In March 1995, I started my professional accounting practice. Over the years, my partners and I have enlarged the firm through marketing and acquisitions. My most notable acquisition was that of a Phoenix-area tax practice in 2001. Earlier that year I’d been through a nasty partnership breakup with three other CPAs. Fortunately for me, about 50 percent of the clients stayed with my new partner and me, and all but one of the firm’s employees stayed with us, meaning we had more workers than work.
On top of this, later in the summer one of my former graduate students came to me looking for work. She was a good student, and I thought she’d make an excellent employee. We took the advice of Jim Collins in his excellent book, Good to Great, to put the right people on the bus and find them seats later, and despite having more workers than work, we hired her.
The end result was that we had far more people to do work than we had actual work to do. So I started looking for a practice to acquire. One day, a card came in the mail from a business broker indicating that he had a couple of practices for sale in the Phoenix area. I called the broker and soon learned that one of the practices was a good fit for us. The practice did a lot of high-end tax planning and had some high-quality clients. One of the clients was a good friend of mine, Kim Butler. Another client was Robert Kiyosaki.
I hadn’t previously heard of Robert Kiyosaki or The Rich Dad Company, but wanting to be well versed on my clients, I immediately went out and purchased his best-selling book, Rich Dad Poor Dad. I loved the book. Then I had lunch with my friend Kim Butler who I knew had been doing some work with Robert and asked her about him. She had nothing but good things to say about Robert and his organization. About the same time, I received a notice in the mail from one of my friends, George Duck, telling me that he had just changed jobs. Amazingly, his new job was CFO of The Rich Dad Company.
Was it a coincidence that all of these occurrences leading me to a great business relationship with Rich Dad happened at the same time? I don’t really know. What I do know is that I’ve learned an enormous amount about teaching, money, and the economy from Robert and Kim Kiyosaki. One of the first things I learned about was the CASHFLOW Quadrant.
What I do know is that I’ve learned an enormous amount about teaching, money, and the economy from Robert and Kim Kiyosaki. One of the first things I learned about was the CASHFLOW Quadrant.
The CASHFLOW Quadrant separates income earners into four quadrants. On the left side are the employees (E) and the self-employed individuals (S). On the right side are big business (B) and investors (I). When I first saw the diagram, my thoughts naturally went to the tax consequences (and benefits) of being in each of the quadrants. I quickly realized that those who earned their income from the left side of the quadrant pay much higher taxes than those who earn their income from the right side of the quadrant.
The reason why those on the B and I side of the quadrant pay so much less in tax than those on the E and S side has become clear to me. It’s because that’s what Congress wanted.
Over the years, since first learning about the CASHFLOW Quadrant, I’ve continued to look at the tax law and apply it to the diagram. The reason why those on the B and I side of the quadrant pay so much less in tax than those on the E and S side has become clear to me. It’s because that’s what Congress or Parliament wanted.
Think about the goals of Congress, Parliament, or any other governing body, for that matter. The government wants to encourage certain activities, and they have two ways of doing that, either by force or by policy. And, as we quoted at the beginning of the chapter, it was the great economist Milton Friedman who said, “If you want more of something, subsidize it.” The easiest and most efficient way to subsidize something is through the tax law. Over the years it’s not only become easier to subsidize through the tax law but it’s also become the way a government steers the country’s economic behavior, as shown in Rule #5.
| RULE #5: | The tax law is a series of incentives for entrepreneurs and investors. |
So what does the government want? First, they want to create more jobs. Who creates jobs? Entrepreneurs. Therefore, entrepreneurs get all sorts of tax breaks that act as subsidies to encourage job creation. What else does the government want? Affordable housing. Real estate investors get all sorts of tax breaks that act as subsidies to encourage building of affordable housing.
Sometimes governments make the mistake of thinking they can create jobs or build housing better than the free market. Eventually, they realize that the market does a better job. And it costs the government a lot less to give tax benefits to business owners and investors than it does to add jobs or build housing through government-sponsored programs.
It is because of these goals that government gives entrepreneurs and investors all the tax breaks they get. Governments even get more specific about the types of investing and jobs they want the market to create by giving specific tax breaks for oil and gas investing, farming and other agriculture, green energy, and low-income housing.
| Don’t Start a Business Just for the Tax Benefits | |
| 1. | To get tax benefits, the business must be real and intend to make a profit. |
| 2. | Paying taxes is less expensive than failing at business. Be sure to get educated before you begin. |
It’s not really that those on the E and S side of the CASHFLOW Quadrant are punished. They just don’t get the rewards (i.e., subsidies) that are given to those on the B and I side of the quadrant. If you want to know what the government wants to see happen in your country, take a look at the tax law. Where are all of the incentives going? That’s where the government wants you to put your money and your effort. That’s why I say it’s more patriotic to arrange your affairs to pay less in taxes. When you do so, you’re actually doing what the government wants you to do: creating jobs, building housing and other useful buildings, and producing food and energy.
It’s not really that those on the E and S side of the CASHFLOW Quadrant are punished. They just don’t get the rewards (i.e. subsidies) that are given to those on the B and I side of the quadrant.
There is even more good news for entrepreneurs and investors. When you follow the government’s rules in order to get your tax benefits, you also receive other benefits and make more money. Let me share an example of this.
A new client of mine was very anxious to reduce his income taxes. I’d already told him that any expense could be deductible, given the right situation. He and his wife were huge fans of New Mexico because of its serene beauty, and they traveled there often. Since they traveled to New Mexico so frequently, my client wanted to use their travel as a tax deduction. I explained that he had to make the travel relate to his business in order to make it deductible under the law.
He was very excited the next time I saw him. I could tell he had a story for me. He explained that he and his wife took a trip to New Mexico and that since they wanted to deduct the travel, they spent much of their time looking for real estate deals—and they found one. In fact, this real estate deal was so good that he expected it would net him over $1 million before taxes. While he was excited about the $3,000 in taxes he was going to save because he turned his travel into a tax-deductible business trip, he was even more excited about the $1 million he was going to make from the deal!
| TAX TIP: |
Put your family to work. Make your business a family business. Then when you travel for business, your family’s travel is deductible.
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