Mike Andes explains a small-business focused tax strategy: prioritize reinvesting profits to grow working capital and business capacity rather than taking distributions or buying depreciating luxury assets solely for tax deductions. He argues spending on R&D, hiring, and productive assets can out-perform buying items like Lamborghinis or private jets, and explains why fast-growth firms often feel cash-constrained and taxed on paper profits during early years.
Chapters
I'm going to talk about taxes of the day and what I've done to make sure I minimize my taxes and really basic math. And that is every single year I've got to ensure that the working capital inside all my businesses is substantially higher than the year before. I might not be super profitable after just increasing my working capital. What that means is if I have a business that's $500,000 in annual revenue and it goes to a million dollars in annual revenue, on paper it might look like I made $100,000 in profit. And however I actually don't take any of that in distributions simply due to the fact that I need the extra $100,000 in the bank because now at at a million dollar business instead of 500,000, I need a much larger pool of capital, working capital sitting in the bank. And this is why a lot of entrepreneurs get disillusioned is the fact that you are getting taxed on profits from the business even though you haven't made distributions to yourself. And this happens as you're growing a business. Not only does growth suck cash, we've talked a lot at prior videos, but furthermore, growth also requires more working capital. And so you might be 5, 10% profitable in your business. And all of that money, 100% of it goes just to staying in the business checking account so you can have a larger payroll and more overhead. This is very, very common and why a fast growing firm for their first three or five years it is so demoralizing to be paying taxes because you're paying on all your, all your profits. So S Corp or an llc, any profits in the business you're going to get taxed on. What that means though is just increasing your working capital inside the business. You're still going to have to pay taxes on that. And that's extremely demoralizing because like I don't really have any distributions the business made profit but I need that money to stay in the company's business checking account because I'm growing so quickly, I need more working capital and that's why it's so demoralizing for the first three to five years and why most businesses, businesses quit. Now what I've looked at, when I look at comes to taxes is how I've always looked at it, is I'm going to grow my businesses as fast as I possibly can without having to take out debt, without having to get investors, I'm going to run my businesses on a pretty thin profit margin. In order to be able to do that, I'm Going to spend a lot on research and development, a lot on hiring, a lot on retaining people and profit sharing and a lot of those things. And I've made that decision simply due to the fact that if I don't spend that money, I'm going to have to spend 50 plus percent of that on taxes. And so I'd rather spend it on my team. Now a lot of people would think that instead of spending on your team or R and D that you should go buy, you know, you can go get a Lamborghini or you can get a helicopter, you get yourself a private jet and use it as a write off. In my opinion, those things should only be used for a tax write off if you don't have any other way to deploy that capital in a meaningful way in the business that could lead to a better outcome in the future. Because I can guarantee you one thing. In five years, that 5 million you spend on your private jet, it's not going to be worth 5 million, it's going to be worth less. I can guarantee you in 10 years your Lamborghini that you buy today is going to be worth less. It is a depreciating asset and people will buy those. They'll take a section 179, take all of that cost as an expense for their business in this year and write it off and that's fine. But I can guarantee you that if I spend that same money and today on development, creating software, getting more things for my business that will produce, that will increase the potential income of my business, I guarantee you I'll be able to outperform in the next 10 years against an asset like a Lamborghini or a private jet. And that's why a lot of times when people say that they do these things for tax purposes, it not, it's not telling me that they're smart with taxes. Although that is something I have to register like they're, they're obviously saving 50%. It is a 3D chess move. But the 4D chess move is to realize that that person by is spending on a depreciating asset that is not going to be a productive asset and bring in more revenue or bring in any strategic alliances with the businesses. By doing that, they basically are throwing the white flag of I have no creative ideas or ways to deploy this capital in an asset or in any sort of research and development that's going to be a productive asset for the business that's going to return greater than that of just the tax savings. Because if I wanted to spend A million dollars and spend on a car or a private jet, yes, I'll get that deduction and save myself $500,000 today. But if I can take that same $1 million, go and hire 10 developers and be able to create software that potentially creates a 2, $300,000 per year revenue stream, I can then just take the revenue stream and go rent that private chartered plane or rent or lease that Lamborghini. And so, in my opinion, when you're young and you're growing your business very quickly, focus on taking every single dollar you possibly can and investing into assets and into development of the business that will down the road compound itself and create the cash flow that will pay for your lifestyle. And so a lot of people will look at this when it comes to real estate and think about cash flow and passive income in terms of buying apartment buildings and buying these, these type of like Airbnbs or apartment buildings or offices and retail buildings. And I look at that is an investment style. I look at it as a small business owner that if I can invest into the assets, the equipment to people inside my businesses that over the course of time they'll have an extremely high rate of return and a whole lot better than 10, 15% than I might get in real estate or in the stock market. And so when all of that to say is when you come, when it comes to taxes and it comes to deploying capital in your business, keep in mind two things. One, it's normal to feel like you are paying taxes. And it seems almost crazy because you're simply just having to increase the working capital in your business as you grow. That feels that's normal. And that's why you're going to feel cash crunch for typically the first five years in business. The next thing is that when it comes to actually having a lot of money that you need to save and shelter from taxes, you do not spend it on frivolous things for the sake of taxes. Unless, unless you cannot come up with a better idea that over the course of time will produce much better returns and it will appreciate in value code. Cash flow. These are the type of things that compound in value. Creating media, investing into, creating digital and physical assets that you can keep for the long term and that either go up in value or produce cash flow is a much better use of something that you can do a section 179 on. But then over the course of the next five, 10 years, it goes down a value and creates no cash flow.
