Tax for Entrepreneurs: Myths, Realities, and Smart Decisions

For entrepreneurs, tax season often feels like a delicate balancing act between minimizing liabilities and maintaining the business’s health. In a recent episode of Profitability Playbook: The Simple Numbers Podcast, hosts Mike Maxson and Brandon Gray tackled this complex topic head-on, offering practical insights and debunking common myths.

Tax Is Not a Strategy — Profit Is

One of the most important takeaways from the discussion: tax is not a strategy; it’s a result of profitability. Your focus should be on building a strong, profitable business first. Taxes come later as a consequence of success. As Brandon put it, “If our clients spent as much time generating profit as they  did minimizing taxes, they’d make twice as much.”

Tax Deferral vs. Tax Savings

A recurring misconception is confusing tax deferral with tax savings. Buying a new truck or funding a retirement plan may reduce your tax bill this year, but in most cases, you’re simply deferring taxes, not eliminating them. For example,

·      Accelerated depreciation on equipment lowers taxable income now, but when you sell that asset, depreciation recapture can create a future tax liability.

·      Retirement contributions defer taxes until withdrawal — often decades later.

Before making big purchases or contributions, ask: Do I need this for my business, or am I spending a dollar to save 40 cents?

Retirement Plans: A Double-Edged Sword for Entrepreneurs

Retirement plans are often touted as a smart tax strategy, but for entrepreneurs, they require a different lens. While contributing to a 401(k) or pension plan can reduce taxable income in the current year, it’s important to remember this is tax deferral — not tax savings. You’ll pay taxes later when you withdraw the funds.

Before maxing out contributions, ask yourself:

·      Is this the best place to invest? Entrepreneurs have a unique advantage: the ability to reinvest in their own business, often earning returns of 45–55% compared to the 10–15% typical in retirement accounts.

·      Will this limit your cash flow? Locking up funds in a retirement plan can restrict your ability to invest in marketing, operations, or growth initiatives that could yield higher returns now.

Retirement plans are valuable for diversification and long-term security, but don’t let tax deferral overshadow opportunities to reinvest in your business. Make decisions based on overall financial strategy, not just tax benefits.

Common Myths and Missteps

·      “Everything I spend is deductible.” Not true. Principal debt payments aren’t deductible, and not all purchases qualify for immediate write-offs.

·      “Buying land reduces taxes.” Land doesn’t depreciate, so there’s no deduction.

·      “Moving into a higher tax bracket means all income is taxed at that rate.” Tax brackets are graduated; only income above the threshold is taxed at the higher rate.

Taxes are complex, and making decisions without understanding their implications can result in unintended consequences. Consult your tax advisor if you’re unsure of a decision’s tax implications.

The Augusta Rule

One lesser-known tax strategy is the Augusta Rule, which allows homeowners to rent their primary residence for up to 14 days without reporting income. If you host company events at home, this could be a legitimate deduction — provided you follow IRS guidelines and document fair market value.

Smart Moves Before Year-End

For entrepreneurs on a cash basis, timing matters:

·      Consider running bonuses or commissions before year-end to capture deductions.

·      Evaluate state pass-through entity tax payments for potential benefits.

·      Review inventory and write off obsolete stock.

·      For accrual-basis businesses, clean up receivables and bad debt.

The Bottom Line

Don’t let tax planning overshadow profitability. The best entrepreneurs prioritize building a healthy, cash-generating business and then manage tax implications strategically. As Mike summed up, “Focus on making money first. Taxes are just part of the game.”

Ready to take control of your tax strategy and boost profitability? Visit our website to access resources, tools, and guidance designed for entrepreneurs and small business owners, or contact us to get started.