Ep. 247 Why Brick-and-Mortar Retailers Shouldn’t Avoid Profit Because of Taxes
When you’re running a brick-and-mortar business, there’s a fear you probably didn’t expect to have, thanks to taxes: the fear of making more profit. Avoiding profit is not the best financial strategy, and it can actually hurt your business both short-term and long-term.
While I’m going to share WHY this is, I want to also remind you to consult your CPA, financial advisor, and/or bookkeeper for clarification on if you can use this for your business and financial situation.
Alright, here’s why you shouldn’t avoid profit because of taxes as a brick-and-mortar retailer:
Why Do Retailers Fear Taxes?
It’s completely understandable why taxes feel overwhelming as a retailer, especially if you’re a small shop owner doing it all by yourself—or even if you’re relying on ONLY a bookkeeper for guidance.
Most store and small business owners don’t have the budget for a CFO, which means you have to learn how to be your own CFO. But, when it comes to paying taxes, you may have heard myths like:
- “Making more money will push me into a higher tax bracket, and I’ll lose money.”
- “I should write off as much as possible to avoid taxes—even if that means unnecessary spending.”
- “It’s better to show lower profits to the IRS, so I don’t owe much.”
But, here’s the truth: Taxes are just a percentage of your profit, and keeping more money—even after taxes—is sometimes better than making less money.
Navigating Tax Brackets and Why They’re Not as Bad as You Think
One of the biggest misconceptions about tax brackets is the idea that if you earn more, you’ll be moved into a higher tax bracket—and suddenly, you’ll owe an insane amount of money. But that’s not how it works.
The U.S. tax system is progressive, which means you’re only taxed at higher rates on the portion of income that falls into each bracket. For example, if the first $40,000 of income is taxed at 12%, and anything above that is taxed at 22%, that doesn’t mean all of your income is taxed at 22%, just the portion that exceeds $40,000.
So, even if your store goes from making $60,000 to $80,000, you’ll still keep most of that additional $20,000 after taxes.
The Right Approach: Profit is Power
Instead of fearing taxes, shift your mindset—profit is power. With profit, you can:
- Invest in new inventory that will drive real sales.
- Improve your in-store experience to attract more customers WHEN needed, not just because you want to save on taxes.
- Save for expansion or emergencies.
- Pay yourself and your team better.
One of the best ways to handle taxes is to set aside a percentage of your profits throughout the year—in fact, it’s often required as you’ll be need to make estimated tax payments each quarter—rather than being surprised in April.
This way, you don’t have to scramble when tax season hits. The exact percentage to set aside will depend on your business; consult your CPA!
What to Do Instead of Avoiding Profits in Your Business
If you find yourself thinking, “I don’t want to make too much because of taxes,” here’s what you should do instead:
#1. Work with a Tax Professional
Don’t just talk to an accountant once a year—have quarterly check-ins so you can plan ahead and take advantage of legitimate tax deductions. While discussing with your partner/spouse is a great idea, also work with a professional for additional guidance.
#2. Reinvest Strategically
Instead of spending more just to avoid taxes, reinvest in areas that drive revenue, like improving your website and in-store experience, launching a marketing campaign, and training your employees to sell more effectively.
#3. Use Tax-Advantaged Accounts
Consider putting extra profits into a business emergency fund to prepare for slower months, and if you have more to spare, then a retirement account (SEP IRA, Solo 401(k))—this reduces taxable income while helping you save for the future.
#4. Set Aside a Percentage for Taxes
There’s no 100% tax bracket; you always come out ahead! A good rule of thumb is to set aside 20-30% of your profit for taxes. That way, when it’s time to pay, you’re prepared.
What Happens When You Follow Unrealistic Tax Strategies
There’s tax advice that gets passed down from generation to generation, and it’s not the best advice. In fact, some of the advice you hear can be causing you to LIMIT your business and your potential.
Here are some of the most common limits that result from not-so-great advice:
- Reduces the amount of retained earnings available for scaling your business or pursuing larger investments.
- Lowers your business valuation as buyers and investors look for your profitability—which you’ve reduced.
- Limits access to financing as banks and lenders assess profitability when deciding whether to grant loans or credit lines.
- Missed opportunities for personal wealth building through dividends, investments, or retirement funds.
- Intentionally under-reporting or overly minimizing profit without justifiable business expenses can lead to audits or penalties from the IRS.
The Balance: Optimizing Profit and Taxes
Entrepreneurs have to walk a fine line—on one hand, you want to minimize taxes, but on the other, you need to show enough profit to keep growing and to be seen as a legitimate, healthy business.
Working with a tax advisor and a financial planner is crucial to developing strategies that achieve both goals by allowing you to take full advantage of deductions, look into ways to defer taxes, and focus on building a strong, long-lasting business.
Ultimately, the decision depends on your long-term vision for your business—whether you want to prioritize short-term tax savings or long-term profitability and scalability. The bottom line is that avoiding profit because of taxes shouldn’t be a blanket strategy.
Taxes are a part of success—whether we like it or not. But remember, if you’re paying more in taxes, it’s because you’re making more money. And that IS a good thing.
