The old saying “nothing in life is free” is true when it comes to taxes. For every deduction or credit, you give up something. If your goal is to build wealth, an overzealous desire to not pay taxes will get in your way.
The size of the check you write to the IRS is the best key performance indicator of true wealth creation. That may be an odd statement for a CPA to make, but I have seen so much wasted spending to save taxes. It prevents business owners from building wealth that will sustain them.
There was a lot of hubbub at the end of tax season this year about GE not paying taxes. Some authors described how you can avoid paying taxes too, but that advice underscores the bad thinking on this subject. It’s true that GE paid virtually no taxes in 2010 due to large losses from their GE Capital subsidiary, but trust me—they would have rather paid taxes than taken the losses.
If you, as a small business owner, take every conceivable deduction, you’d have to spend the maximum allowable amounts on retirement contributions, tuition, health insurance premiums, energy-saving measures, and whatever else you can dig up to qualify for all those deductions. Sure, you’d save on taxes, but after all that spending, you wouldn’t have enough to live on.
Every tax benefit comes with a cost. Spending $1 to save $0.35 in tax is not a good deal. If you want to build wealth in your business (without cheating!), you must generate income that you will owe taxes on. If you are not paying any taxes, you either cheated or you did not make any income. Both are bad!
When you buy into the fact that paying taxes is necessary, you have to adjust your consumption so you can live on less than your after tax net income. Don’t pay more in tax than you should, but those so-called tax benefits can be traps that keep you from reaching your wealth-building goals.