Small Business Finances
This is a question I get asked a lot by friends, clients and other entrepreneurs. I have an easy answer for my clients: Mike. I’ve known Mike since my Coopers & Lybrand (now PwC) days. He’s honest, dependable, smart and fair-priced. If a client were to get audited three years from now, I know he’s still going to be in business. He’s going to stand by his work.
When a new client asks me, with a tilt to her head, “Is he…creative?,” I say “On a scale of 1 to 10, Mike is a 5.” What I mean by that is that he’s a middle of the road guy. He’s going to get you the tax deductions you deserve but he’s not going to stretch any rules too far, make anything up or do any funny math. And I believe that’s just the kind of tax preparer you want.
My staff asked me to focus this blog on how to maximize tax deductions; to share some secrets and tricks. The truth is, it doesn’t work that way for “the 99%”. (More accurately, probably 90%) For low and middle income wage earners that don’t own a home, the deductions are fairly standard, pardon the pun. For home owners, there are more deductions, but they are still fairly standard: interest, property taxes, etc. As your income rises, it’s likely that there are more opportunities as you’re likely spending money in areas that are indeed deductible. But I’m not talking rising from $40,000 to $80,000. I’m talking rising well into the six figures.
For consultants and small business owners, it’s a bit more complex, but not much. Deducting office supplies, employee’s payroll and auto mileage isn’t rocket science. If you spend money on your business, it’s most likely deductible.
I think many business owners suspect they’re missing out. They suspect that if they had the RIGHT tax preparer, they would maximize their deductions. That myth gets perpetuated by radio commercials that inform us we’re missing out if we don’t incorporate and by home-based business experts that declare you can deduct the cost of your dog because it protects your home office. Really? I suppose it could be argued, but I wouldn’t want to sit across from an IRS officer trying to explain why I wrote off dog food, unless I was a professional breeder.
The simple truth is that, until you amass significant wealth or own complex businesses, the choices for tax preparation are fairly simple. They boil down to software like Turbo Tax, retail tax preparation companies like H&R Block, or choosing a tax professional ranging from an Enrolled Agent to a Certified Public Accountant to an attorney that specializes in taxation.
And here’s my opinion of the options:
Turbo Tax (or any other reputable tax software):
Pros – This is a great option for those that are comfortable with computers and don’t have any situations that are too complex such as multiple businesses, uncommon deductions or specialty credits. I often recommend this as the best option for someone who is newly in business, but only when I’m certain the person will use the power of Turbo Tax and not just blow through it as quickly as possible. The value of Turbo Tax for a new business owner is that when you follow it down the paths of its questions, it then educates you on the convoluted rules of business deductions. It synthesizes the 72,000 pages of tax code into user-friendly questions, and then, if you ask, it tells you the rule behind the question.
Cons – There is no human review function. For my clients that use it, I glance at their return before they send it in. An educated second set of eyes is always good practice, whether using Turbo Tax or a $300/hour tax accountant.
H&R Block (or any other reputable retail tax preparation company)
Pros: The cheery green and white balloons you’re greeted with.
OK, seriously. I must admit I’ve previously disparaged this option because I believed H&R Block to be mostly staffed by intermittent near-minimum wage employees. But I’ve changed my perspective over the past few years. I’ve had the opportunity to work with a long-time H&R Block tax preparer who knows her stuff and has handled one of my clients with some complexities very well. H&R Block also has a solid training and review process in place. If you don’t have the time or inclination to use Turbo Tax and have a typical tax situation, H&R is a smart and economical choice. (Many tax accountants will disagree with me, but that’s my opinion based on years of listening to others experience.)
Cons: Most of their storefronts close for over half the year. If you’re a business owner, I believe there’s great value in checking in with your tax accountant a couple of times throughout the year. That’s not possible when they aren’t there.
Enrolled Agents, Certified Public Accountants and Tax Attorneys:
There is a wide gamut of professional options to getting your taxes completed. They can run anywhere from $50 per hour to $500 per hour, and more. I’ve seen really good ones in each of the categories and really bad ones. There are some qualities that are important to find in your tax preparer:
- For wage earners: do they talk to you and teach you about your options, do they ask questions about your life that might impact your return, do they return your calls and do they finish your return in a timely manner? How long have they been in business? If all they do is have you fill out a form and don’t have any meaningful conversation with you, find someone else.
- For business owners: All of the above questions, with a much greater emphasis on education. Do they walk you through the honest decisions involved in corporate or sole proprietor status, or do they automatically tell you to incorporate…always a red flag. Do they connect with you a few times throughout the year to see if your profitability has significantly increased or decreased; a trigger that could potentially change your need to squirrel money away for a large tax bill on April 15th.
- For high wage earners, individuals who own multiple businesses, and any other complex tax situation: The more complex your tax situation, the more you’ll benefit from a more experienced, more licensed professional. Decisions for this group are beyond the scope of this blog, but what I will say is, by hiring the right professional, you will almost always see a definite return on investment from the tax planning you receive. Joel Stein wrote a humorous article Joel Stein Has Four Accountants on Bloomberg Businessweek last week and he said it well: “What a higher-end accountant does is look a my financial situation holistically and think long-term.”
In the research for his article, he discovered that not all tax preparation options are equal. His remaining taxes due/refund ranged from $4,544 due, to $2,387 due to a refund of $469. That’s not including the $119,554 refund he calculated from TaxSlayer.com, surely an operator error.
What he clearly points out is that all the options are not equal, and who does your taxes can be an important decision. Over the years I’ve seen some horrible outcomes from some ‘great accountants.’ If your neighbor or colleague tells you about their really great tax guy (or gal) that always gets them a refund but they’re not really sure how, think twice before you bite. The after effects of tax accountants that push the envelope too far can be devastating. While the chances of you being audited are miniscule, the chances of one of the tax preparer’s many clients being audited are much greater. When the IRS sees a pattern with a tax preparer, they swoop in and look at the returns of his or her other clients. I’ve seen perfectly upstanding, ethical business owners have back tax bills as a result of tax audits of this type, sometimes to the tune of thousands of dollars. And the tax accountants they used were seemingly ethical. They weren’t outright frauds; they just pushed the envelope way too far. And it’s the tax payer who is ultimately liable.
The final piece of advice I have, no matter who does your return: read it. It may read like Greek to you, but read it anyway. Every year, you’ll learn just a little more.
Stacey Powell builds financial muscles at TheFinanceGym.com and shows off Financial Art at Facebook.
I was listening to a new client tell a story that I’ve heard many times. She is in a creative field and passionate about her work. She really wants to work, but contracts aren’t coming and she is struggling financially. I asked the obvious question: “How are you marketing and selling yourself?” She looked a little blank; and then she scrunched her face; and then she launched into an explanation of the ways in which she was kind-of sort-of maybe marketing herself. Which really was to say: she wasn’t.
Through years of working with small business owners, many have come seeking answers to their financial issues. As an accountant, I would like to think that good accounting would provide the answers. But the truth is that it’s usually not about the numbers. The truth is that the most important component of impacting one’s financial issues is sales and marketing.
If you’re tempted to stop reading because you don’t own a business, please keep reading. More >
First, to alleviate any perception that I am speaking ill of him, I want to share what a fine man he was. My love of community service comes from him. His dedication to making this world a better place is clear in this tribute:
Even his business ownership was, in a way, community service. He was ‘saving the family business.’ http://www.davidlnelson.md/FFF_FlyTyingGroup/Buszeks/BuszekHistory.htm
Now, on to telling the truth. As a child I watched my father work, work, work, and then work some more. He came home late for dinner, went back to work at night, and worked most weekends. Even our few vacations were often spent at work-related fly fishing conclaves or networking conferences. Both of my parents worked, hard, yet we never seemed to have any money. We weren’t destitute; dinner was always on the table. But money was always an uncomfortable issue. Always having a keen sense of numbers and business, even at a young age it was apparent to me that something wasn’t right. I often wondered, weren’t business owners supposed to be rich?
As a teenager, I became the bookkeeper for my dad’s business, and my childhood observations were clarified. The business was barely profitable. My dad either trusted me enough to let me see his truth, or he thought I was so inexperienced I wouldn’t get it. It wasn’t my place to ask.
But the questions I kept to myself then are the exact kinds of questions I ask clients now. And they are questions I want you to ask yourself if you own a business, no matter how large or small. Yes, even a side Tupperware business, or a little consulting gig, or do a bit of wedding photography. These are all businesses, and they do impact your family!
Here are 12 questions to ask yourself.
- Do you spend less time with your children, spouse, or friends as a result of your business?
- Have you ever paid an employee late?
- Are there months that your business doesn’t pay you?
- Do you ever put off buying basic things your family needs because your business needs the money more?
- Have you ever lied (or avoided the truth) about your business’ finances to your spouse?
- When was the last time you took a real vacation?
- Do you avoid asking for professional advice about your business’ health?
- Do you truly know how profitable your business is?
- Is your business contributing to a retirement fund?
- Do you have partnership agreements that aren’t in writing?
- How much have you borrowed against your family’s home, retirement, savings, children’s college fund or inheritance?
- Does your spouse’s income support your business?
If you don’t like your answer to more than a couple of these questions, it’s time to find a trusted advisor, a business coach, an external CFO, or a mastermind group and tell the truth. Print this blog out and put it in the front of a binder titled “Making My Business Better.” Make an action plan. Make it better. In six months, ask yourself the questions again. Then repeat.
What would my dad’s answers to these questions have been? 100% not good. In the 32 years I watched him run his business, I only saw his business run him. I’ve taken these lessons and have been committed to reverse engineer his mistakes into a balanced plan for running my business. I haven’t always been successful, but one of my life’s quests is to be just like my dad when it comes to community service, and exactly opposite my dad when it comes to small business ownership.
We all make financial decisions every single day, some small, some large. Do I cook at home or go out to eat? Do I change banks? Do I clean my own home or hire a housecleaner? Do I buy a used car, a new car or lease a car? Do I start my own business or buy a franchise?
The original title for this blog was “10 things you might want to talk with your CFO about,” but most people don’t have a Chief Financial Officer (though I’m trying to change that.) Many people do, however, have a financial planner, a tax accountant, a business coach, or some trusted advisor. Rising in popularity is the type of financial and money coaching that I believe is so valuable.
Over the years I’ve had many a client announce, during their scheduled monthly appointment, “I leased a building last week,” or “my attorney submitted all the paperwork to change my business to an S corporation,” or “I took out a home equity loan.” I always wonder why they wouldn’t have waited just one more week to discuss the decision with me. I suspect it’s often our subconscious telling us to move forward before someone tells us “no.”
Accountants get accused of being naysayers, and there’s a bit of truth to that. We’re conservative by nature. I’ll be the first to tell you: don’t always take your accountant’s advice. But: do always ask for it. Discussing the facts of major decisions, as well as the feelings and the what-if’s, is invaluable.
What are the 10 things you should discuss before you jump in?
Last February I promised myself that I would implement a creative motivating approach to ensure this January would not suck. In an accountant’s world, no matter how planned and prepared you are, the multiple January 31st bureaucratic deadlines wreak a bit of havoc on your business. This year was going to be different!
The first workday of January I handed 21 crisp $5 bills and 21 crisp $1 bills to my staff and had them hang three ‘clotheslines,’ $6 for each day
and one clothesline for each team member. The instructions for distributing the ‘prize money’ was as follows: I got the $6 any day I had to deal with January bureaucratic deadlines, and they got the money on days they handled it all. $5 went to rockstar team member #1, and $1 to the supporting team player.
Is $126 enough money to motivate your staff? Is it enough to motivate ourselves? No.
But the truth about motivation is that money is rarely the most effective method. (Unless you’re Goldman Sachs handing out high six-figure bonuses. That’s motivating.) For most micro businesses that’s not an option. In a micro business, serving your clients and providing value is often the highest motivation.
How can we use money to motivate ourselves and our team? Here are some creative approaches we’ve used with clients:
Pay yourself first. This works for the business owner who always pays everyone and everything else first, and then doesn’t have enough left over to pay herself. She’s extremely motivated to pay her vendors, but not so much herself. We implement a bill-paying structure that puts her first, and by the end of the month, she’s jamming to bring in enough money to pay her vendors, because she won’t let them down.
Put yourself on a commission structure. This works for the business owner whose monthly income fluctuates between high and low. He has a good month, he takes all of the profit and suffers during his next low month. For a commission structure to work, you need to learn how to set your base ‘salary,’ which you can read here: The Power of a Salary Structure. Then create a motivating commission structure for yourself, document it, take no more, and take no less from your business.
Bonus your team based on your goals for the year. Small businesses rarely commission their employees, but if you want your team to be extremely clear about your goals, putting a commission structure in place for them, no matter what size, signals that you need their help in reaching your goals. It’s not just about the money, it’s about the motivation.
How do you implement creative motivation in your business?
- Choose one thing that consistently nags at you about your business and look at solutions from a creative vantage point.
- Choose a dollar amount you’re willing to invest in the problem.
- Use a creative way to come up with your implementation plan (mind mapping, journaling, drawing with crayons are a few great approaches).
- Then jump in and earn the results you want!