A recent column in the New York Times, “You’re the Boss” section dealt with the owners of small, cash-based, businesses and if those cash receipts make it to the tax return. Of course, the examples were all about business owners who didn’t report (all of) the cash. The author expressed some amazement that these owners didn’t realize they were going to sell the firm for less by not reporting their cash receipts.
The dozens of comments to this column covered the whole spectrum including, “These owners just don’t get it” to “You [this author] don’t understand the cash business culture” to “They cheat the IRS so they can’t be too smart if they admit to you they skim cash.”
I’d like to point out that it’s not just cash-based businesses that do this. It’s a lot of businesses that break the law to save on taxes. I’ve seen owners sell scrap metal personally to get the money, Costco and Safeway charges regularly on the company credit card, personal car, utilities and more run through the business. It doesn’t seem to matter if it’s a male or female, young or old or Democrat or Republican. Something triggers some people to take risks with the IRS in an otherwise risk-adverse life.
One lady, many years ago, was forced to sell her business. She confided that yes, she ran every personal expense she could through the business. And, she knew that in the long run this would come back to haunt her via a lower purchase price. We figured the $40-50,000 in tax savings over the years cost her $150-200,000 in price (because she had high urgency given a serious medical issue).
The NY TImes author was right. It makes no sense, especially if someone is planning to sell. It’s been my advise for a long time that any owner thinking of selling should pay as much tax as possible for three to five years. Painful for some but definitely worth it. Maybe the biggest benefit is that the buyer can then imagine all the ways they can save on taxes!