Adventures with lyrical - buying a business
- Thread starter Shonuff
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You are correct, it"s not always better. But it"s also not always better to be debt free. In your previous post, you mentioned clients buying things they didn"t need. Well, of course then that"s a waste of money.OneofOne said:
However, given a choice of paying Uncle Sam more of your money for taxes, so it can go to God-knows-what pork barrel project, vs. using that same money and expanding your business.....well, the latter choice is often the better route. You can often buy hard assets also (equipment, office buildings, etc), which can have sustained value.
Again, it depends on the individual situation. Look at Cutlery"s example of a 30% tax bill on $500,000 (so $150,000) vs 50% tax bill on $1,000,000 (so $500,000).
In the first example, you would take home $350,000, and pay $150,000 in taxes. In the second, you would take home $500,000, and pay $500,000 in taxes. (The difference in taxes is $350,000).
You might say "well, isn"t it better to take home $500,000 vs $350,000"? Sure, in a basic sense. However, if you had spent that $350,000 difference in taxes on your business......how much better off might you be? What if you increased your employee"s salaries with it so they work harder and/or stay loyal to your company? What if you used it to purchase an office building so you don"t have to be a slave to a lease anymore and you can build equity on that property just like you would your house? Maybe you could even rent out space and make money!
So even though you think you would make more had you taken home $500,000 instead of $350,000.....in actuality you might have made more money long term had you invested more money into your business. Again, it all depends on what you are spending money on. Make smart investments to expand your business, not "buy shit they don"t need".
Also, once you get into making serious money, you will find the difference between something like $500,000 and $350,000 isn"t that great. Honestly, how much money do you need to live well? Above a certain point it"s all gravy, unless you are one of these Chad Johnson idiots that buys a $300,000 car without knowing when their next paycheck is coming. I"m already putting away like 60-70% of my income towards retirement. If I took home any more money, it"s just going to go towards retirement, ie. investments.....so why not invest more in my companies and my employees?
EDIT: and just to address your own example:
Because now you have another work vehicle and hopefully you"ve done the research to see how much that car will expand your business. Hopefully this work vehicle will increase your overall revenue, maybe you will even hire another employee to drive this vehicle. So not only did you save a little on taxes, but you will be increasing your future earnings.....and isn"t that better than giving that same money to the government?OneofOne said:
I"m not sure where you got from my post that I said to spend money just for the sake of lowering your tax bill. Maybe I should clarify.OneofOne said:
I am saying spend money wherever reasonably possible to invest in your business. Like I said, my CPA says I should spend "X" dollars on my business, I find ways to spend "X" dollars. I don"t spend "X" dollars on frivolous things. I am not advocating spending "X" dollars for the sake of spending.....but I can tell you that I have NO problem finding reasonable ways to spend money on expanding the business or creating a new opportunity.
Not everything I spend money on turns out to be a good investment or choice. God knows I"ve made some horrible business decisions. But owning and running a business involves risk, and growing a business even more so. I could definitely take home more money if I didn"t keep putting so much back in, but maybe that"s how I"m just wired. So I firmly believe putting money back into the business, even it it means carrying debt to do so, is better than giving that same money over to the government, or even putting a little more into my own pocket, for that matter. You are right it"s not always the wisest choice, risk, financial risk, is involved, and sometimes I miss horribly. However, I have had more success than failure, and I don"t know anybody who was able to build a successful business without occasionally failing. For me, that involves lowering my tax burden as much as possible while expanding my businesses.
I see now, I guess my wording is poor and I"m not getting my point across.OneofOne said:
What you have to understand is I would spend money on my business in any case. I would spend "Y" dollars for example if I didn"t know where I stood with my revenue, etc.
So my CPA calculates it every quarter, and then let"s me know what he feels the optimal amount to spend is....his "X". I just follow that because I trust his judgement when it comes to my money.
Even if I didn"t have him, I would be investing in my business and lowering my tax bill, I just wouldn"t have a target amount. It"s nice to know what number to hit because if it I didn"t know, I could end up over-spending with decreasing returns on my tax savings, or I might not spend enough to take advantage of my tax savings.
So in a sense, I"m guilty as charged, because I do try to optimize the amount I spend on my business to reduce my tax burden, and I would advise others to do the same. However, I won"t spend money just to spend it. It does have to go into something I think will benefit the business. However, I can tell you it is very rare when I don"t want to spend more than what my CPA suggests. If anything, he talks me out of expanding too quickly and to spread out my depreciations and expenses in a more even, steady manner.
Let me ask you OneonOne....do you own your own business? If so, how much do you like to reinvest into your business, or how do you go about determining how much to put back into the business? Is there a certain formula you like to use, or are you like me and you rely on someone else like your CPA to guide you? Does the amount of corporate taxes you pay affect how much you decide to reinvest in your business?
I don"t see a problem with people like Izuldan and Lyrical who reinvest a tax-optimal amount in their business, even if I disagree with their views on government. I only have an issue with people like krinkled that start a money-losing business on paper for the sole intent of tax reduction, and peor that do shit like buy a plot of land, leave it fallow, and apply for agriculture subsidies.
I hate it when people talk about people losing money for tax reasons. Does this actually happen? What kind of a retard would want to lose a million dollars to save 300,000 in taxes? You don"t get farm subsidies if you don"t plant anything. I think you are protesting things that don"t actually happen.Evelys said:
ToeMissile
Pronouns: zie/zhem/zer
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I had a teacher in HS who would talk about she and her husband would make sure that her husbands plumbing business showed a loss so they"d pay fewer taxes.Brutul Tarew Marr said:
Shonuff
Mr. Poopybutthole
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I"ve known auto dealers to engage in LIFO accounting manipulations to make their profit go away. At the end of the year, they write down a good portion of their inventory as worthless. A friend of mine showed me his monthly financials, he had earned 770k November YTD, and in December his YTD profit was -80,000. Its easy to do when you have 9-10 million in inventory. He wrote down almost a million in profit every year like this.Brutul Tarew Marr said:
The catch-22 is that inventory inflates in price every year, and since you are using LIFO, you had a larger and larger tax liability. Some guys had a LIFO pool that was five to ten million.
The reality is I"ve known hundreds of entrepeneurs, and NONE of them paid what their tax bill was. Whether it was from complex LIFO manipulations (complex enough that they had to have a Controller manage them) or just taking cash from the drawer and not logging the sales data, it is done in 100% of businesses.
Agree with it or not, but businesspeople don"t like the government taking a % of their action. I might be in grey areas, but I"m not that guy that is falsifying personal receipts as business ones. I"ve seen guys buy their daughters wedding dresses for 20k, and then have their vendor falsify the 20k as uniforms. I know another guy who owns a cleaning company that works with an NFL team, he has three or four homes around the country, his wife and kids are in BMW"s, and he"s never shown a profit in four decades in business. The IRS for some reason doesn"t seem to look at assets. If a guy is living in a million dollar house and drives a Bentley, but is showing a loss for ten years, they should be targeting him for an audit.
I sleep well at night, because we don"t get nuts. The reality is that when you own your own business, you pay whatever taxes you want.
Shonuff
Mr. Poopybutthole
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This thread is about maximizing cash flow, not politics. No one wants to pay taxes, regardless of political affiliation. I"ve known businesspeople who are both conservative and liberal, and they all duck taxes equally.TheCutlery said:
I guarantee if you had to kick back the government 50% of your action, you wouldn"t want to do it. I shit my pants after my first year in business, at my tax bill. It can creep up on you fast if you don"t watch it. My first year in business, we made 305k net profit, and I hadn"t planned on that contingency. I was more concerned with making sure our customers were happy and doing the job right. I should have done more planning, then to wake up Dec 15th and realize I had this huge tax liability. Live and learn.
I guess the point of where this thread is going right now is tax avoidance vs. tax evasion. Avoidance involves proper planning with your CPA, to legally reduce your liability. Evasion is illegal. At the very least, you better be doing the first, or the government will ass-rape you.
001001102
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Bro, sorry for the quick tangent in your thread. This is one of the reasons why I believe we"ll never truly adopt (or maybe part of why I believe it"s probably a bad idea to move entirely to) an IFRS-based accounting system. IFRS doesn"t allow the use of LIFO for inventory valuation, and there are companies with massive LIFO reserves that would be crippled by the burden of paying the taxes they avoided by establishing those reserves.Lyrical said:
Thanks for the answers, and I feel most business people behave as you do, as in they only expand their business when they feel it"s right, and they don"t really pay much attention to their tax or interest rates. I know I"m probably more of an outlier as far as being so anal about reducing my tax burden, although I will say most of the more successful business people I know behave more like I do. I also don"t want to politicize this thread, but I want to mention that because most small business owners don"t fret over their interest rates, this whole notion that lowering the interest rates a small amount (or keeping interest rates low with all this quantitative easing) will somehow stimulate small businesses is ludicrous, for the reasons you mentioned. You won"t get a loan to expand your business because the interest rate went from 3.24% to 3.15%. You will expand your business because you feel like you"re ready and the economy is looking like it will accommodate your growth.OneofOne said:
And I think Lyrical made an important distinction between tax avoidance and tax evasion. Like him, I see people cheating on their taxes all the time, regardless if they are a small business owner or just your average Joe salaried employee, it"s just a degree of scale. No one likes to pay taxes, especially at a 50% rate. I"m all for trying to minimize one"s taxable income, but not through illegal means. I may decrease my taxable income through my business, but I"m at least expanding my business legally. I feel this is more ethical than say, a waitress who "forgets" to declare all her tips and ends up paying less taxes because she"s not giving a true picture of her income. I will say though that if you do have a small business, definitely have an outside person or firm handle all your taxes and auditing. This way it will be more transparent to both the IRS and yourself. It will also remove any temptation, subconscious or not, to do some "funny math".
Shonuff
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A friend of mine owes $10 million in his LIFO pool on a business he might sell in it"s entirety for 5m. So he"ll owe 5 million to the IRS when he sells. Some years when inventory is hard to get, he can"t sell anything in the last two months, because the tax ramifications of doing so are higher than selling that inventory at full price. It is all his own fault though. He never paid any of his liability down over decades of business. He"d be screwed if LIFO wasn"t allowed under the tax code.001001102 said:
The real issue is that no one watches the writedowns, and compares them to what the inventory actually sold for. You can"t write up inventory after its been written down. So the monthly activity for a business like this is a huge writedown in December, followed by huge profit months when the inventory sells for its real and not deflated price. It"s not rocket science what is going on here, but almost everyone I know with inventory does it.
Shonuff
Mr. Poopybutthole
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I feel like you are talking about two different things. I believe in reinvesting. My first year was awesome, but the second year not so awesome. The industry started growing, so lots of other companies popped up out of nowhere. People couldn"t tell the established companies from the non-established ones. Had I reinvested in better equipment and more advertising, I could have dodged the pain in the second year.Izuldan said:
But not all the things I can do to lower my tax burden will be beneficial. I have two big trucks that expensive, one is 50k, the other is custom modded at 110k. They should last ten more years. We don"t need to buy any new ones, they would just sit there. I"ve seen people go out and buy BMW"s in December just to lower their tax burden, when they already have enough cars.
I try to lower my taxes, but if I owe, I owe. I"m not going to go drop 70k in a year on stuff I don"t need just to say I didn"t pay taxes.