GREAT IDEAS FOR ENTREPRENEURS FROM THE THOUGHT LEADERS AT CASEY NEILON
5 REASONS SMB (SMALL-MEDIUM BUSINESS) CONTRACTORS AND REAL ESTATE INVESTORS NEED ACTIVE TAX PLANNING
HOW THIS APPROACH STRENGTHENS YOUR FAMILY’S FINANCIAL STANDING
I love working with SMB contractors and real estate investors. These fiercely independent entrepreneurs take great pride in not relying on traditional financing solutions and bootstrapping their own ventures. They possess a strong work-ethic, are family-oriented and chart their own course in life. Most of them are self-made and the odds were that stacked against them. They achieved success through risk-taking, faith in themselves and their family and a never-say-die attitude.
This independent mindset is both a strength and a weakness. How so? I find that SMB contractors and real estate investors often do not seek advice when they should. The result is that they usually end up paying far more in taxes than they had to. The solution to this problem is active tax planning. I’d like to share with you 5 reasons SMB contractors and real estate investors really need active tax planning.
A Family Orientation
Before I put forward the five reasons, I’d like to explain why I think this is important. SMB contractors and real estate investors take big risks and work hard to ensure their family is protected from financial uncertainties. For most of my clients, this is their top motivation.
When working with my clients, I often find that a few challenging personal or business events have become something of a plumb-line in how they make future financial decisions. Decisions are made with the intention of preventing past events from being repeated in the future. In this way, past events shape decision-making. In the back of their minds, they’re wondering if the outcome of a decision is increasing or decreasing the odds that they might experience another similar event.
In some instances, the event was the unexpected passing of a parent or other provider whose loss produced great stress on the family. Sometimes it was the experiences of a first-generation immigrant who endured hardships, worked long hours and faced discrimination. Sometimes it was the loss of a home or business. Other times it was the fallout of a recession.
Whatever the situation might have been, the family now bears the scars. The stories of this difficult time have taken on the significance of family lore, especially for first-generation family members who lived through it. The overriding mantra is – never again.
These difficult experiences produce many positive attributes like hard work, self-reliance and fortitude. But they also can produce some traits that hinder the growth of a business. For instance, some people who’ve had to bootstrap their way to success become insular, don’t trust outsiders or seek the counsel of people who could help them achieve their goals more effectively.
They do this for a few reasons. Some believe it costs too much to get good advice on a regular basis. Others have become accustomed to making decisions entirely on their own. But the biggest reason seems to be that they feel like no one really understands their situation or wants to. No one gets them or will take the time to build a relationship with them and their family. The result is that they end up with shallow, transactional interactions with advisors who don’t know them very well. Why is this a problem?
SMB contractors and real estate investors routinely make decisions that have tax consequences. They are often unaware of the tax implications or of alternative options until it’s too late. Here is what I’ve come to believe. If you don’t have a trusted advisor helping you analyze the tax consequences of the decisions you make every month, it is a near certainty that you are paying more in taxes than you should be.
Every dollar you pay in taxes, that you didn’t have to pay, weakens your family’s financial situation. In this sense, SMB contractors and real estate investors often end up working against themselves and reducing their family’s financial strength – the very situation they are trying to avoid. This is the number one reason that you need active tax planning – it makes your family financially stronger.
If you don’t have a trusted advisor helping you analyze the tax consequences of the decisions you make every month, it is a near certainty that you are paying more in taxes than you should be.
What Is Active Tax Planning?
Active tax planning involves a proactive year-round relationship with a trusted tax advisor who deeply knows you, your family, your business and your goals. In this approach to working with a CPA, you get great advice every month that is tailored to your needs and at a price-point you can afford. This is the sort of relationship that provides peace of mind to real estate entrepreneur Jason Lococo.
This relationship eliminates the transactional nature of preparing a tax return. Most people face taxes on a retroactive basis, meaning a tax advisor prepares their return and they react with pain. Once they see the results, there is little that can be done to influence a better outcome.
Active tax planning eliminates this cycle of surprise by regularly evaluating your current year business activity and applying it to the current tax landscape to determine not only your future tax liability, but what strategies can be implemented to reduce tax liability. This ultimately allows you to keep more of your hard-earned money.
5 Reasons SMB Contractors & Real Estate Investors Need Active Tax Planning
What are the benefits of active tax planning and why should you do it? Because it helps you:
- Avoid unhappy surprises.
- Manage cash-flow and budgeting more effectively.
- Make the best use of capital expenditures.
- Take advantage of tax saving strategies.
- Make the best decisions year-round.
Let’s take a closer look at these.
Avoid Unhappy Surprises
Filing a tax return is an inevitability for SMB contractors and real estate investors. There’s no getting around it. I have a sense that many entrepreneurs dread the tax season because, for years, it has left them with nothing but disappointment and frustration. But the biggest problem seems to be the surprise factor.
I have sat across from numerous entrepreneurs over the years and watched their faces fall as we discuss their tax liability. When they hear what their tax bill will be, there is sometimes a groan. These are not happy moments for them or for me. But this is completely unnecessary.
Active tax planning removes the surprise factor and puts you in the best possible position to deal with a tax bill. If you wait until the tax season to develop your tax strategy, it’s too late. Most of the opportunities that were available to you to reduce taxes are gone.
Can you imagine a looming tax deadline that does not even cross your mind or cause you any stress? This is what active tax planning can do for you. It can greatly reduce stress and give you peace of mind to focus on work and family.
Manage Cash-Flow And Budgeting More Effectively
SMB contractors and real estate investors always seem to need more cash than they have on hand. This sometimes leads to situations where cash that should have been set aside for tax purposes is instead used for other things. Active tax planning fixes this issue by allowing you to make the best use of cash throughout the year while preventing a big tax bill later on that you may not have the cash to pay. This ultimately helps you budget more effectively and predictably.
Make The Best Use Of Capital Expenditures
SMB contractors and real estate investors make very substantial investments in capital asset purchases. Contractors often need to buy expensive equipment and real estate investors buy property. Often these expenditures are measured in the hundreds of thousands of dollars, if not more. There are four questions to consider here:
- How do we finance the capital expenditure – with cash, borrowing money, leasing, leveraging existing assets or some other way?
- What are the tax implications for how we finance the expenditure?
- Are we using cash for the expenditure that actually should be set aside for tax liabilities and if so, how does this impact us later?
- What are the opportunity costs of making this expenditure? For example, you could forego the capital expense for say six months and instead put that money into a tax-deferred retirement account.
Active tax planning empowers you to consider a range of options and the implications of each option so you make the best decision. When I brainstorm capital expenditures with entrepreneurs, we typically come up with at least 3-4 options that they had not considered before.
Take Advantage Of Tax Saving Strategies
SMB contractors and real estate investors have many tax saving strategies available to them. But far too few actually take full advantage of these, which means they pay more in taxes than is necessary.
For example, there are a variety of retirement savings accounts that can shelter you from tax liabilities today and help you pay far less in taxes over your lifetime. There are also employee benefit programs that can accomplish similar goals and provide incentives to long-term employees to stay with your company. These are just two examples. There are many more.
You are probably aware that these options are out there but may not know which ones are right for your situation. There are all sorts of factors to consider as you evaluate each option. I believe active tax planning sessions over the course of a year help you take advantage of every available strategy so you never pay more than you have to.
Make The Best Decisions Year-Round
One of the biggest benefits of active tax planning is how it impacts your relationship with your CPA and how this, in turn, allows your CPA to deliver real value to you – value that far outweighs their fees. I believe there are two ways most entrepreneurs think of their relationship with their CPA: transactional or relational.
In the transactional relationship, the goal of the entrepreneur is to save money on taxes while paying as little as possible, and spending as little time as possible, with the CPA. In this approach, the CPA is a vendor who does a job and then goes away until next tax season.
In the relational approach, the goal of the entrepreneur is to save as much on taxes as possible and to position their family for long-term financial strength. This means they invest time and energy into the relationship with their CPA so the CPA deeply understands their family, business and goals.
The relational approach allows the CPA to proactively make recommendations, year-round, that save the entrepreneur money. This also means that the entrepreneur doesn’t have to spend time bringing the CPA up to speed on every phone call or meeting. They are already aware of the entrepreneur’s operations and can just dive straight into answering the question at hand. This saves a lot of time and produces better results.
I believe that active tax planning is the single best solution today for helping SMB contractors and real estate investors keep more of their hard-earned money and strengthen their family’s financial situation. If you or someone you care about needs this type of relationship, we should have a conversation.
Lucas Gonzalez – CPA, Manager
I am a Senior Accountant at Casey Neilon. In this role, I provide business and tax consulting for small to medium sized businesses and individuals. I have been serving clients in this capacity since 2013. My experiences have taught me about the challenges that a small business owner faces on a day-to-day basis and just how valuable it can be to that business owner to have trusted advisors they can regularly call on for advice and guidance.