This article are provided for information purposes only, and are not intended as legal advice.


Business dilemma – banking needs vs minimization of income taxes

April 23rd, 2009

It is tax time of year for many people and everyone hates to pay taxes.  Many people try to deduct as many expenses as possible to reduce the corporate income taxes that they owe.  Then they decide to go to the bank and get a bank loan, the bank says that there are no profits therefore we cannot lend you any money.  You can explain that you have put through some discretionary expenses but they look at what you have recorded not what you have explained to them.  You may have avoided income taxes, but you may now have violated your banking covenants or you may prevent your company from getting a bank loan.

 

There is a happy medium between paying taxes and cash flow and profits which your bank needs to see.  You must be the one to determine what that magic number is.  it may be different for every company. Remember, many people will do anything to avoid paying taxes.  I have seen people spend money on things they did not need to save taxes.  If you spend $1,000 for something that you did not need, you may have saved anywhere from $200 to $500 in taxes depending in what country you are located. But that also means that if you did not spend $1,000 on something that you did not need, you would still have $500 to $800 in your company after taxes if you did not buy something you did not need.  If you have a mortgage on a property, the principal is repaid from profits, not from pretax income.  How can you pay down a mortgage and your debt if you do not show profits? 

 

Unfortunately, death and taxes cannot be avoided.  You can still do corporate tax planning to minimize taxes but you still need profits to be able to run a healthy company and not run it from week to week hoping that you will have enough money to pay the bills.


Filed under: Business strategies — Gary Landa @ 8:01 am


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