Paying Taxes Isn't Always a Bad Thing...
- Published on February 24, 2016
Uh oh… it’s that time of year again… so grab your checkbooks and get prepared to write it out to “Uncle Sam!” Taxes may bring grumbling and stress to the business owner, but I am going to try to shed a little positive light on your payment of taxes. I would like to mention some things to avoid that may hurt you in the long run, not necessarily legally, but also in your business’s general standing. The first thing to acknowledge and grasp is as Benjamin Franklin once said: the two things that are certain in life, taxes being one of them. To do business in this country, taxes are inevitable. However, this being said, you have every right in the world to legitimately minimize your tax payment through maximizing your deductions. All BUSINESS related expenses that you accumulated can go right down on your tax form- and you should make sure you deduct as much as you appropriately can. That is why we hire the experts, and why you pay your CPA good dollars.
What I am NOT in favor of is the so-called “creative accounting,” or whatever other term you want to sneak by. If you legitimately owe taxes on your business’s income, it is your legal obligation to pay that. A classic example to avoid this is “I am just going to show zero profits!” The downside: a business that profits nicely for its owners is considered a healthy businesses. When seeking equity or debt, whether from private money or a loan service, the qualifiers will definitely want to see some proof that you can make the covenant. Why go down the path of personally guaranteeing a loan, when your business’s profits could easily have been enough for the banker’s approval? Additionally, what about your exit strategy? What if you wish to enter retirement soon, or have thoughts about selling? You would want the enterprise value of your company to be high as possible, and to show proof on your financial statements that you are a healthy, well-run business. A business that never shows a profit will have a hard time qualifying why someone else should pay $$$ to purchase this business. For more tips on an exit strategy, please see my article on getting ready to transition your business at:https://www.linkedin.com/pulse/concerns-challenges-family-owned-businesses-part-2-cynthia-alloway?trk=mp-reader-card
To go even further, let us just suppose that your business has consistently shown losses for several years. The IRS can actually then reclassify your business as a hobby. The IRS will look at several factors before determining this, but ultimately can bestow the “hobby” title, which prevents you from taking any future losses. This has some serious consequences that can result in more financial pain than if you had just paid your taxes. A key point on this subject is how the IRS will check your profit motive- if you are clearly attempting to make profits you will not receive this classification. If it is apparent you are attempting to reduce your payments… then your business will become your “hobby.”
For more on this, please see this great article: https://turbotax.intuit.com/tax-tools/tax-tips/Small-Business-Taxes/When-the-IRS-Classifies-Your-Business-as-a-Hobby/INF22852.html
As a general reminder, drawing money from your business account does NOT count as an expense. Equity distributions do not lower the profits of a business. Many business owners incorrectly classify these payments as expenses and then are shocked at the end of the year when their profits (and taxes) are much higher than they anticipated.
Common Sense Business Solutions can provide hands on training in learning to understand financial statements and utilize them as a diagnostic and management tool to identify problem areas and run your business as profitably as possible. We are located in Valrico, FL, and have been providing services to the Tampa Bay Area for over 23 years.