Death and taxes are not the only absolutes. It is also an absolute that people will get up everyday to make progress, create enterprise and fuel our economy.
When you become an entrepreneur and do those first few years of taxes you get a new appreciation for taxation in our economy. And every four years, someone runs for office and proposes to change the levers of taxation that will help or hinder you.
The early years and your taxes
Until you run a business, you may not appreciate the impact taxation will have on your ability to grow a venture. Most entrepreneurs start out running their businesses at a loss or barely breaking even. You put your money in and pay for the privilege of being in business.
At tax time, when your corporate returns are completed, that initial loss is recorded and a K-1 form is completed for you. K-1 is not a mountain in Pakistan...ba-dum-bum. When you do your individual taxes, the K-1 reflecting your business loss reduces your individual taxable income. Losses are good when you’re an early entrepreneur—at least from a tax standpoint.
Modest profit & your K-1
When profit is modest, and businesses struggle with cash flow and the daily grind of small business, the tax scenario isn’t necessarily as scary as it is for companies trying to rapidly scale in size or profit. At a modest profit your K-1 will add your business profit to your taxable income and increase the amount of tax you pay.
At this point, you may not be drawing a sizeable income that would put you in a larger tax bracket. But if your business suddenly has a significant profit, and you haven’t been paying in high enough estimated taxes, your tax bill could catch you by surprise, or include penalties. Your accountant will likely advise you on the amount of income to draw and how to balance business spending to minimize or optimize your tax burden.
Aggressive growth & the responsibility to become more educated on taxation
When you begin to scale in revenue (but more importantly profit), your focus on taxes gets sharp…fast. This can become daunting because as an individual taxpayer, you need the same kind of liquidity you have traditionally sought for your business. Here’s what I mean by that.
As your business grows, you often focus on lines of credit and access to capital for the purposes of operating the business. When you begin to reflect sizeable profit, you need to have capital to not only fund the business, but to cover your sometimes-surprising tax obligations.
As a small business owner, you may be accustomed to holding some amount in reserves for business operations. If it’s year-end and you are reflecting a large profit, you may have to liquidate those reserves to pay taxes and may start your year with no operating reserve. You need to stay liquid both as a business and as an individual to ensure you can afford the taxes that result from your success.
People’s misperceptions about business owners & avoiding taxes
In the news or around the water cooler you may hear people talk about business owners getting rich and trying to avoid paying taxes. They suggest that business owners don’t want to pay the taxes that the country relies on to run. People assume that tax avoidance or the attempt to reduce taxes is the same thing as being self-interested or perhaps uncharitable.
Most small business owners I know are very charitable people, and while they may enjoy their money, they also use it to reinvest and create jobs. If business owners and job creators can’t retain enough earnings, or any earnings, after paying taxes the engine for creating new jobs or scaling doesn’t exist.
The politicizing of tax plans
Every 4 years when we have an election there is a tremendous focus on tax plans. Too often this analysis is oversimplified to suggest that those that raise taxes have greater community interest and those that seek to reduce taxes are assisting the self-interested or wealthy. Take the time to understand for yourself what potential tax changes may lie ahead.
For an analysis of the tax plans before us by this year’s Presidential candidates, consider the following sources from the candidates themselves:
- Donald Trump’s tax plan from his Website. No matter how much you love or hate him he gets points for simple facts on this page and a little less editorializing than on Hillary’s site.
- Hillary Clinton’s tax plan from her Website. Hillary takes this opportunity to make sure you know Warren Buffett supports her approach.
- Gary Johnson’s comments on the tax system from his Website. This is not a plan; these are position and beliefs.
- Jill Stein’s comments on taxation from her Website. There are positions on taxation fairness and increasing tax revenue.
It’s hard (if not impossible) to find an objective assessment of tax plans. It is up to you to consider whether published analyses of tax plans fall into a category of neutrality, conservative (supposedly pro-business), or liberal (supposedly pro-tax/tax fairness). Do not simply pick the source whose point of view most aligns to yours and read just that one. Read many to open yourself up to a broader point of view on the potential implications.
- The Tax Foundation – the group claims to be an independent group in operation since 1937. Analysis here.
- The Tax Policy Center (Urban-Brookings Tax Policy Center – TPC) – An analysis of Donald Trump’s tax plan is here. An analysis of Hillary Clinton’s tax proposals is here. Their full election site was produced earlier in 2016 before some of the recent specifics the candidates have released. This analysis includes the plans of candidates who have suspended their campaigns.
- PBS News Hour – A comparison of the tax plans here.
- Other policy sources from every political persuasion – If you’re interested in additional analysis and want to know the leanings of the publishers, you can find a variety of think tanks and policy research groups at Citizen Source.
It’s time to get smarter, look beyond party lines and party politics and do our own math. Assess the candidate’s tax plans and estimate how each policy applies to your personal situation as an individual taxpayer and as a business owner.
Will it impact your ability to operate your business and scale it? Will you fear your K-1 or look forward to reinvesting your profits? You’ve got 51 days to answer that question and act.
