Jackie Zach
October 25, 2024
In another enlightening discussion, Mike McKay and Jackie Zach explore the importance of having a strategic approach to taxes, particularly in long-term business planning. They highlight the pitfalls of short-term tax avoidance tactics, such as deferring revenue or unnecessary spending to reduce tax bills, which can lead to higher taxes in the future. Jackie emphasizes the mindset shift needed for business owners, pointing out that paying taxes signals growth and profitability, which are ultimately positive indicators of success.
The hosts also stress the importance of investing in areas like real estate or services that can enhance a company’s value, rather than making purchases solely to lower taxes. They remind listeners that taxes are unavoidable, but with the right planning, they can be managed effectively. Rather than fearing tax liabilities, business owners should focus on long-term financial optimization and work closely with the right professionals to implement strategies that reduce the tax burden over time.
Is your growth stuck because you’re afraid to pay taxes? Take advantage of a complimentary business strategy session to discover the opportunities in your business! https://actioncoachwi.com/podcast-ask-a-question-complimentary-session/
Podcast Transcript:
Mike McKay: Welcome back to the Tough Love for Business podcast. I’m Mike McKay, and my co-host is Jackie Zach. Today, we’re discussing taxes. Yes, although it’s probably too late for 2023—it’s February!
Jackie Zach: Yes, it’s too late for 2023, but it’s not too late for 2024.
Many people I know, including some clients, say they hate paying taxes, and as a result, they stunt their own growth to avoid it. I’m not a fan of taxes either, but if I have to pay them, it means I’ve made some money.
Mike: Out of curiosity, why aren’t you a fan of taxes?
Jackie: I prefer my tax dollars to go toward better uses than what they currently fund. While I don’t mind paying taxes, I think there are more effective ways to allocate that money.
Mike: In Switzerland, it is what it is, right?
Jackie: Absolutely.
Mike: And that’s probably not going to change. You mentioned you don’t like paying taxes, but the only way to avoid taxes is to make zero money.
Jackie: Exactly. This topic came up because we discussed good versus bad debt and how, at year-end, people buy things to lower their tax bill. If you’re making capital expenditures, that’s fine. However, spending just to avoid taxes is another form of bad debt. It’s really a mindset issue.
Mike: Three years ago, I was coaching a rapidly growing company. They did the end-of-year revenue recognition dance, but their CPA—who should guide them on tax decisions—was only focused on minimizing taxes for the current year, not over a five-year period. They thought they could defer revenue and avoid taxes, but I told them they needed to recognize revenue and pay taxes this year.
They insisted on following their accountant’s advice. My projection showed that their overall tax rate was 21.4% this year because they deferred revenue. But next year, they would likely pay 26.2% because their backlog indicated they’d make even more money. Their CPA just cost them 4.2%, translating to $8,600 more in taxes if they didn’t sell anything else.
As a business owner, it’s crucial to focus on long-term trends. If you expect to grow, delaying revenue recognition only results in higher taxes later.
Jackie: Right! It’s about thinking long-term rather than just year to year.
Mike: If you’re expecting a downturn next year, then it makes sense to defer revenue. However, making decisions based solely on short-term tax implications can jeopardize the longevity of your company. Many people express frustration over taxes, but honestly, there’s no better place to run a business than in the United States.
Jackie: Exactly. Some people say they don’t want to grow because they don’t want to pay more taxes, which makes no sense.
Mike: There’s no situation where you don’t keep the majority of your earnings. There’s no 96.7% tax rate like there was during World War II. The highest rates kick in only after making around $1.6 million. So, the government won’t take all your money, and the more you earn, the more tax strategies you can implement with a solid financial planner and CPA.
Jackie: Right! And we want to avoid short-term thinking.
Mike: For example, if you’re signing a lease, consider buying a building to take advantage of real estate tax breaks. Understand the distinction between capital gains and payroll tax. You can’t pay yourself $36,000 a year running a $10 million company to dodge self-employment tax—the IRS will catch you. Ideally, your other income should come from capital gains or distributions. If you want to excel at taxes, invest in assets like real estate, which have lower tax burdens.
Taxes, like many aspects of business, require a strategic mindset. Some people think, “I won’t make more money because my spouse will get half,” but in reality, your spouse never gets it all. Money is essential for resolving all kinds of issues, including divorce.
The government never takes everything, but you can make decisions that help minimize your tax burden over time. It’s about optimizing your finances over a five to ten-year period, which might include owning real estate.
The idea of not making money to avoid taxes is counterproductive.
Jackie: Yes! I had a conversation with someone who didn’t want to grow her business because her husband hated paying taxes. It was an eye-opening discussion, especially as we were discussing good versus bad debt. Tax Day is coming up, and while it may be too late for last year, it’s not too late for planning this year. If you’re spending money to avoid taxes, are you doing it in ways that help your business grow?
Mike: That’s an interesting point. Some clients, during strong years, prepay for coaching. Our advice aligns with that. If you’re going to invest, think about whether you’re spending or investing. For instance, prepaying for services like coaching or training can enhance your team’s value, unlike buying a truck that depreciates immediately.
Jackie: Exactly. You need to consider whether your approach to taxes is helping or hindering your business. If you’re investing, it helps. But if you’re just spending to avoid taxes, it might not.
Mike: Ultimately, would you rather pay taxes on a million dollars in profit or avoid taxes on zero profit?
Jackie: I’d rather pay taxes on a million dollars. Even with a 50% tax rate—which it never is—you’d still have $500,000 left.
Mike: Exactly. The point is being a business owner means thinking long-term, not just panicking about taxes in the short term. You’re a pro, or you wouldn’t be listening to this. So between now and next time, go kick some ass.