Around this time of year, a familiar headline often pops up; a theme along the lines of “Amazon Pays $0 in Taxes!” Or substitute any of the other huge companies of today – Facebook, Google, Apple … you get the point.
First of all, tax returns are confidential. Only the IRS and a handful of employees should know what a company pays (or doesn’t pay) in taxes. Any speculation about a company’s tax bill, based on its published financial statements, is just that – speculation. To get a better understanding of the corporate accounting and tax prep process, let’s take a quick peek behind the scenes.
Large corporations use a different accounting method.
Big companies, like Amazon, typically use the accrual method of accounting.
This means that they recognize income when they earn it, even though they might not receive the money until weeks or months later. Expenses are booked when incurred, and they may get paid sometime in the future.
Smaller operations often use the cash method of accounting, meaning they recognize income and expenses immediately. What do accounting methods have to do with taxes?
Taxable income will depend on the accounting method used as well as eligible deductions and tax credits. Therefore, you can’t look at a corporation’s income statement and calculate how much tax you think should have been paid, because total income shown on the statement isn’t necessarily taxable.
A tax by any other name is still a tax.
In addition to federal and state taxes, companies pay property taxes, employer taxes, and business license fees, to name a few of the expenses in this category. Even if Big Business, Inc. avoids paying the IRS, it still pays taxes, as you can see.
Finding loopholes like it’s your job.
Well, for some people, it IS their job. Large companies hire employees and outside firms to stay current on tax law and to find every legal deduction and credit available. Equipment investments, travel costs, employee compensation – these are just a few of the many expenses that companies can legitimately write off.
So, while you can’t avoid paying taxes any more than an Amazon or a Xerox, you CAN reduce your tax liability as a business owner. Here are three recommended first steps:
- Keep accurate accounting records. I’ve said it before, but I will say it again. It’s almost impossible to track your expenses by collecting receipts in your car console or in a shoe box. More importantly, if you are ever audited, you must be able to show the expense’s purpose, and that it was actually paid or incurred. Creating an effective tax strategy starts with a strong accounting system.
- Hire a qualified accountant. Unless you are an accountant yourself, or you read tax code for kicks, it’s hard to keep up with all the credits and deductions your business can take. Working with an experienced accounting professional takes the guesswork out of tax planning.
- Get a copy of my book Business Blueprint 2.0: A Guide to Starting & Running Your Business The Right Way. Chapter 5 explains accounting systems and gives an overview of the most common business deductions.