Preserving Working Capital

[Ted S.]

Anyone have any tips on how to keep working capital in the Bank without getting whacked on tax day?

I could spend down which my accountant told me to do last year, but I have a new leg of the business I want to fund early in the year. So if I spend all my money, I will be working on a slim margin next year.

I'd like to have the security of money in the Bank as I venture out. But...I will be whacked as it will show as 2012 profit. Not sure what to do.

[Allan Edwards]

Ted:

Are you asking how to minimze taxes, if so are you working as a sole proprietor or S-Corp? Are you trying to build of your cash position as working capital in a company or personal net worth (or both)?

Allan

[David Meiland]

Ted, if you send me $500 we can pretend that I'm your CPA and can give you good tax advice.

Seriously, if you made money, it's taxed... assuming your business is a flow-through entity. Your income minus expenses for the year, that's the deal. How else can we afford these wars?

If you want to not pay tax on the money, you have to spend it on a business expense. If you look at it over a multi-year period, maybe it all comes out in the wash... you make a bit this year and pay some tax, you spend a bunch next year and pay no tax, like 47% of the population. Just try to keep your head down and fit in.

[Dick Seibert]

Ted:

What is your tax basis, cash, accrual, percentage of completion, or completed contract?

[Ted S.]

You know I never realized how much I didnt know about business until I went into business.

I am a Sub Chapter S Corp. I'm going to get whacked on taxes, I don't want to spend the money on myself, I have taken my salary, I just want to reinvest the money in the company. At the beginning of the year I will be starting a project that will consume much cash, so Allan, I believe I am trying to build cash position in the company but in order to do that I will be taxed. I just feel I have been taxed a boatload on my income and payroll taxes. My insurance broker said to buy life insurance...my accountant is looking at the numbers now. Not sure hat to do. I just want to be one of the 47%. If I was taking the money out then I am fine with being taxed, but I want to reinvest 100% of it and provide green jobs.

[parkwest]

Have you read THE POWER OF LEVERAGING YOUR CHARITABLE REMAINDER TRUST?

[Allan Edwards]

I'm going to get whacked on taxes, I don't want to spend the money on myself, I have taken my salary, I just want to reinvest the money in the company.

Ted:

If you are getting "whacked on taxes", that means you are making money in your company and the government is going to take their cut. No easy way around that. Other than the typical business write off's, of which you only save a percentage equal to your marginal tax bracket on those write off's, there really isn't anyway I know to avoid taxes on earnings. You can set up a retirement plan and shelter approx $50,000, but even then you are only deferring taxes and of course you lose the right to use that money as working capital. But a good way to build personal net worth.

Welcome to the reality of our tax system.

[Ted S.]

Have you read THE POWER OF LEVERAGING YOUR CHARITABLE REMAINDER TRUST?

No, what does that mean? I just gave away some shoes, is that what you mean?

[Allan Edwards]

Have you read THE POWER OF LEVERAGING YOUR CHARITABLE REMAINDER TRUST?

Park:

Not sure this helps Ted with his problem of taxes on earned income, I believe a trust as you describe only helps with estate taxes.

[parkwest]

The guy has some tax strategies using CRT's and whole life insurance that might help Ted.

The amazon link is on my blog under page 2 of recommended reading. You can review part of the book...

http://workingmanpwh.blogspot.com/p/...d-reading.html

[Ted S.]

My accountants general approach is to spend down with business expenses, then use a line of credit to make payroll if I go negative early in the year before I can generate a surplus.

I'd rather have cash in the bank then use a line of credit.

[Dick Seibert]

Probably the most important subject ever brought up on these fora, try being in California with a 50% combined tax rate, threatening to go higher. For every two steps forward you take you fall one step back, it's a lot easier to delay income if you do large jobs, small jobs are constantly recognizing taxable income.

A S Corp is bad tax-wise with a new company since you have to pay yourself a salary on a regular basis commensurate with the salary of the president of a similarly situated construction corporation in your area (and Boston is an expensive area), you could well invest a lot of money starting up your corporation, make money, but actually lose money after deductions, but then after Schedule K pass-through you reduce your taxable income but never get it all back after your corporation's share of unemployment, disability, FICA, and many other taxes.

[Allan Edwards]

My accountants general approach is to spend down with business expenses, then use a line of credit to make payroll if I go negative early in the year before I can generate a surplus.

I'd rather have cash in the bank then use a line of credit.

You are losing me a bit with the line of credit, can you give an example? As to business expenses I would never recommend using earned income for a business expense just for tax purposes, it doesn't make sense.


Park:

I believe a trust as you described is primarily used for a highly appreciated asset, not earned income.

[Ted S.]

Allan, you are correct in that I am trying to preserve the "percentage equal to my marginal tax bracket" . That could be some decent money I could put back into the business when looking at the year end surplus.

[Allan Edwards]

Allan, you are correct in that I am trying to preserve the "percentage equal to my marginal tax bracket" . That could be some decent money I could put back into the business when looking at the year end surplus.

Let's say you make $500,000 and you are getting hammered on taxes, so you decide to spend $100,000 because of that $100,000 the government gets $45,000 and you keep $55,000. It only makes sense to do this if the "business expenses" is something you need and will help your productivity. It might be better to just pay the government their $45,000 and pocket the $55,000 rather than spend $100,000 on "business expenses".