Taxes, Taxes Everywhere
If you feel like all you ever do is pay, or think about paying, taxes, you're not alone. On any given day, someone somewhere is receiving their paycheck and thinking fondly of their school days when they longed to graduate and make big bucks to pay for all the things they wanted...and now fully identifying with Mom or Dad as they fumed over the tax forms each year.
We all know that taxes are inescapable. If you don't have income taxes to think about, then you have to think about property taxes. If all of those are paid for, then you have to decide if you have enough money at the supermarket checkout to pay for the cost of your groceries, plus sales taxes. You even have to think about how much taxes are going to cost when you die!
This newsletter is a perfect example of how much we think about taxes. Excluding the Year End Tax Planning section, there have been a total of 65 articles since we began this newsletter. Excluding the disclaimers and navigation aids, forty-eight (48) of those articles contain the word "tax" somewhere in the text.
That's 74% of everything written through May 31, 2000. Tell me we don't think much about taxes in this country!
It gets even worse when you stop to consider the breakdown of those articles. Over half of the articles should have been talking about how to run a business or invest more wisely, but even in the best non-tax category, something about taxes was mentioned in almost 36% of the articles.
Can you blame us though? According to the Tax Foundation, tax freedom day in 1999 was May 11. Put simply, up until May 11, 1999, you worked for the Federal, State and Local governments to support their operations, not your needs. The comparable date in 1964 was April 13, according to the Tax Foundation.
Certain governmental agencies disagree with this date, but the exact date is of no real importance. The important point is we pay a lot of money to keep our government running.
I hear what you are thinking. "So? I already knew that. Since this is a newsletter, can we please get to the news?"
That would be great, but this month's article is not really about news, it's more about common sense, or cents if you prefer.
Every December, tax advisors all over the United States have this same conversation with their clients.
"We are going to owe how much this year? You've got to be kidding," the poor unsuspecting client says.
"Yes. I'm sorry, but since 1986, if you make money, you're going to pay taxes. At least you have the cash to show for it," the CPA may say.
"Isn't there anything we can do to cut the tax bill down? What about buying a new computer for the business or giving more money to charity?" the client asks, desperately seeking a life line.
The reply is always the same, "Do you need the computer, or do you really want to give the money to charity? If you do, then fine. Go ahead and do that and we will deduct them on the return.
If you really don't need the computer, or don't want to give the money away, then keep it. The sad truth is for every dollar you spend; you will only reduce your taxes by, say 25%. That means you have 75 cents less cash. Unfortunately, most deductions cost you far more than they save you.”
If the CPA deals with international clients, he may tell the client to feel lucky. Taxpayers in Great Britain have to work until May 27 to pay all their taxes, according to a 1999 Adam Smith Institute report. Even worse, Canadian taxpayers, on average, work until July 1 according to 1999 Fraser Institute report.
It won't work, though. The dejected client will leave the office and start dreading April 15.
This may be something of an over-dramatization, but it points to the true theme of this article:
"No matter what you do, you are going to pay taxes. So, do what makes the best economic sense and pay the taxes later."
I don't mean to imply that there is no way to minimize taxes on a transaction. Most business owners know different. However, every business decision needs to be evaluated based on the profit it will generate or the loss it will minimize.
Almost every significant transaction you engage in will have a tax consequence, but it also has a very real consequence in terms of gain and loss. It is the gain and loss you should look at first, not the tax consequence. Once you have these in mind, then you can move forward and see how to structure the deal to minimize the tax consequences.
Say you have an acre of land in the hottest part of town. You inherited it years ago and its cost to you is $100,000. A developer comes to you and offers you $2 million for it. Absent any considerations other than profit, can you really hear yourself saying "No, I would have to pay a lot of taxes if I sold it”?
Let's hope not. Let's hope you say yes, followed by "…but I want my lawyer and CPA to look at the deal first".
Would it surprise you to know there are people who might do this kind of thing, just to avoid taxes? They are out there.
How about the people who put bundles of cash in their safe deposit boxes rather than some kind of interest bearing investment or other growth vehicle, simply to avoid paying taxes? They are out there also.
They forget that even though they may pay some tax, they still have more than when they started.
A famous person once said, "There will be poor always.” The same is true of the tax collectors. They will always be around.
The smart person does their best to increase the value of their assets. When the time comes, that same person asks their CPA and investment advisor how to turn those assets into something with which they can buy their groceries, while paying as little tax as possible.
The smart CPA can help you do both.
Next time you are faced with a significant financial decision, remember to ask your spouse and other confidants what they think. Remember also to give us a call. Help us help you by keeping us informed.