GREAT IDEAS FOR ENTREPRENEURS FROM THE THOUGHT LEADERS AT CASEY NEILON
I’M MAKING MORE MONEY – NOW WHAT?
3 STRATEGIES FOR ENTREPRENEURS TO TURN TAX BREAKS INTO REAL GAINS
The new tax laws have produced both excitement and anxiety. Entrepreneurs in particular have the opportunity to benefit from a reduced tax burden, but this introduces another challenge. What do you do with the money you save on taxes? It’s a good problem to have, but it’s still a problem.
It’s a wonderful thing to pay less in taxes than you might have paid in the past, but this is no guarantee that you’ll be happier down the road. Why do I say this? For the last several years I’ve worked with entrepreneurs and high-wage-earners who are so concerned about taxes that they let this drive their financial decisions.
I’ve watched these people make good decisions and poor decisions. Here is what I’ve learned. Unless you have a well-thought-through plan to both save money on taxes and use it to achieve your long-term goals, it’s unlikely you’ll really benefit from a reduced tax burden. You need both tax savings and a good financial strategy. Let me share with you how these two are linked.
What To Do With The Money
If your family is like mine, you probably already have a long laundry list of things you could use. I know our list just seems to grow every year, but like all disciplined people, we have to make tough choices about what we’ll buy now, what we’ll save to buy later or what we simply won’t buy at all.
It seems so obvious that if you are saving money on taxes then there should be more to go around to buy the things you’ve been delaying, but I’m not sure that it’s a good idea. In fact, I see this as a huge trap for entrepreneurs. Why do I say this?
Entrepreneurs, more so than almost any other type of person, are willing to take risks. This is baked right into the DNA of being an entrepreneur. You have to take risks to see returns. For many entrepreneurs, the risk is that you’ll invest your tax savings into strategies that do not provide the long-term returns that you most need.
Tax reform is providing a type of tax relief that we have not seen in a very long time. None of us know or can predict the future, but if history is any indication, this tax relief may not last beyond just a few years. It is entirely possible that a new Federal administration could swing in the other direction and the tax savings could be gone, not to mention that some of the relief provisions are planned to be temporary, and are already set to expire in a few years.
This means that entrepreneurs have an opportunity now that may not come around again in their lifetime. This is why I advise caution. Be very careful about what you do with your tax savings because this could be a once-in-a-lifetime opportunity. When you think about it this way, your list of potential ways to utilize these funds should get much more refined. Now at this point it is important to note that determining the savings that could be available under the new tax law is going to be complicated for entrepreneurs, because the rules apply differently depending on the types of business activities you are engaged in. This is exactly why a well-thought-through plan is so important.
I believe that the new tax laws are creating opportunities for entrepreneurs to make big strides toward their financial goals, but if you don’t have a real plan, it will be very easy to squander the savings and miss the mark. I see this more than you might imagine.
Entrepreneurs have an opportunity now that may not come around again in their lifetime.
An Example Of Not Having A Great Plan
I’ve been working with a client who has struggled to build a long-term plan that they believed in. Over the years, this client has actually lost ground against their long-term financial goals. There are all sorts of reasons for this, but the root cause is not having a well-thought-through plan and the belief in it to remain committed over the long-term.
At one time, my client had a diversified portfolio that probably would have provided solid long-term returns, but during a period of market volatility, they lost confidence and quickly changed their strategy. Unfortunately, the new strategy did not perform to their expectations, and they did not realize the recovery that their original portfolio delivered. Feeling discouraged as they looked towards retirement, they considered changing strategy again trying to find some higher yielding investments.
They also started wondering if it made sense to cash out of their 401k plan to pay off their mortgage. They were thinking that they could save a lot of money by downsizing their home and making reasonable improvements to a new and smaller home.
All of these decisions came with both tax considerations and financial planning considerations. But the problem was that this client was making decisions without the counsel of the experts who could really help them. The client was being reactive, rather than proactive, and the consequence to them was that they were losing ground against their long-term goals, primarily because each decision was being made in isolation without considering how each played a role in their long term plan.
How To Profit From Tax Savings
After working with dozens of entrepreneurs who are in various phases of their life, I’ve come to believe that there are three key questions you need to ask yourself:
- What are your long-term goals?
- Where does your income come from?
- What is your strategy to use your income, particularly the increased income from tax savings, to achieve your long-term goals?
The answers to these questions will help you turn your tax savings into the type of gains that give you real peace of mind and long-term benefit. Let’s explore them a bit.
What Are Your Long-Term Goals?
I believe one of the most important things you can do as an entrepreneur is to get clarity about what you want to achieve and why that matters to you. This exercise is ultimately about defining a vision for where you want to be in 10 years, 20 years and beyond.
When I ask people what they want to accomplish, I hear all sorts of goals.
- Start a new business. Many entrepreneurs want to grow their current business while also having the funds and the time to start a new business. This is an exciting prospect for a lot of people and it bolsters their sense of achievement and self-actualization.
- Fully fund retirement. Some entrepreneurs are on a good course to retire with enough income to last their entire lifetime. But many others are well behind and need to catch up.
- Invest in college for children or grandchildren. This is a top goal for people of a certain age and position in life. As the cost of a four-year university education increase, so does the sense of urgency to fully fund education accounts.
- Reduce debt. The downturn of 2008 has left many entrepreneurs with a dislike for debt. Some people are struggling to balance their desire to risk capital to grow versus using that capital to pay off debt.
- Improve lifestyle. Many entrepreneurs want to improve their lifestyle, both for themselves and their loved ones. This could mean upgrading their primary home, buying nicer cars or even taking expensive vacations.
- Buy real estate. Many of our clients believe that real estate is one of the best long-term investments they can make.
I would put all of these goals under the larger umbrella of building wealth. This is not always intuitive. Once you have a safety fund of about 6 months of living expenses, it can be challenging to figure out the best way to grow wealth for the future. Your choices should be guided by your goals.
When you look at the goals I’ve listed above, I’m wondering how yours compare. Here is why I ask. It’s not enough to know WHAT you want to achieve. It’s crucial to understand WHY you want to achieve them. When you get clarity about why you want to achieve certain goals, you can define priorities so that you can be committed for the long-term. Long-term goals require long-term commitment. This can be especially challenging when the going gets rough in the short-term. If we go back to the earlier case study, it became clear that from the outset they had not determined the WHAT or the WHY, and it was time to put on the brakes and look at these questions before making any more big decisions.
Here is a simple exercise to help you get clarity about your what and your why:
- Make a list of all of the goals that come to mind for you and your family. You can use my list above as a starting point.
- Rank these goals on a scale of 1 to 10 where 1 equals “not all that important”, 5 equals “we’ll do this if budget permits” and 10 equals “this absolutely must get done.”
- Sort your goals by the score you give them, putting all goals with a number 8 or higher at the top of the list and all of the other goals below this in descending order.
This exercise can help you see what absolutely matters to you and what you must achieve versus what you’d like to achieve. This simple exercise helps you get clarity.
Where Does Your Income Come From?
The next most important thing to understand is where your income comes from. Here are some common income sources:
- Income from a business.
- Portfolio income such as dividends, interest or capital gains.
- Selling a valuable asset, such as real estate or even a business.
- Wages or earnings, especially for serial entrepreneurs with interests in more than one business.
Why is it important to understand how your income is generated? Because income sources have numerous tax laws that apply to them and several strategies that could be deployed to improve your outcomes. This is especially true under the new tax laws, as some of the provisions are more beneficial for certain types of income. So this leads me to my final question.
What Is Your Strategy?
Once you have clarity about WHAT you want to accomplish, WHY it’s important to you and WHERE your income will come from – you need strategies. This is where I see entrepreneurs making some big mistakes. Here is my best advice to you about how to avoid these mistakes and turn your tax breaks into real gains.
- Don’t go it alone. The story I told you above is about a person trying to make critical decisions without the input and guidance of professionals who could have really helped them. Entrepreneurs need good counselors because many of the decisions they make are multi-faceted and complex.
- The strategies will likely be as complex as your individual situation. The more complex your situation, the more complex the strategies will likely need to be to help you achieve your goals. Taking advantage of tax reform to maximize your tax breaks is not a one-size-fits-all plan. My colleague Darsi Casey wrote a great article about this that I recommend you review.
- Don’t wait until it’s too late. One of the biggest mistakes entrepreneurs make is to underestimate how complex the strategies will be, how long it will take to fully implement them and how long it will take for the strategies to produce the desired outcomes. Depending on your goals and your horizons, certain strategies could require years to fully mature. So don’t wait. The more complex your situation, the more you need to get started now.
We developed our Entrepreneurial Excellence program specifically for people facing these situations. This program allows our team members to take a comprehensive look at your goals, your situation and the challenges you are facing. If you want to take advantage of the tax breaks that the tax reform is providing and turn these into real long-term gains, I recommend that you take a look at our program.
Suzanne Olsen – CPA, SHAREHOLDER
I am a Manager and Shareholder at Casey Neilon. In this role, I provide consulting, accounting and auditing services to our clients. I provide leadership and training to our staff and I get to learn and experience new things every day. I have over fifteen years of accounting and auditing experience in a wide variety of industries that include public accounting, construction, manufacturing, small business, captive insurance, risk retention groups, and self-insurance groups. I have over ten years of individual and business tax preparation experience that includes multi-state tax preparation.