates an illiquid position for them. Then it’s stressful because the well doesn’t come online in the time that it needs to. Then the developers have a capital call, where you must put another $10,000 or $20,000 to continue exploration. If you aren’t ready to do that, it creates problems.
You must become an accredited investor1 to take advantage of these programs. Accredited investors have at least $200,000 personal income per year for at least two years, $300,000 household income for a married couple, or a million dollars of net worth excluding their primary residence.
If you have questions about your tax strategy or are looking for a vetted and competent CPA, I have several that I trust to be in alignment with my coaching practice. If you’d like to schedule a FREE discovery call, reach out! I’d love to discuss these strategies and see how working together can help you achieve your financial goals.
1 https://www.sec.gov/education/capitalraising/building-blocks/accredited-investor
