Overpaying the Government in Taxes
Income taxes are the single largest expense that a small business owner will encounter. This amount is often larger than their home or the cost of getting their kids through college. It is apparent to me that one can never build any real wealth without first getting their income taxes under control.
I am often amazed at the number of business owners looking for ways to reduce expenses. I have seen time and time again many small business owners spending hours fighting over a €200 charge by their credit card company. Yet, they will spend little or no time learning how to reduce their tax burden. And, in many cases the amount could be thousands of euros. So, which amount do you feel is a better investment of your time to save?
There was a study carried last year that stated that Irish small business owners overpaid their income taxes by over 2 million euros. The overpayments were made because the businesses failed to take the tax deductions they were legally entitled to take. Many of these businesses are still unaware of their errors. In talking with many small business owners over the years, I don’t ever remember a single business owner telling me that they got a call from their Inspector of Taxes because they missed taking a deduction. The Revenue is not going to help these businesses by telling them about a tax deduction that they didn’t claim. That’s up to them/you!!
I was recently reading a book by Dr. Stanley titled “The Millionaire Next Door.” This guy did extensive research on millionaires and he concluded that most people who became millionaires didn’t win a lottery, inherit a lot of money, or make a big stock market gain. They were, for the most part, average folks who saved a little bit each year, probably from the taxes saved with good planning, and invested the money in an average investment for 30 or more years.
At first I didn’t believe this so I calculated it for myself. If you were to invest €4,000 for 40 years at an average of 9% return per year, your investment would be worth a whopping 1.6 Million at the end. This means that the small business owner who saves money through good tax planning and invests the savings in a retirement account or other investment can become a millionaire. Tax knowledge is lucrative.
You probably know that tax laws are constantly changing. What makes sense today may not make sense tomorrow. If you have an accountant helping you with this role, they better keep up with the trends! From my experience, many tax and accounting professionals don’t proactively help their clients with tax saving strategies and prefer taking a “back seat” approach. That does not help the small business owner.
For example, when I talk to many new business owners, they are not taking advantage of many important tax reduction strategies like the home office deduction. Many don’t hire their spouse and children to work in their business and hence, miss out on being able to shift income from a higher tax bracket to a lower tax bracket. Others are not sure if they are set up with the best legal structure and overpay the government because it’s been years since their accountant last reviewed their legal structure. Yet others operate with several owners/members and either don’t