There’s a misconception out there that CPAs have some sort of “secret pill” that helps lower taxes. If it did exist, I imagine it would be flavorless and hard to swallow. But it doesn’t.
So why does this misconception persist? It probably has something to do with news reports about big companies like Apple and Google managing to pay very little (or in some cases, no) income taxes. This has led to many believing that they’re missing out on a secret only CPAs know.
Well, I do have a secret for you:
There are no secrets
Now, if you’re making billions of dollars, it might make sense to spend hundreds of thousands on a sophisticated tax strategy that saves you millions in taxes. But for the guy making $150,000 in salary? That sort of approach probably doesn’t make sense.
If you’re an employee somewhere, you have a modest investment account, you own a house, and you make a few charitable contributions each year, it’s a good idea not to spend too much money on a CPA to prepare your tax return. You could even do it yourself. In fact, the IRS could probably do it for you with your W2, 1099s, and 1098s, so an accountant isn’t going to find a lot of ways to save you money.
Sure, maybe it’s easier to have someone else do it for you, and that is worth something – but seriously, don’t spend a lot of money on that.
But, what if you have your own business? In that case, there are some things you can do to lower your taxes (but sadly, still no secret pill).
How to lower taxes for business owners
There is one sure-fire way to pay less in taxes – make less money. That may seem silly, but it is true – you pay taxes based on the profit in your business, so the lower the profit, the lower your taxes. But you don’t really want to make less money. There are two ways to reduce your business profit without actually making less:
1. Increase your expenses.
This doesn’t mean you should go out and blow $5,000 on a few MacBook Pros that you absolutely do not need. You shouldn’t spend $1 on something you have no use for just to save 40 cents in taxes. Instead, the key is to make sure you’re taking advantage of all of your business deductions, the things you have already spent money on.
A lot of my conversations with clients are about whether something is deductible or not. It helps to have a CPA who knows those answers because you hear a lot of crazy stuff from your neighbors and friends. Some of it might be legitimate, but unless you’re a recognized whaling ship captain with dyed hair and a guard dog (all deductible), it pays to get professional advice.
The very best kind of business deduction is the expense you already had but didn’t know you could claim. A car payment, your cell phone, or your rent could all help you lower your taxes.
2. Make a retirement contribution.
This is really an extension of #1 since the contribution counts as a business expense, but it’s the best kind of expense – the money goes right back into your own pocket (albeit a pocket you can’t open for a little while).
For people who own their own business, there are all types of different retirement options, and it’s always a good idea to plan as far in advance as possible. Make sure you know which options are available to you and get help finding the right one for your situation. Your CPA and your financial planner can help you design a plan that’s best for you. (If you don’t have a financial planner, we’d be happy to recommend a few – just ask!) I’ve personally seen owners be able to put away hundreds of thousands of dollars per year into a retirement account – and that level of saving will really make a difference to your tax bill!
When you start working with a CPA, don’t expect some earth-shattering secret to help you pay less tax. Sure, you could move to a remote island off the coast of Ireland to lower your tax bill by a few bucks – but that isn’t an option for most of us. The real benefit of working with a CPA isn’t in finding a loophole that will get you a bigger refund – it is the peace of mind that your finances are in the hands of a professional and that with advanced planning and expertise, you’ll avoid any nasty surprises.