“I’m deathly afraid of what I don’t know about my business’s finances.”
I had a successful small business owner say that to me the other day during a meeting.
If I had a nickel for every time I’ve heard that one. Business owners are busy. It’s hard enough to run a successful business; there’s no way you can know everything all the time, right? If you’re a parent and you’ve raised a child, you know that you go into that job blind as a bat…and most of the time, the kids turn out alright.
When a business owner says this to me, they’re often talking about taxes. Let me let you in on a little secret…tax law changes all the time. There are days that I can honestly say to someone’s tax question “I have no idea how to answer that, but I will find the answer for you.” I don’t think it’s possible to know everything about taxes, even the small sliver of tax law that relates to your business, so you need to give yourself a little break, ok?
Let me put your mind at ease. Here is what I think you need to know about your company’s tax situation:
1. A general idea of how the tax liability is calculated: I don’t mean knowing how to prepare a tax return and calculate it yourself, but I think you do need to know the basic mechanics. For instance, if you’re a cash-basis service business, you need to know that revenue is counted when received, expenses are counted when incurred, and the net (revenue minus expenses) is where we calculate the tax liability. If you’re an accrual basis business, there is a big likelihood that you’re still filing on the cash basis for tax purposes; so, you have to calculate your cash basis results to get there. You need to know which set of numbers you’re looking at and which one drives the taxes.
2. A general idea of what’s deductible: I can hear you saying “But that’s what I pay you for, right?” Yes, that is true, but you also should have a working knowledge of deductions so you don’t operate every day with bad information about what you can deduct for business purposes. I see new small business owner customers who have labored under a mistaken impression for years about how their automobile expenses were deducted, for instance. Not knowing these types of things is what makes you feel like you’re fumbling around in the dark.
3. A general idea of how taxes fit into your day-to-day business: This gets to the point of understanding what your CPA or business advisor is doing for you. If you’re only working with a tax preparer once a year, you’re probably not thinking too much about taxes. You get all keyed up about it in late Dec/early Jan, you start combing your files for copies of bank statements and receipts, and then you scramble to get your data in a format that makes sense so you can send it over. But, if you’re working with someone like me, and we are constantly discussing taxes, you can keep them on the horizon line in front of you at all times. This way, you aren’t caught by surprise and you can always have an idea of what you’re going to be paying that year. Money can be saved or set aside, quarterly estimated taxes can be paid, and you’re never in a scramble.
Bottom line: there are things about your tax situation that you are never going to commit to memory (depreciation rules for new equipment, for instance), and you don’t have to. That’s what we are here for; we take those complicated rules and explain them in ways that make sense. There are other things, such as a general idea of how the taxes are calculated, a general idea of what’s deductible for your business, and what your CPA or tax preparer is actually doing for you, that you do need to know. So, don’t stress about knowing everything; focus on these three things and you’ll feel a lot less stressed. Let your business advisor worry about the rest of it.