The Trump Organization allegedly avoided paying taxes on almost $2 million of compensation to an employee. The allegations and prosecution shouldn’t surprise anybody because:
- There’s politics involved.
- There seems to be a family history of this.
- Most business owners do the same thing but do it to reduce the owner’s taxes not the taxes of an employee.
One of the most irritating aspects of small business buy-sell is when the owner blends their personal and business checkbooks. I’m not talking about a meal or ballgame or round of golf now and then, I’m talking about paying for obvious personal expenses with business funds. One owner (I know his son, who bought out dad’s half of the business) felt the role of the business was to pay for his and all his kids personal bills (insurance, Costco, groceries, etc.). The son doesn’t feel the same way because he plays it straight and gets audited financial statements.
Of course, then the seller will say it’s the job of the buyer (and the bank) to determine what is really a legitimate business expense and what isn’t. In other words, “I’m cheating the IRS, but I won’t cheat you.”
But what if there’s an “Oops” and you must sell? A deal from years ago had an owner who was like the dad mentioned above, and she knew it. When a medical issue arose, she was stuck. She knew the risk and understood the increased price of the business would be more than many years of tax savings. And she’s right! Ignoring the time value of money, it’s 10 years or longer of tax savings to equal the increase price.
Nobody wants to pay more taxes than they’re obligated to. There’s an inherent desire to get the tax bill as low as possible. But consider the big picture and it’s why I tell owners (and it’s in my book If They Can Sell Pet Rocks Why Can’t You Sell Your Business (For What You Want?)) to not play any games for three years (or more) because in the long run you’re way ahead.
The point of this memo is, just because you can do it (and others, including big names also do it) doesn’t mean you should do it.
“We must believe in free will. We have no choice.” Isaac Bashevis Singer
“At 50, everyone has the face he or she deserves.” George Orwell