In May or June of just about every year I hear individuals complaining that their “CPA/Accountant either did a great job of getting them a refund or didn’t.” I am always fascinated by those statements, given the fact that people expect their financial accountants to work miracles after the fact.
As I have told my clients, “if you want a good result in March or April of the following year, you need to work on getting that result in the prior calendar year.”
What many people fail to realize is that you make history from January 1st to December 31st. You merely record it on March 15th and April 15th of the subsequent year.
So, what should you do? I have encouraged my clients to tell their Financial Advisors what they expect. It is very difficult for the financial advisor to anticipate what you may or may not want if you never ask for it. Likewise, it is very difficult for the Financial Advisor/Accountant to create miracles when nothing was done in the prior taxable year to allow that miracle to happen. So, once again, what should you do?
Sit down and talk with your Financial Advisor, Accountant, Tax Lawyer, etc., and discuss with him or her what you would like to see accomplished.
Get a budget. Map out what you expect to happen in that calendar year. How long has it been since you have reviewed your projected income and expenses?
Make sure that your budget is in line both with your expenses and income. Have you set aside money for capital purchases, such as equipment, computers, cars, tractors, trailers, etc., or are you going to have to borrow it? (Debt is a killer!)
Meet at the early part of the year, not just at the latter part of the year. Plan what is going to happen, and then go to make it happen.
How do you want to depreciate your business assets? As you know under Section 179, you can write off up to $1,040,000 of assets in one (1) year. Would you have that much income to use the deduction, or do you need to write off a lesser amount? Remember that in some businesses that are marginally profitable, especially in the earlier years, you do not want to take excessive depreciation and show continuous losses. The Internal Revenue Service interprets that to be a hobby loss. This is especially true if you are raising cattle, hogs, horses, trees, or anything that is time sensitive as to when it will become profitable.
As you age, and to the extent that you have a profitable business, you might want to look at being more aggressive in your retirement planning. Many of us have Profit-Sharing/ 401(k) Plans, that will allow you to put up to $55,000 a year in them. However, if you are over 55, have a small work force, and have good cash flow, you might think about being more aggressive in your Retirement Account, such as putting in a Cash Balance Account or a Defined Benefit Plan. Under these you can put aside hundreds of thousands of dollars each year.
Do you have children that are looking for jobs? Why not employ them in your own business? If you are going to have to pay for school, you might as well let the children do it at a reduced tax rate, as opposed to using your after-tax money.
Is your spouse working in the business ? If not, hire him or her in the business, pay them a salary, and you will do two (2) things; 1) allow them to participate in the Retirement Plan, and, 2) also build up quarters for Social Security.
Have first, mid and year end meetings with your Financial Planners and/or have them look at your Profit & Loss Statements and Balance Sheets and make suggestions. You should absolutely have a meeting with your Financial Advisor in October or November of each year. You will know at that point in time what your profits or losses are going to be. At that point in time, you may want to buy additional equipment, increase contributions to your Retirement Plan, or find other ways to shelter your income.
Good business practices do not happen by accident. They take careful planning, and oftentimes, if you do not have all the answers, it is good to ask someone who has training in income tax planning and through your knowledge and theirs, possibly you will develop a good plan that will make your business and your enterprises profitable. Remember – you really don’t want a refund, or at least not a large one. A refund means the government has had the interest free use of your money for months.
If we can help you, give us a call.
