 | | Steve Steinbrunner |
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Power Thought: Four Quadrants Advisory
In a standard Monopoly® board, Income Tax is the fourth space on the board and one of the least-liked spaces. When a player has the misfortune to land here, they must immediately choose one of two options: estimate their taxes at $200 and pay to the bank, or choose to pay 10% of their total assets. Ouch. In the game of dental monopoly, time and time again, Rich Uncle Pennybags congratulates you on a profitable practice - you pass GO! and turn the corner - then he slaps you with a $35,000 tax surprise! The good news is that there is a solution. The bad news is that most of you are missing it. First, understand how your accountant misses the target. Most accountants utilize the widely accepted practice of basing your estimated taxes from prior year profits. This works great for the first quarter payment, but they almost always fail to evaluate the business profitability routinely throughout the year. Pretend you owned a practice with $1,000,000 in collections and overhead of 65% in a given business year. The following year, collections were up 7% and you managed to cut overhead by 3%. Your accountant has no idea profits are up $100,000 because you don't speak to them often enough. Since there are no monthly reconciliations of your books, you may not even know that you are due to profit $100,000 more for the year. Once you close your books, back up your file, and hand over the information to your accountant you wonder if you'll get that dreaded call - another dental tax surprise. Sure enough, you need to cobble together $35,000. We haven't even addressed state taxes yet but congratulations on a great year anyway. If you "clouded" your quickbooks, total reconcilation can be done in 10 days - timely data allows for speedy improvements to overhead and tax and not rearview-mirror regrets. As this snowball builds upon itself, you realize now you have to pay the first quarter's tax payment with the increased amounts based off of your increased profitability on April 15 of that year. 2011 Q4 Est. Tax Due Jan 17: $26,250 2011 Tax Surprise Due Apr 17: $35,000 2012 Q1 Est. Tax Due Apr 17: $35,000 2011 Retirement Plan Funding: $35,000 Total Due in 3-month Timespan: $126,250 Since you have become accustomed to huge tax surprises, you're likely hoarding cash in anticipation of bad news. Couples hoarding cash are like those stock-piling canned goods in bomb bunkers, waiting for some disaster around the corner, never able to enjoy the lifestyle they've worked so hard for. Eventually, this cycle of bad tax planning begins to constrict the opportunity to build wealth long-term. The ultimate failure that results from bad tax planning is the inability to save enough for retirement consistently. Sadly, your retirement fund is often an after-thought, like the last person in line at a company picnic taking what scraps remain and moving down the line a little unfulfilled. I recommend 3 key strategies to consider that will make 2012 the smoothest year ever: - Cloud your Quickbooks and get a "dental CPA". Twist their arm and make them promise you monthly reconciliations of your books and they'll communicate great ideas accordingly.
- Convert to an S-Corporation. You're on payroll now like everyone else and taxes are being withheld with every paycheck instead of lump sum payments paid quarterly. Distribution payments, taxes, and W-2 salary increases can all learn to get along with each other peacefully. Taxes still need to be managed in an S-Corp. but this is a huge step toward reducing the dreary year-end tax surprise.
- Re-evaluate your retirement plan. Figure out why 401K's are not the same and learn how to identify whether yours is an All-star or a lottery pick bust. Seek "fee-only" plans (non commission) with active management. Add a 4-6% match and profit share and you'll be amazed what you can pile away.
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