Another year, another amazing time at DCBKK meeting all types of entrepreneurs building cool businesses. I often find that I have some of my most interesting conversations over meals – and this year was no different.
On Sunday, between breakout sessions and listening to speakers, I was sitting next to one of our esteemed speakers Nathan Barry at lunch.
He told me, he’d heard from a fellow entrepreneur, about a tax credit for companies that allowed for a significant ‘deduction’. It was originally created for manufacturers but, after further digging, it seems equally applicable to companies building software that fall under the category of ‘Qualified Domestic Production Deduction‘ on form 8903.
Although I haven’t talked with anyone currently implementing this strategy, it certainly looks interesting.
All of this got me thinking: how important is it to be paying attention to tax saving strategies?
Often, in the community of small business owners and entrepreneurs, we spend the majority of our time and resources mining for revenue and building businesses. In general, most of the entrepreneurs I meet are probably over-optimizing their business and under-optimizing the amount of money that actually makes it to their personal bank account. I would include myself in this category.
Why is it hard to maximize the amount of money that hits your personal bank account?
Mostly I attribute it to incentivization and resources.
I would venture to guess that, some years, my accountant makes more money from me than he saves me. He is not paid based on performance but, rather, a yearly retainer. Maybe a good accountant should be like a good doctor: not only practicing but also diligently researching the newest laws, regulations and best methods. Unfortunately, it seems this is the exception rather than the rule. A lot of CPAs are simply filing returns, and singing off on company financials, without giving them much attention with regard to tax optimization.
Nathan told me something else – he recently switched accounting firms to one that is working with other software companies. This makes sense to me. Your accountant should probably be well versed in your industry, or focused on a niche. Like anything else, it’s impossible to be an expert in everything. You don’t go to a general practitioner if you have a major heart problem. So, why go to a general accountant to help with expat taxes, for example? The US tax code is one of the most complex in the world. It’s understandable that your accountant might not be optimizing for your business if they aren’t familiar with your niche.
I have more questions than answers about how to surround yourself with the best accountants and financial thinkers. But one idea I’d like to put out there for entrepreneurs is that they form small groups to share the costs and hire a full time CFO and Accountant. This would mostly be for companies that are somewhere between 1-5M in revenue, are in a similar niche and at a stage before most can afford to hire these positions full time. By pooling resources I think it might be possible to get more, say 20%, of an Accountant’s attention than I probably currently achieve, which I would estimate to be around 1%. The cost would be higher but, if they are specialized and well experienced in your niche, I think they may be able to make it worth the added expense by what they save you.
Surrounding yourself with good financial advice is much harder than it sounds. The information, and different views, about tax optimization can be confusing, and sometimes contradictory.
This post is probably no different :)
One step I’m taking this week is to have another accounting firm audit my previous tax returns and look for any efficiencies that may have been overlooked. Continuing with the doctor metaphor, a second opinion doesn’t cost much and could save you a lot of pain.