Ask an Accountant: Pt 3
How Do I Change My Mindset About Taxes?
In the latest installment of our current blog series, we clear up the confusion about a hot-button topic we are often asked about by Early Childhood Education clients: paying taxes. In the following article, learn about a common misconception about paying taxes and discover how you can change your mindset when it comes to taxes. Continue reading to learn more.
Identifying a Common Misconception About Paying Taxes
The Honest Buck team often hears variations of the same theme from well-meaning childcare business clients: “I need to get my taxes down as low as possible.” We understand this mindset. After all, no one wants to owe the IRS a huge tax bill. Paying out as little as possible in taxes is one tax strategy, but there are better ones to consider.
We like to tell clients, “Paying taxes means you are making money. If you aren’t paying taxes, you aren’t making money.” We help them to focus more on the profitability of their Early Childhood Education business rather than how much they will have to pay in taxes. To understand this concept better, let’s take a look at the difference between profit and taxable income.
Difference Between Profit and Taxable Income
Many business owners worry about how much money they will owe on their tax bill without recognizing the difference between profit and taxable income. Remember, profit equals income minus expenses, and while it’s true that an increased profitability may likewise increase your tax obligations, it also opens up new avenues for reducing your taxable income through deductions and credits. Increasing profitability is always a good thing—especially when it gives you more options for reducing your tax liability.
Better Tax Strategy for Building Long-Term Wealth
You can use a number of tools within the structures of the tax law to increase profitability, reduce taxable income, and build long-term wealth. For example, you can use a 401(k) retirement plan or a health savings account (HSA) to hang onto your money or invest in real estate. Here at Honest Buck, we help our Early Childhood Education clients explore tax credits and deductions available to them, such as:
Employee Retention Credit (ERC)
Work Opportunity Tax Credit (WOTC)
Small Business Health Insurance Credit
Qualified Business Income (QBI) Deduction
In fact, there are quite a number of ways to reduce your taxable income as a childcare business owner.
How Do I Change My Mindset About Taxes?
Try not to panic when it comes to reducing your tax burden and focus instead on profitability; then you will begin to reap the benefits of increased profitability:
- creates a healthy financial foundation
- provides sustainability in times of both economic growth and recession
- makes it possible to obtain a business loan for expansion or capital improvements
- helps accelerate your company’s growth
- increases tax-saving options
- builds long-term wealth
- provides more options for succession and exit strategies
Just as important as how you think about taxes is how often you plan for taxes. Checking in with your CPA once a year during tax season (your accountant’s busiest time of year!) is not enough to effectively plan a tax strategy for your Early Childhood Education business. The Honest Buck team recommends touching base with your CPA throughout the year, at least once a quarter, if not more frequently. We encourage our clients to get in touch with us as early in the calendar year as possible and to take advantage of our slower months over the summer and fall. An end-of-the-year meeting with your accountant is always a good idea too.
We hope this article will give you plenty of food for thought as you reflect on your mindset about taxes. Making a shift from the immediate dilemma of your tax bill to the long-term picture of your business’s profitability will take you far. Reach out to our team of experts to learn more about how we can help you develop a tax strategy that works for your childcare business.