Matters Column

It’s time to figure out where you are and where you want to be

November 28, 2014
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In a month, it will be 2015. The books will be closed on 2014 and the process will begin as your tax liabilities will be determined come April 15.

To focus on the issue of tax liability after Jan. 1 is an ideal example of closing the barn door after the cows have left the barn. The time for tax planning is as soon as you have a November financial statement.

As a small business owner, you may feel it is overkill to spend the money and time on a tax projection. Let’s look at the reality.

First, you should look at the comparative damage a large tax bill has for a family business. The Biblical exhortation to render unto Caesar what is Caesar's and unto God what is God’s leaves out a critical persona. That’s you.

If your tax bill is $5,000 more than it would have been if you had planned, that is significant to you. That money can go to pay people like MIT economist Jonathan Gruber, or it can go to pay for your kids’ education. To a big business that amount is lunch money, and the CEO is going to get his money regardless of what the company pays in taxes.

Taxes for small businesses are up close and personal. To a big business CFO, the taxes are just a number in the expense column. The small business owner personally writes the check to the government. If you pay your taxes and you tithe at church, what’s left is what’s really important: how you provide for your family.

I have heard the criticism that CPAs focus too much on taxes and not enough on profit. I’ve never understood that. If you don't make a profit, income tax is not an issue.

There is another reason to begin looking at your 2014 financials, and that is to begin doing your 2015 projections and budget. There is a term I have used called “realized expectations.” Humans need targets. How do you know if you are a good archer if you shoot an arrow into a field with no intended target?

Dreamers have dreams that disappear when they wake up. Planners have dreams that become reality because they take the actions necessary to reach their goal. Dreamers generally have jobs they hate. A dream is their only escape. Planners dream the goal and then build a path to get there and follow the path.

Make the biggest profit you can and then address the tax issue.

Obviously, given my background, I am going to suggest you spend some time with your CPA this month. Some people don't like to spend the money for that time and some people think CPAs are working more for the IRS than they are for the client. Remember that CPAs are proud of their reputation for honesty. Doing fraudulent tax returns is a crime for which an accountant can go to jail.

The good accountant is the one who reduces your taxes to the minimum legal amount. I had situations during my career when a potential client derided my unwillingness to do things their way. In more than one incidence, I saw a newspaper article years later relative to their indictment for tax fraud.    

The CPA is not the only member of your professional team you need to use now. How is your legal work being monitored? Many of the issues having to do with 2015 planning require legal attention. Do your financial statements indicate the need to let some people go? You need to handle that properly in order to avoid being sued by a disgruntled former employee. Sometimes it is not a matter of right and wrong that gets you in trouble. It may be that not documenting things properly makes the fact that you’re justified in your actions irrelevant. Use your legal team to keep you out of trouble as opposed to getting you out of trouble. It is a lot cheaper.

This is the year of the health insurance consultant. Make sure you are doing the right things legally and financially under Obamacare. You may hate it, but it is the law of the land. Don't do anything stupid. There are bound to be some people who will claim a lot of false cures for the health insurance mess. Listen to your CPA, attorney and licensed insurance agent. Anybody else is just blowing off steam.

Start planning now for your retirement contribution next year. Retirement planning should be both short and long term. Short term is putting all the money you can into a tax-deductible plan. Long term is monitoring the projections to make sure you are keeping pace with your needs.

Be careful about assumptions. I was as guilty as anybody in believing real estate was an almost guaranteed asset for value and growth. Balance your finances. Have a good house in a good neighborhood. Balance your investments according to your expected retirement date and remember nature may have a surprise for you in a health issue you did not expect. Disability and life insurance have a place in your planning.

Get your head out of the sand and be aware of your situation. I accidentally bought a CD by Dr. Phil. I don't like the guy, but I listened to his advice because, like most cheap people, I can't throw something out without using it. I hate to admit that I liked his advice. His subject was making a life plan. His point was that you can't make a plan unless you know where you’re starting from. If you are not honest about where you are, the plan is bound to fail because the starting point is inaccurate. I hate it when people I am disdainful of make statements with which I agree.

Figure out where you are now. Figure out where you want to be at the end of 2015. Make it happen.

Paul Hense is the retired president of local accounting firm Hense & Associates. He also is past chairman of the Small Business Association of Michigan.

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