New Year’s Eve hangover has finally worn off!

The hangover from New Year’s Eve has finally worn off.  The year 2023 holds the promise of finally emerging from the shadow of the Covid pandemic. Even with the hope of normalcy around the corner there remains the cloud of uncertainty with inflation and shaky fiscal leadership. Most small business owners are struggling to keep up in a fast changing economy. I believe the start of the year is a great time to review the basics and try to remain focused on the core values and habits of your business. I always take the start of the new year to review some of the best habits I have seen from my clients over the 40 years I have been doing small business taxes. So, here are just a few of the most productive pieces of wisdom I have come to know from watching my clients both succeed and struggle over the years. This advice is basic enough that it remains as relevant today as it was 40 years ago.

  1. LET YOUR SAVINGS ACCOUNT FILL UP

The easiest way to do tax planning at the end of the year is starting with an amount you have available to spend. Even though it sounds silly, I continuously have clients plotting at the end of the year to make moves to save thousands in income taxes, except for one thing. They have no money to spend.  The desperation for lower taxes because there is no cash to pay for them cannot be satisfied by an empty bank account at the end of the year.  And more important to your business is you will always make better decisions without the urgency of cash flow hanging over you.

  1. PAY YOURSELF PAYROLL

If you are a Schedule C, sole proprietor, or single member LLC, (all the same thing) and you are getting overwhelmed with the 15.3% Self-Employment tax,  you can make the move to incorporate and elect Subchapter S status. This eliminates the self-employment tax on the profit. But the IRS does require you to pay reasonable compensation to yourself. Do not be afraid to pay payroll taxes. I define success for the small business owner as follows: “When you can pay yourself a salary greater than the market would, you have created wealth beyond your market value.” Retirement plans and employee benefits are usually deductible but often based on a percentage of your salary. You want to set aside more money for your future self. A higher salary will allow you to set aside more.

  1. FOCUS ON THE BALANCE SHEET NOT THE PROFIT AND LOSS

You want to become wealthier? Focus more on the Balance Sheet of your business. Although the Profit and Loss tells you if your business is making a profit, the Balance Sheet tells the far more important story of what you have done with that profit. Have you been able to save any of your profit? Have you been able to invest any of your profit? If you want to grow wealth then just making money in your business is nothing if you can not save any for future growth.  The Balance Sheet summarizes your assets and liabilities, or in other words,  what you own and  what you owe. Two powerful guides to future success are the total value of your assets going up and the total amount of your debt going down. Both can be found on the Balance Sheet.

  1. ALWAYS HAVE AN FOCUS ON THE NEXT YEAR 

Most small business owners get caught in a trap of repetitive issues because they get stuck in the demands of the day to day. Over the years my most successful clients have always made decisions that caused them more pain today but yielded those small gains in the future that allowed them to gain traction and move out from under those cash strapped constraints.  It’s hard to sacrifice things in such a demanding environment that most small business owners experience every day. But sometimes sacrifice is the only source of future capital available to break out of the constant cycle of not having enough money to pay your obligations. And if you are ever to scale your business you will have to visualize the future with more customers.

The beginning of every year is like the start of a new race. And every year we all make the same vow at the start of that race: to run it faster, better, smarter this year. 

One of the most asked questions of our firm, McGehee Davis & Associates, all year but specially during tax season is WHAT DO YOU NEED FROM ME TO DO MY TAXES? The answer to this question has two parts, Business & Personal.

In this month’s newsletter, we will look at the items that are needed, should have, keep on file somewhere, and don’t need at all for both business you own and your personal items.

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