A weekly look at Wyoming business questions from the Wyoming Small Business Development Center (WSBDC), part of WyomingEntrepreneur.Biz, a collection of business assistance programs at the University of Wyoming.
By Bruce Morse, WSBDC Region II director
"If I make more profit, I also have to pay more taxes which I hate to do. So, I try to minimize my income to reduce the amount of tax due -- that's ok isn't it? Gary, Casper
First, I along with the good accountants that I know recommend that you make decisions for sound business reasons, not just for tax reasons -- if it covers both bases, then great.
Buying something you really don't need simply to show more expense and reduce taxable income is usually not a great idea. By doing so, you typically reduce cash reserves, and in today's economy, having some extra cash is a good thing since being able to borrow it in a pinch might be questionable.
Think about what profit is needed for in the first place. It is used to do essentially three things -- reinvest in the business, pay debt or pay out to the owners, perhaps some combination of the three. Having no profit does mean you will pay no taxes, but it also means you have nothing to reinvest (purchase inventory, equipment, take advantage of discounts), repay debt (the bank wants their money regardless) or pay yourself or other investors. The bottom line: Profit is really a good thing to have.
Let's think about it another way, using a simple math example. If you make one dollar, you will pay tax on that at a rate of about 35 percent (an example), or 35 cents, but you still have 65 cents left to put in your pocket.
Even if you pay taxes on that incremental dollar, you are still financially better off. Of course this is an overly simplified example and the real world of tax regulation is always changing, but the principle still holds true.
I have known many business owners who believed in managing to reduce tax liability which worked fine until they either wanted to borrow money or sell the business. This practice comes back to bite them since they can't demonstrate to a lender or potential buyer that the business can make enough money to repay the debt or return a profit to the new owners.
A blog version of this article and an opportunity to post comments is available at http://www.wyomingentrepreneur.typepad.com/blog/.
The WSBDC is a partnership of the U.S. Small Business Administration, the Wyoming Business Council and the University of Wyoming. To ask a question, call 1-800-348-5194, e-mail wsbdc@uwyo.edu or write 1000 E. University Ave., Dept. 3922, Laramie, WY, 82071-3922.
