How Year End Planning Can Save Your Business

Hey, um, you know, what can you do in the next 2 and a half months to save thousands of dollars? Uh, how about that for a gimmicky line? But the reality is, is you could possibly save, um, a few thousand dollars in the next couple months by doing this one simple thing: year-end tax planning. We are heavy into this at our tax firm right now, and so it's on my mind, and I just wanted to share with you guys some of the ways that we approach the idea of year-end planning, and maybe you can take some of these ideas and apply them for yourself. At least that's the hope. So one of the first things we do is we never let the tax tail wag the dog. What I mean by that is we don't ever want to make a purchasing decision purely based on saving income taxes. The reason being, if I spend a dollar on a business expense, I don't get a dollar back in tax savings. If my tax rate is 20%, I get 20% of that dollar back, or in this case, 20 cents. So expenses help lower taxes, but we don't encourage you to spend money just to lower your tax bill. At the end of the day, if you don't have, don't have a good reason to spend the money on a productive expense, You will be better off ahead and create better wealth for you just by paying the taxes and giving yourself the ability to use the money left over for whatever you want. We often get the question by a handful of clients every year, hey dude, should I buy a boat? I don't know, should you buy a boat? Is it in your business plan? Is there a way you can utilize it to make more money? Or is it just a vanity spend? In which case, if you have the cash to do it and you want to do it, great, do it. But never buy a boat just for the sake of saving taxes. And I think for gym owners, instead of boat, we could substitute that for any new shiny object equipment that may or may not be beneficial to our members. So just that is a general idea. That being said, if you know you are going to make a big purchase, especially if you think you're going to make that within the first quarter of next year, go ahead and spend that money now and take the tax deduction. That also means if I'm doing a big purchase, maybe I'm— maybe I need to get a loan. Maybe I need to reach out to Clay Ferrer with Rig Equipment and see if I can get a loan. Even though I'm getting a loan for equipment that I'm buying, I can still take the full purchase price of that equipment as a tax deduction, even though I personally didn't spend money on it. I borrowed the money to do that. I still get a deduction even if I'm using borrowed money to buy the equipment. Another thing to do if you are worried about your tax bill is prepaying expenses. Sometimes you can send your landlord a month early in rent. Sometimes you can prepay a few months. Your landlord's cell phone bill, I mean, you really look at anything that is going to allow you to generate a credit. You know, you can accelerate those payments because as a cash basis taxpayer, you're going to get a deduction for the money you spend, even if that expense might happen in the next couple months after the year ends. So January or February. Another thing you can do is look at your personal credit card statement. Now, in most cases, You should not be tracking your personal credit card in your business bookkeeping. And so because of that, that's why I'm suggesting this way. You know, if you are tracking your personal credit card on your business bookkeeping, we may need to chat because that's not really the best approach. And it certainly doesn't look very good if you're audited by the IRS. That being said, sometimes we do spend money on our personal card that we're not tracking in our business books. that could be a business expense or it was a business expense and we just used the wrong card. So go back and review the last— in this case, we're at the end of October. So just the January through October credit card statements of your personal credit card. See if there's any expenses that were like, oh yeah, that was a business expense. Make sure you get that information to your bookkeeper. They can update your books to include that information. It's always a great time of year to also consider the tax strategies that you have, that you're implementing, or that you've heard about and maybe delayed implementing for whatever reason, or that you need to learn about. So, you know, for our clients, we have a tax strategy that we call corporate rent, sometimes called the Augusta Rule. We, despite, you know, telling all of our clients this strategy, sometimes they don't implement it. Well, you still have time to implement it by the end of the year. So now would be a great time to implement it if you haven't. Also paying your kids. Do you have enough cash flow and enough business purpose to pay your kids? Those are all tax strategies that involve a more in-depth conversation, but they're great ones and worth considering if you're trying to lower your tax bill. As a general rule, get your bookkeeping in order. If you don't have an internal bookkeeper or you're the one responsible for it or someone else and you're not really consistently doing it every month, now's a great time to do that because that's literally the only way you're going to find out if you might have a tax burden that you're going to be worried about come January. So get your bookkeeping in order, um, make sure you're consistent with your expenses. If you do have a bookkeeper, I would recommend looking in the equity accounts, and it's going to be called shareholder distribution or owner's distribution or member's draw or shareholders draw. Any of those names refer to the same thing where the bookkeeper saw money leave the bank and they're attributing it to you, that it was paid to you. Okay. A lot of times it's simple if it is transferred to your personal account, but sometimes bookkeepers might look at an expense and say, hmm, that doesn't feel like a business expense. I'm going to book it under owner distribution. So double-check all the transactions that are in that account because you might find some that are legit business expenses, but the bookkeeper didn't ask about it. And so that's an easy fix to do right now. And then of course, As you know, we love the Profit First system. One of the best ways to make sure you are prepared for year-end tax planning and the tax burden that can happen at the end of the year is to use a tax account. So throughout the year, you're setting money aside, a very small amount, into your tax bucket so you don't feel the pain throughout the year. Not the same way as if you're not saving money, then all of a sudden it's like, crap, I owe $3,000, $5,000, $10,000, $20,000 in taxes, whatever the number may be. but you didn't save for it, now you're running the risk of pushing the envelope, potentially pushing the envelope too far on tax strategies or aggressive deductions that the IRS is not going to be happy with. So by having that tax account, you're just, you're set. You have peace of mind. You make better decisions. I know this from experience because I've done this now for about 4 years, having my tax account. And what I love is that when my tax bill is lower than the amount in my tax account, I get to take the difference as an owner distribution. So it kind of feels like Christmas for me, um, because typically I, I save a little bit higher of a percentage than I need to. Uh, anyways, hope those tips help. It's, it's that time of year to think— be thinking about these things because you have until December 31st to make decisions that will lower your taxable income for 2020. Once January 1st happens, that, that book is closed. And there may be one or two things that you could potentially do after the fact to lower your taxes. But most of the big bulk of things you can do need to happen right now. Remember, profit is a choice. Choose to be profitable.