Call the Booth
BUZZZZZ. The buzzer sounds, telling the teams and fans alike that game has concluded. Although two teams run off the field, only a single victor emerges from the battlefield. The owner of the defeated team rings the scoreboard technician to ask, “What can I do to change the score of the game?” The confused technician apologizes, “I don’t understand. This game? You want to know how to change the score of the game that just ended?”
The owner replies, “Well, yes. You keep the score, don’t you? Tell me what I can do to change the score of the game.”
People may smile at the team owner’s delusion. His misconceptions are two-fold:
- He believes the score can be changed after the conclusion of the game.
- He believes the scoreboard technician is the proper person to impact the score.
All too frequently business owners hold the same misconception when it comes to their tax reduction “game”. After receipt of their tax returns from their tax preparers, they ask them, “What can you do now to change the score of this finished game?” or “What can you to reduce last year’s taxes?”
Similar to the owner of the sports team, the business owner’s misconception is two-fold:
- He believes you can change the score (tax liability) of the game after the game’s conclusion (after year-end).
- He believes the scoreboard technician (tax preparer) is the proper person to impact the score (increased after-tax profits).
These two misconceptions can be summarized as a timing misconception and a role misconception.
The timing misconception.
Correcting a timing misperception requires understanding the differences between when tax is paid versus when taxes are filed. Taxpayers earn income throughout the year. Therefore, tax liability accrues throughout the year. As a result, tax is actually paid throughout the year.
The government’s strategy is to take an estimated amount of tax from the taxpayer as soon as possible. Think of a paycheck – the amount earned is never equal to the amount paid. The government requires employers to withhold the amount of estimated tax and then distribute the net amount to the employee. These withholdings are then submitted to the taxing authority (Internal Revenue Service in the United States).
Tax returns are filed after the end of the year. The deadlines for corporate and individual tax returns are March 15th and April 15th, respectively. If tax has already been paid through withholdings, then why do we file a tax return in March or April? The withholding amount is a rough estimate of what someone may owe. The preparation of a tax return calculates the amount of actual tax a taxpayer should have paid, after considering such things as exemptions and deductions available to the taxpayer.
Do I owe you or do you owe me?
The tax return preparation process calculates the amount of actual tax a taxpayer should have paid. If a taxpayer has already paid (through withholdings or estimated payments) is more than the tax liability, they are entitled to a refund of the difference. If the tax liability is more than the amount paid, they have to pay the difference when filing their tax return.
Let’s apply this new knowledge to the timing misconception. Tax return preparation and filing reports what happened in the prior year. The tax liability created was from activities in the prior year. In order to impact that liability, changes would have to been implemented in the prior year. This is why trying to reduce tax liability at tax filing time is similar to trying to change the score of a football game after the final buzzer – the game is over!
Tax preparers are talented, but they do not have magic wands. They cannot turn back the hands of time to a prior year, prior period, prior quarter, or prior inning.
The role misconception.
Was the scoreboard technician the best person for the team’s owner to call regarding increasing the score? Of course not. A better choice would have been the Team Manager, the Coach, or even any member of the Coaching staff.
Similar to the team’s owner, a business owner is looking to the wrong person to increase the score of their “after-tax profit” game. Tax preparers’ roles are similar to those of scorekeepers– they are engaged to report, as accurately as possible, the “score” of the game. They tally, add, subtract, multiply, and record data from a business the same way a scorekeeper keeps valuable data from a game. Rather than looking to the scorekeeper (tax preparer), they should be contacting a Coach (Tax Planning Team) to help them increase after-tax profits. A Tax Planning Team (coach) should help strategize on how to “hang onto” more of what the tax preparer (scorekeeper) will eventually count.
Tax preparers possess many talents in their area of expertise (reporting). Their role is not without its challenges. All too frequently, tax preparers are faced with a number of clients handing them shoe boxes full of stained receipts that have been dug up from the ashtray of cars, bottom of purses, and even unopened correspondence. They have their workload in excess to prepare tax returns based on the gross amount of unorganized information provided. (If they possessed magic wands, certainly they would use them to remove gum or coffee spills from the shoe box of receipts.)
Contacting the right people at the right time is imperative to winning the game.
Changing the score
The answer to “how do I increase my chances of victory on the field” is the same as the answer on how to maximize after-tax profit. Engage a strategy before taking the field! A knowledgeable coaching team will strategize plays based on the sport, the players’ strengths, and the playing field. The coaching team will train the team on these various plays and rehearse different scenarios. That way, when the team runs onto the field, they are prepared with the skills they need to beat their opponent.
A Tax Planning team is similar to a coaching team. They develop a strategy applying their expertise to a business owner’s (or taxpayer’s) personal and business circumstances, such as industry, ownership, succession wishes, physical location, customer location, and volume. They team trains the owner and its key “players” how to make both rare and day-to-day decisions throughout the year in order to maximize their after-tax profits and protect their assets. This way, when the year comes to a close, the business owner has done everything possible to win the game!
Above all, remember, when the buzzer sounds, the game is over, but also remember a new one has commenced. Just because you may have lost the last game, do not lose sight of the game you are now playing! Every day you operate without a strategy in place is a day you accrue tax liability and potentially overpay in tax. Absent a magic wand, the way to win on the field is to implement a customized, well-researched strategy well before you change into your uniform or run out of the locker room.
