(This post originally appeared on The Guardian)
As a certified public accountant, you know what I hate? Tax refunds. A refund simply means that you’ve paid in too much money to the government for taxes during the year and so the government pays it back to you either in the form of cash or a credit on next year’s taxes. If you and your accountant are doing a good job managing your taxes – which for many business owners is one of the most significant expenditures each year – then you really should have zero refunds. You should be paying in what you owe and using the rest to grow your business.
Unfortunately, a lot of small business owners (and, sadly, their accountants) don’t seem to realize this. I think that’s dumb.
If you don’t believe me, then just check out the new report from financing firm Balboa Capital. The survey of small business owners across the country found that more than half of them (52%) expect to get a refund this year.
That’s a huge number to me, particularly when you consider that a whopping 88% of those same respondents say they start to prepare for tax season at least six months in advance and 48% of them use a tax professional to help. The authors of the survey are pleased because an overwhelming number of the small business owners they asked (70%) are planning on taking their refunds and investing back in their companies.
“What we are hearing from business owners regarding their expected tax refunds is very encouraging,” Matthew Von Velasco, Tax Accountant at Balboa Capital said in the report. “Seventy-percent of business owners said they are planning to reinvest their tax returns into their companies. This bodes well for their employees, suppliers, and vendors, not to mention their customers.”
That’s all well and good, but wouldn’t it be better if they did this stuff back in 2019 instead of waiting around for this year? Wouldn’t those investments have been paying off by now and wouldn’t those companies be better positioned for any potential economic challenges down the road? How many of these companies would’ve rather had the money in their bank account instead of sitting with the Internal Revenue Service. My quick survey: 100%.
But no, even though they were planning so far ahead – six months! – apparently their planning wasn’t very good. Why else would so many of them have paid in too much of their hard-earned money to the government and are now waiting around to get it back?
Individuals get excited when they receive a tax refund and I give these people a pass because many of them aren’t that well-informed about tax management and frankly it’s kind of a forced savings (although at a 0% interest rate).
But small business owners? C’mon, we’re smarter than that. It’s our responsibility to intelligently manage our money and not having enough cash to properly buy and invest in the things we need can impact the future of our businesses not to mention the livelihoods of the people that rely on us for jobs, contracts and orders.
Overpaying the government, when it can be avoided, is dumb. How do you avoid it? By hiring a competent tax professional and meeting with that person regularly to evaluate your company’s financial performance. Then adjusting your tax payments throughout the year to match expected profitability. The closer eye you keep on this stuff, the more cash you’ll have to invest in the things that matter now, instead of waiting for Uncle Sam to give you a check later. That’s smart.