If you have a business — even a very small business — or if you have investments, you should have an accountant.
It’s not just about taxes. Every year, the accountant will help you figure out your net worth. If you started as a teenager and now you’re middle-aged, just crunching those numbers will give you a much better sense of how far you’ve come and how much further you have to go than looking at old tax forms.
Your net worth is not just a number on a spreadsheet; it’s also a guide for how much risk to take and how to live your life. More specifically, if your net worth is positive — that is, if the total value of everything you own exceeds the total value of all your debts — then you can afford to lose money without going broke. You can afford to be wrong. That’s the time when taking risks is likeliest to pay off; it’s also when we’re most afraid to take them.
When I was in my early 20s I thought I knew pretty much everything about money and investing that mattered: which mutual funds were best and why, what the market was going to do next week and next year, and so on.
The reason it is important to have an accountant is that you probably aren’t good at keeping track of your money.
The evidence for this is simple: you aren’t rich. The corollary is also true: if you want to get rich, you should start keeping better track of your money.
Why do you need an accountant? Don’t they just count beans, make sure the numbers are there? Why would an intelligent person want that?
The answer is that an accountant will save you money. You will pay your accountant A LOT less than you pay in taxes every year. And the tax savings are just the beginning of the benefits.
The best way to understand why you need an accountant is to understand what your accountant does for you.
When I was starting my first business, I called an accountant. It seemed to me that he would just do the paperwork, but in fact that is only a small part of what accountants are for.
He was surprised that I didn’t know what complicated things were involved. He told me about depreciation, for example. There are many reasons why a business needs depreciation, but the most important is tax planning: it is better to take an expense in the current year rather than delay it to a future year. A lot of people find this surprising, because they think of depreciation as purely an accounting matter. They are wrong; it is tax planning too.
Accountants also know when you should buy equipment instead of leasing it, when you should buy your building instead of renting it, how to value inventory and accounts receivable, when you should merge your company into another one or form a strategic alliance with it–things like that.
The main reason I needed an accountant was so he could help me plan for taxes. But there were other reasons too:
An accountant can’t tell you how to run your business.
But an accountant can look over your records and point out things that might otherwise have escaped your notice, such as:
You own a subsidiary company in the Cayman Islands.
You made $10,000 last month, but you still can’t pay this month’s rent.
You have stocks worth $1 million, but you haven’t looked at them for six years.
You bought 100 shares of Microsoft in 1995 for $1,000. They are now worth $5 each. You own 1% of Microsoft.
If you have a job, you probably have an employer who handles most of the paperwork for you. Paychecks, W-2s, and 1099s just appear magically in your bank account at tax time.
It is not my purpose here to argue for or against any particular tax policy. But I do think it is important to understand the economics of taxation, because economic decisions are affected by taxes in ways that are often not being taken into account.
People do not have an intuitive understanding of how taxes work, but I have never met anyone who does not have opinions about them. A rational opinion about taxes requires an understanding of what they are, how they work, and what they are good for.
What are taxes? Taxes are mostly payment for services—specifically, for four services: protection, infrastructure, law enforcement, and the judicial system that enforces the laws. Let’s look at each service individually.