For some doctors it feels like they are on a different planet as their accountant and advisor. One of the reasons for this feeling is because the business owner lives in the cash world and accountants live in the tax world. Let us take a look at these two related but different worlds.
In the cash world the only things that matter are the amount of money in the bank, the amount of money we are going to receive and the amount of money we are going to have to pay. A business owner needs to make sure there is enough cash in the account to pay for the things that come up and to make rent and meet payroll. Business owners are very happy in this world because it is simple and it makes sense.
Then along comes the accountant and she starts talking gibberish and complicates things. She starts talking about depreciation, liabilities, non-deductibles and 50% deductibles. None of this makes sense or is at all intuitive, however it is important to explore.
In the tax world we have income and expenses. The important thing to understand is that income is usually cash, but not all cash is considered income. For example if a business owner borrows money from the bank then the business has more cash, but does not have more income. The money has to be paid back to the bank, so that money is a liability. By itself, borrowing money and paying money back has nothing to do with income and expenses.
Another reason for the difference is when things are not fully deductible. The business owner paid $200 for the business meal, but their tax return will only show a $100 deduction for the expense because it is only 50% deductible.
These things create a difference between cash and taxable income. Once a difference has been created the business owner and the accountant are now on different worlds.
When you talk to your accountant about strategy and planning for your business make sure you understand their tax world and demand that they make sure things make sense for you in your cash world.