Hey, this week’s tax tip is the conclusion to a 3 part series.
Last week’s recap:
Brewery owner was given advice to spend, spend, spend because his CPA projected $40,000 in profits at year end. He has his eye on a $40,000 forklift. This purchase was a “want” not a “need.” With $40,000 in profit, the forklift purchase saves the owner $10,000 in taxes. How is the owner going to pay for the remaining tax bill?
You guessed it.
The money to pay LAST year’s tax bill comes from THIS year’s profits…..ouch
However, to pay that $30,000 to IRS, the business has to generate $40,000 in profits ($40,000 less 25% tax leaves $30,000).
In a growing business this snowball continues to get larger each year.
A lot of businesses let this snowball grow unchecked between 2000 and 2009. It never caused a problem because their January, February and March numbers were always solid and higher than last year’s. This practice cannibalized current year profits to pay last year’s taxes.
I actually think it is the complete opposite in the alcohol business. January, February, and March are typically slower months.
Whether it’s a recession, a competitor who opens up across the street or just grandma’s common sense ringing in your head, eventually that unpaid tax bill is going to create some serious headaches. You may be running on borrowed time.
Remember our example earlier. If you make $10,000 of profit in a month and spend it on a blockbuster family vacation not only are you failing to put away the $2500 you will eventually owe Uncle Sam, you are blowing $7500 that you could use down the road to help fund one of those fancy long term tax saving strategies you can never afford because your CPA tells you “I’m sorry, you don’t have enough cash to do that.”
Lesson: Pay this year’s taxes out of this year’s profits.