ECONOMIC REALITY: SELLING YOUR BUSINESS IS TRICKY BUSINESS

            Saving on income taxes has become a popular pursuit of many business owners and their advisors.  Nobody should pay more taxes than they legally owe.  But, sometimes folks tend to “push the envelope” to maximize tax savings.  That is just smart business, right?  

            You might be surprised to learn that “pushing the envelope” to reduce your income tax bill can be one of the most costly mistakes you will ever make.  In fact, every dollar of additional tax savings may actually cost you ten dollars!  How is this possible? 

            Let’s look at this very common scenario.  Assume that at year end, Joe Biz, Inc. had an inventory with an actual cost basis of $250,000.  But, Joe Biz, Inc. decided to report only $200,000 as inventory cost, because doing so reduces annual profit by $50,000.  Assuming a combined 40% income tax rate, Joe Biz saves $20,000 in income taxes ($50,000 x 40%).  Is this a smart move? 

            What would Joe Biz rather have, the $20,000 in tax savings, or an extra $200,000 in additional sales price?  Which would you rather have?  The key is to keep from tricking yourself into costly income tax gaffs.  Inventory is just one area where business owners “trim” their tax bills.  Other areas include: 

• Padding payroll expenses for non-employee family members
• Expensing non necessary recreational items as business expenses
• Expensing personal expenses as business expenses
• Under reporting income 

When you are beginning to plan for the sale of your company, it would be wise to sit down with your bookkeeper and accountant to “verify” that all expenses and income items are properly reported, without pushing the envelopes.  

Keep in mind that buyers and lenders will rely heavily on filed tax returns of your business.  Don’t even begin to think about trying to “explain” the short comings of your tax returns.  First, buyers and lenders must rely on tax returns as they have been filed, not the way they should have been filed.  Second, trying to explain to that you may have been less than honest…sends a very bad message about you and your business. 

For more information go to www.gruttercpas.com