CEO, Nth Degree CPAs. A not-boring finance guy helping purpose-driven entrepreneurs achieve financial certainty.
Spring concluded what many consider the official tax season. Is that a collective sigh of relief I heard? I thought so.
We’re at the midyear point and while last year’s tax milestones just wrapped, it’s 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 that way.
Spring is one of the biggest financial rhythms for both individuals and business owners, 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’s also one of the most stressful times. A study by Freshbooks from earlier this year found that 80% of U.S. small business owners feel stressed at tax time. The stretch of time leading up to the big deadline in April comes with all varieties of stress and, for many, the weight of digging up financial history from the past year to help optimize this year’s tax situation.
It’s a common burden and one that’s especially heavy for those working with CPAs or wealth managers who operate like archeologists. What I mean is that, by definition, an archaeologist is a detective of the past. Archeologists are experts on history who gain expertise through experience with historical documents and artifacts.
You can see the comparison to the typical CPA. CPAs are experts who look at a year’s worth of financial history, documents and even artifacts (receipts, income statements, W-2s, all the greatest hits). Both archeologists and CPAs look backward at historical data to try to understand patterns, trends or problems. Archeologists use artifacts to reconstruct past societies and cultures while CPAs use financial records to assess past performance and compliance.
Architects are playing a different game. Architects are visionaries, inventors and innovators. They’re shaping futures and transforming ideas and theoretical concepts—dreams, really—into reality. Inspiring, no? Architects are also already mapping their plans for next year—for years from now, really—now. They’re not waiting for next season.
The reality is many small business owners and individuals have archaeologists, while sophisticated investors and big corporations have architects. The consequence is those working with an archeologist might be paying more taxes. Part of the reason for this is, well, historical.
Historically speaking, while tax rates have fluctuated over the last 100 years, on average, they have actually stayed the same. 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 impact how much you can either pay or save in taxes. As new benefits change, increase, ebb and flow, those who are sophisticated in the tax rules and lingo modify their behaviors. But the average taxpayer or small business owner doesn’t know the rules. Again, typically they work with archeologists. The people digging into the last year, looking for bones of expenses past.
But taxes can and should be future-focused. If you want to pay less, you need to work with someone who is future-focused. You need an advisor who behaves more like an architect than an archeologist—someone who is going to help you build the future.
Cliché or not, the future starts now. Not next winter. Here are three things you can do now to think like an architect and get ahead:
• Get smart on getting all of the deductions and credits you’re entitled to. For example, are you familiar with the R&D tax credit? 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’re a business owner who is planning to uplevel or make something new this year, look into 26 U.S. Code §41 now.
• Turn existing parts of your life into deductions. One way to think about this if you own your own business is paying your children to do legitimate work for that business. You can then deduct their (reasonable) wages as a business expense, and that in turn can reduce your business’ income tax liability. For example, say you’re in the top 37% tax bracket; leveraging this tactic could save you $4,500 on your tax bill. The Tax Cuts and Jobs Act increased the standard deduction up to $12,200 in 2019, so employing your children in the family business can have them enjoying a 0% tax rate on that income (at least for Federal tax purposes). If you have a kid, consider how you can give them reasonable and legitimate tasks this year—the upcoming summer vacation is a great time for it.
• Implement home run strategies. Home run strategies are strategies that can reduce your tax bill by up to 100%. In other words, these are strategies that can get your bill to zero. One way to do that is to look at on-paper tax losses from short-term rentals. Under current rules, losses from short-term rentals can be used to offset 100% of your business income.
Taxes are not just about what happened last year—that’s what you’re getting from your archaeologist CPA. If you want to pay less in taxes 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 with a licensed professional for advice concerning your specific situation.
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