As business owners, we all know owning a business is not about how much money we make, but it’s about how much money we take home. Realize it or not, we all have an unwanted, silent partner in our business taking a large percentage of the profits….taxes.
Most business owners do not want to pay any more in taxes than is absolutely necessary. As Business Brokers and business owners, we understand this very well, however the issue is some business owners choose to hide profits. These are examples of a few of the more common strategies:
- Not reporting revenue
- Running personal owner/family expenses through the business
- Having non-working family members on the payroll
What is the real cost of these strategies? Let’s look at a company making $300,000 in profit per year. It’s in the upper most tax bracket paying 24% in taxes (Married Filing Jointly $168,401 to $321,450 in 2019). A business owner in this tax bracket would pay $2,400 in income taxes for every $10,000 in profits after deductions. That sounds good, the business owner saved $2,400 in income taxes!
The result: $10,000 in profits would have likely increased the selling price of the business by $30,000 to $40,000. This increase in selling price would take a person 12 to 16 years to recoup this money when you compare the tax savings to the future value of the business! This is just a small example, there are companies that have not reported hundreds of thousands of profits to minimize taxes making a really good business – not sellable.
These are some tax strategies you CAN implement that will not decrease the value of the business.
- Contribute larger amounts to your retirement accounts
- If you own the real estate and it will be sold with the business, own it under a real estate holding company and pay a higher than market rent rate
- If you own the real estate and it will be sold with the business, own it under a real estate holding company and run your non-business expenses through the real estate holding company. When we sell your business, buyers and lenders only look at the operating company.
It is important to have a good CPA that is willing to think outside the box on how to structure your company, your expenses, and your profits to minimize your taxes and to maximize the value of the business.