How businesses and individuals can benefit from economic downturns

Tax strategies for high earners and business owners

Every client, friend, and stranger I’ve talked to is one news story away from being totally freaked out about the economy — be it inflation or recession or the labor market or interest rates. I get it. The numbers are confusing, and many of them aren’t headed in the direction we’re used to.

You’re right to be paying more attention (while you pay more for everything else). But I want to encourage you to not spiral into worry or be immobilized by dread.  

Yes, times like these can be scary. You’re exposed to a lot of people yelling on TV. Networks and pundits and “experts” have a financial incentive to keep us fearful and divisive so we tune in and click through. There are legitimate reasons to be concerned, but they will crank your emotional dials for profit all day long.

Let’s all take a collective deep breath so we can think strategically about this moment in time.

If we can stay calm, there is massive opportunity to be found inside economic instability. The hype and fear mongering won’t go away, so let’s use it to create profit for us. And maybe even create some unity.

When our clients call us, sounding nervous, asking if they should panic buy gold, or just wanting some helpful advice, here’s what we’re telling them.

Be Encouraged by History

Economies are not always up and to the right. Disruptions (and disasters) have happened in the past. However, history shows us that when economies have the greatest downturns, savvy people have used it to their advantage.

Look at the Depression era companies that were able to stay the course but adapt to the moment. They came out of it stronger than they were at the start. That’s possible for you, too.

Am I declaring that we’re headed for a depression or recession or stagflation or hyperinflation? No. I’m not writing this article to pontificate about what state our economy is “in” or what's driving it.

Somewhere, there’s a mahogany-walled room or a Slack channel full of economists arguing about what definition to use or formula to follow in order to label this moment in time. Or whose fault it is. Ultimately, does it matter? Not really.

Let’s just you and I agree that this is not a normal time. There will be some kind of fall off from our present situation. So let's be prepared. Don't freak out. If we stay calm and strategic, we can use this moment to our advantage — just like savvy people in the past.

Advice for High Earners or Big Savers

Start looking for investment opportunities.

Don’t act just yet. Wait until we see the full direction that the economy is headed. I think it will take another 3–6 months before it’s clear(er).

Start deciding now what kind of opportunities you want when the economy improves.

Think about ideas or strategize about what you’d do in a perfect world. Ask yourself questions like: “What are my strengths? What life stage am I in? When opportunities present themselves, what kind of opportunities do I want?”

The opportunities will likely fall into two buckets: active and passive.

Active Investment Opportunities

Have you dreamed about owning a business before? Do you want to become an owner and stop working for someone else?

If owning your own business has been your dream, this economy will offer great opportunities.

In the next six months or so, assuming the economy continues to shrink, we will start seeing really good businesses enter the market. These are businesses that have good fundamentals, but they're hurting for cash flow. They'll be listed at steeply discounted rates compared to even six months ago.

Before you buy or invest, make sure the business fundamentals are strong enough to allow for a large or prolonged economic slowdown.

Passive Investment Opportunities

Do you want to find solid-but-discounted investments that 10 years from now are going to put you in a 10 times (or 100 times!) better place than you are now? Being a passive investor can do that.

Passive investments are attractive because they don’t take a bunch of your time. You’re not responsible for making all the decisions on how they grow. But those same benefits have a downside: you're entrusting your money to someone else. If it's the right person in charge: Awesome. If that person has some additional good luck: Double awesome. If it's the wrong person: It stinks and you’re poorer.

There are many passive investments out there, but the one we often suggest to our clients is real estate. It’s a limited asset; no one's making more of it. It will ride out a recession, even with significant inflation. Real property has always tracked with economic recovery. There may be a lag, but over time, real estate always exceeds inflation.

Right now, people are scared to buy property, especially in the vacation rental world, because mortgage interest rates are 7+ percent when they used to be 3 percent.

But, in another six months or so, properties will be cheaper, some of them will be a lot cheaper. So there's still a lot of potential in the market.

And there are significant tax incentives for real estate owners. Our tax professionals are experts at helping real estate investors access the hidden money inside the tax code. Those tax benefits exist regardless of what the economy is doing.

How can a CPA help individuals make investment decisions?

Every investment option has tax implications. However, not all of those tax ramifications are bad — many of them are designed for your benefit! You should be asking, “What are the tax implications of this purchase? Which investments are more tax beneficial for me?” The answer can make a huge difference in your Return on Investment (ROI). Our tax professionals can help you answer those questions.

However, the timing is critical. Most people don’t talk with one of our tax planners until after they’ve bought. When you come to us a few months before you buy, we can help you significantly, just in the way the purchase is structured. If you wait until after the purchase, the impact we can make is much more limited. Bringing us into the purchase process too late is an expensive mistake.

Advice for Business Owners

The foundational advice for owners is the same as it is for individuals: Keep calm. Maintain perspective. Look for opportunities.

As a business owner, you have short-term, midterm, and long-term goals. Your short-term goals have to be dynamic. Your midterm goals have to be adjustable. But your long-term goals should not waver, even in times of economic distress.

As you evaluate how to adapt to this moment, work backwards from your long-term goal — like when you're solving a paper maze. Starting from the finish point is the easiest approach.

Once you’ve got your eyes fixed on your long-term goal, there will be some immediate things that need your attention.

Every good business owner is trying to figure out how they are going to keep their business up and running if things get worse, and how they are going to keep their business staffed if things get better.

Start stress testing and planning for contingencies. Consider the possibilities a year from now. The economy could be:

  • great
  • at the beginning of a long downturn
  • teetering like we are now
  • or some variant of these

So how does your business stay afloat in each one of those situations? What actions can you take as an owner?

Let the airlines be a cautionary example: During COVID, they cut as much staff as they possibly could (even though they got a bunch of money from the government to avoid doing so). While that might have helped them in the short term, it quickly became a problem when business returned because they didn’t have the staff to meet demand.

Now, let me tell you a success story of a business whose demand was decimated by COVID. Not only did they survive, they thrived!

Bill’s business sets up AV systems for large events — concerts, sporting events, conferences.

When COVID brought those kinds of events to a close, his competitors immediately started cutting staff.

Bill had a very honest conversation with all of his employees, acknowledging that the company was in trouble and wasn’t going to have any revenue for a while.

If Bill kept paying everyone, the company was going to go out of business. But he also didn’t want to let his people go. So, he asked his staff to talk with their family, pray with their family, and then tell him how much of a pay cut they could take in order to help the company survive in the short term.

Nearly all employees agreed to take a significant pay cut. Only a couple chose to leave.

Bill’s company made it through eight months of zero revenue — down from multiple millions a year.

How? They acted on important questions, like:

  • How are we going to improve internal efficiencies?
  • How are we going to improve our overall service model?
  • How are we going to make our clients even happier?

Employees worked on systems and processes they previously hadn’t made the time to invest in. And once business opportunities returned, the company was ready (unlike their competitors, who had laid off all their employees).

Bill’s company took off after COVID restrictions were lifted. It jumped from number 10 or 11 in their field to the number 1 or 2. Why? Because Bill thought more empathetically about his employees and more strategically about the business.

(Bill didn't have any formal agreement that he would pay the employees their lost wages, but that’s exactly what he did with the first profits the company earned.)

That's the level of business strategy that you can do. I believe in you! You can figure out the right ways, the smart ways, the compassionate ways to make cuts, while still keeping your business fundamentals strong. When you do, this time can be a huge boon for your future.

How can a CPA help your business survive and thrive?

So many of your business activities impact your tax liability and opportunities. It can be as simple as: the more you pay in taxes, the less cash you have on hand. If you're not tax planning, you're sending more of your hard earned revenue to the government than they deserve. Making savvy tax decisions for your business can help your cash flow during stressful times. Our team of tax planners can make sure you’re paying the minimum in taxes and help you find hidden money inside the tax code.

Unity in Adversity

Maybe you’ll think I'm an idealist, but this is my article, so I’m going to say it anyway: I hope this moment helps us become more unified and stronger as a nation.

If a shrinking economy and rising inflation are here, and there’s little that you and I as individuals can do about it (other than vote), then we ought to make the most of it.

Let’s draw on the examples of history one more time: Our country has been through many difficulties. The shared sacrifice of the “greatest generation” from World War II generated a more cohesive society. Our legislators stood on the steps of the Capitol and sang the national anthem together after 9/11. History reminds us of the real potential for unity.

There will be casualties created by this economy. And while I would never wish for that pain, I pray that this experience will bring us together and make us stronger.

So here’s my bottom line advice to individuals and business owners who want to thrive on the other side of this moment in time: Stay calm.

  • Acknowledge the economy reality in front of us. We don't exactly know what's coming or for how long. Don’t deny the challenges, but don’t freak out, either.
  • Don't let fear drive your decision making. Turn down the noise coming from the TV personalities and economic gurus. They care about their ratings, not about you. Their chatter won’t help you make wise, strategic decisions. Instead, repeat this message like a mantra, write it message on a post it, or make it your lock screen: Don't let fear make the decision.
  • Look for the opportunities. Don’t be a victim. Don’t sit still. Use this moment to your advantage and respond to the opportunities that arise. You can come out better off than you are now.
  • Use every tax benefit available to you. There’s never a good time to pay the government more than you’re legally obligated to. But now is an especially bad time to leave money on the table. Take advantage of all of the tax code designed to help your business and investments thrive.

Thanks for letting me share what’s on my mind.

Mike Pine

Founding Partner, Pine & Company CPAs

Do you have more questions?

Schedule a consultation with Mike and his team today.

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