“Say What?” Beware Bad Tax Advice This Time Of Year
I recently came across some “fall tax tips” from the blog of a competing payroll service that boasts a fairly significant market share. As I read it, I thought, “This is the kind of amateur advice I could see being tossed around casually on the golf course.” But it should never come from a financial professional, especially one you trust with crucial parts of your business like taxes and payroll.
There are two particular points from the blog post that I’d like to examine. Here’s the first one:
Spend money. Time is running out in 2015, so don’t shy away from spending money on your business to maximize deductions. Do you need to upgrade your equipment? Is it time to spend more on advertising? Can you make vendor payments now, as opposed to waiting until the new year? If you can buy it in 2015, you might as well do so.
Our Response: The point of doing business is to maximize profits, not to minimize taxes. (There’s your tweetable quote for the day.) Spending should never be justified simply on the basis of tax savings. This kind of advice is short-sighted, and encourages the business owner to spend $10,000 on a piece of equipment in order to saved $4,000 in taxes. This still results in a $6,000 net loss of cash! Expenses should only be incurred in order to support current operations or invest in future growth. If you shouldn’t spend the money in the first place, you definitely shouldn’t spend it just for the tax deduction.
Here’s the second questionable piece of advice from the article:
Plan on ways to decrease revenue in December (and maybe even November). This sounds crazy, as every company shares the goal of increasing revenue month over month. However, if you can defer payments from December to January, you can effectively reduce your 2015 tax bill.
Our Response (Part 1): Again, revenues should not be managed simply to reduce taxes. If your business can use the cash, bring it in! Most business I know don’t have the luxury of delaying cash inflows. Cash is the lifeblood of the small business.
Our Response (Part 2): There’s another subtle point here. From an accounting standpoint, most businesses are on the accrual basis, meaning revenues must be recognized when earned. If business owners are attempting to delay taxes by recording revenue in future periods (when cash is received), rather than recording the income in the period in which it was earned, this could be considered tax evasion. Yikes!
I’m not the only one that thinks there’s a problem with this kind of thinking. There tends to be an unhealthy obsession at year-end with tax reduction, which can lead to decision-making that makes no sense in the larger business context. Before taking advice from the so-called experts out there, ask yourself a couple questions: “Is reducing taxes the goal of my business? Or is the real goal to increase revenues and profits?”
Did you know that Cirrus Payroll is owned and operated by a CPA? We understand the role that payroll plays in the larger context of your business, and take extreme care in the advice and direction that we provide. If you want to work with a payroll service made up of experts that care, get in touch with us for more information.