When minimizing your taxes costs you the loan

If you are self-employed and doing well, there is a version of tax season that feels like a win and turns into a problem 18 months later: the return that shows almost no income. It saves you money in April. Then you apply for a mortgage, and the lender reads that same return and sees someone who does not earn enough to qualify.

Before bookkeeping became the whole job, I spent years as a licensed loan officer. I have looked at literally thousands of tax returns, hundreds and hundreds of them belonging to self-employed people. This is the pattern I watched play out over and over, and almost nobody sees it coming.

Your CPA is doing exactly what you asked

Start here, because this is not a story about a CPA making a mistake. A CPA’s job is usually to minimize your tax burden. That is the assignment, they are good at it, and most of the time it is the right assignment.

But minimizing your tax burden means minimizing the money you show making. And the money you show making is the money a lender counts.

So if you are self-employed, and especially if you are the only income in your household, the strategy that wins in April is the same strategy that can disqualify you in September. You might not be eligible for a mortgage simply because, on paper, you do not have any income. Even though you are doing well. Even though you know you are doing well.

Your CPA was optimizing for the goal they were given. The gap is that nobody told them about the house.

The same trap, at sale

The other version costs more.

Say you have built this business and you want to sell it in a few years. A buyer values your business largely on what your books say it earns. Years of minimizing your reported profit puts a little bit more money in your pocket today, and it potentially undervalues your business at the moment you cash out.

That trade might still be worth it. Sometimes it is. The point is that it should be a decision, not a surprise. Right now, for a lot of owners, it is a surprise.

Buying with cash vs. buying on credit

There are certainly situations where buying things with cash makes sense. There are very much situations where buying things on credit makes a lot of sense.

Which one is right for you depends on where you are going. That is not a tax question or a bookkeeping question by itself. It is both, and it only gets answered well when your books are in line and someone knows your plan.

The fix is a sentence

Here is the whole solution, and it costs nothing.

Talk to the professionals in your life about what your goals are.

• Make sure your CPA knows: “I want to sell this business in 5 years.”
• Make sure your bookkeeper knows: “I want to buy a second location in 2 years.”
• Make sure both know: “We are applying for a mortgage next spring.”

Your goals matter, and how you align your tax strategy with your goals is imperative. A good CPA given a real goal will build a different plan than a CPA given no goal at all. A bookkeeper who knows you want to borrow in 18 months keeps your books in a shape a lender can read.

What is your 2 year plan? Your 5 year plan? Your 10 year plan? Those answers absolutely matter to your tax strategy, and they are worth more than any single April.

Where the books come in

None of this works on messy records. If your books are approximately true, nobody can build a strategy on them, and a lender will find the soft spots.

Properly having your books in line does 2 things at once. It gives your CPA accurate numbers to plan from, and it gives you a picture of your business honest enough to know what you can afford and when. Then the conversation stops being “how little can we show this year” and starts being “what are we building, and what does the plan need to look like.”

I do not prepare taxes. I keep the books that your tax strategy gets built on, and I am happy to be in the room with your CPA when you tell them where you are going.