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Taxes, One More Time

November 25, 2009

Man is governed by a variety of clocks and calendars. We have our biological clocks, our chronological clocks and yes, of course, we have our tax clock.

As we approach another calendar year end, the tax clock begins to beat with increasing intensity as indicated by the plethora of “how to do it” tax articles in every conceivable publication. Most of the this good advice could be categorized under the title “how to save $1000 with $2000 worth of time and effort”. This year, with the new tax law that has been recently enacted, the tax clock is beating at an unusually frenzied pace.

Independent business owners cover a broad spectrum in their attitudes towards tax preparation. There are however, a disproportionately large number who reside at the extremes of the spectrum.

At one extreme we have the “John Waynes”, they are independent and proud of it. Their boast is that they prepare all their taxes themselves and they don’t need an accountant. At the other end of the spectrum, we have the “hear no evil, speak no evil, see no tax forms”. This heavily populated group hires a tax preparer and avoids any personal involvement except signing the final forms. Their boast is that the system is so screwed up and complicated that its no worth their time to try and figure it all out.

As the beat of your tax clock quickens, my advice is to move to the middle ground. Retain the services of a competent C.P.A. to prepare your taxes, but maintain an active involvement and understanding of the major issues in the process. I would venture a guess that even John Wayne was not so independent as to get a little tax advice from a professional from time to time. You seek the wisest counsel in other areas of your business and personal affairs, do it here also. And we all know what the eventual fate of the “hear no evil etc.” crowd will be.

The myopia that occurs when business people discuss taxes is indicated by the minutiae that many of the tax advisory articles delve into. You need to view the impact of taxes on your business in much the same manner as the other costs of doing business. With a balanced management effort, tax planning should get no greater attention than the other operating areas of your business. When business decisions become overly dependent on tax considerations as opposed to fundamental economic considerations, take a second look.

We most frequently discuss taxes in light of the marginal impact on income. To gage the broader impact of taxes, a different view point should be taken. First, when I talk taxes, I am talking about all taxes not just income taxes. As a businessman, I take exception to those who describe businesses that paid no income tax, regardless of the reason, as a business that paid no tax. Add them up, even a business without a profit pays substantial taxes for employees, licenses, real estate etc. The most anti-business lobbyist will go a long way before they find a business that paid no tax.

To determine the real impact of taxes on your business, compute your total tax as a percent of your total sales. Add all your tax payments for a given time period and divide that number by your total sales for the same period. Compare the resulting answer with the percent impact on your business of other elements such as utility expenses, personnel costs etc. Allocate your time and energy to the tax situation in proportion to its overall impact on your business, not just its marginal impact on income.

Another important area for the business owner to focus attention is on the policies that cause the formulation of the tax structure under which we operate. It might sound naively optimistic, but I truly believe that we are a government by the people and as such our voices do make a difference. The system goes astray when the people don’t demand what makes sense.

The the independent business owner can have a powerful voice in this process. Sure, those that own businesses are a decided minority, but don’t forget that those people that don’t own a business have a dream for themselves or their children someday. The independent business person is looked upon as a respected individual who understands the economic needs of government. The business owner sees close up and first hand the burdens, inequities and ethical compromises that accompany even the newly reformed tax law.

Because its your business, get involved where taxes really impact your business. Understand your personal tax situation from a management perspective. Hire a good accountant to do the detail work and make sure they keep you informed. Articulate what you believe will make sound tax policy and support those politicians who will work to implement that policy.

Joe Driscoll is a management consultant whose column appears regularly in the Monday edition of the Herald.

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