- When it comes to income taxes,
is your goal to minimize the amount of tax paid?
Okay, well evaluate the logicof the following reasoning.
Okay, well, evaluate the logic of the following reasoning.
I have a small business.
My revenue is $4,000.
I'm going on a business trip.
I can make the trip, travel, hotel, and food
for about $1,000.
However, I want to spend more on the trip
because the whole thing is a business expense.
I can write it off on my taxes.
I plan to travel first class all the way,
and spend $3,000 instead of $1,000.
Because my income tax rate is 30%,
the extra $2,000 I spend on the trip
will give me an additional $600 in tax savings.
in tax savings.
So, if I want to minimize my income taxes,
I should take the expensive trip, right?
Well let's think about this a little bit.
Well, let's think about this a little bit.
This chart helps us see the two options.
If I take the regular trip,
I report taxable income of $3,000
and pay taxes of $900.
That's 30% of the $3,000 taxable income.
the $3,000 taxable income.
With the regular trip,
my after-tax cash flow is $2,100.
cash flow is $2,100.
Now with the expensive trip,
Now, with the expensive trip,
my taxable income is just $1,000
my taxable income is just $1,000,
and my taxes are only $300.
That's 1,000 times 30%.
I save $600 in taxes by takingthe more expensive trip.
I saved $600 in taxes by taking the more expensive trip,
But think about it,
but think about it.
I reduced my after-tax cash inflow by $1,400.
Yes, I saved $600 in taxes,
but I had to spend an extra $2,000
an extra $2,000 to get that tax savings.
to get that tax savings.
Let me say that again.
I paid $2,000 to get the $600 tax savings.
Boy that better have beena very nice, nice trip.
Boy, that better have been a very nice, nice trip.
The key point here is that the appropriate goal
is not to minimize income taxes paid,
but instead to maximize after-tax cash inflow.
Although tax effects may be relevant,
it is important to make decisions
based on business factors,
not just income tax factors.
We don't want to the income tax tail
wagging the business dog.
Now let's review the common taxissues for small businesses.
Now, let's review the common tax issues
for small businesses.
I can pretty much sum them up with this,
be careful and don't get clever.
It's likely that the taxing authority in your jurisdiction
in your jurisdiction has already seen
has already seen every clever tax evasion scheme
every cleaver tax evasionscheme that you might invent.
that you might invent.
For example, in the United States,
the IRS is aware of common tax evasion strategies
is aware of common tax evasion strategies
and they're very good at detecting
inappropriate tax activity.
Sometimes, it's worth it to pay someone else,
a tax professional, todo what they're good at
a tax professional,
to do what they're good at
so that you can focus on what you're good at,
which is running your business.