PROFITABILITY AND INCOME TAXES ARE INSEPARABLE.
MINIMIZING BUSINESS INCOME TAXES IS PRUDENT AND MANDATORY
“Anyone may arrange [their] affairs that [their] taxes shall be as low as possible; [they are] not bound to choose that pattern which best pays the Treasury. There is not even a patriotic duty to increase one’s taxes. Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible.”
Judge Learned Hand, U. S. Court of Appeals. 1934
ACCESS TO CAPITAL – NET PROFITS RESULT IN INCOME TAXES
Businesses need capital to grow. As a business owner you must appreciate these facts - to qualify for access to capital the company’s financials must reflect:
1. A history of profitable operations, which shows the lender or investor that it makes business sense to provide capital to the company, and
2. Positive cash flow from operations, which shows the lender or investor that all debt obligations will be timely and fully repaid, with sufficient cash still remaining to meet operating obligations.
In other words, the business is a going concern.
The company’s history of net profits from operations is vital to qualify for access to capital, and since operating net profits generally lead to income tax obligations – Profitability and Income Taxes are Inseparable.
INCOME TAXES - A DIFFERENT VANTAGE POINT
The Business Owner must understand that income taxes are like tolls on the highway – you have to pay the tolls to get to your destination using the faster, efficient highway system, or endure a longer, less efficient route to that destination.
ACCESS TO CAPITAL – AVOIDING INCOME TAXES CAN RUIN THE BUSINESS
Too many business owners purposely operate at a financial net loss to avoid paying income taxes. If your company is operating at a loss and therefore is not paying income taxes –
Uncle Sam may not care, but the Business Owner should!
INCOME TAXES – MANAGED AND MINIMIZED
Business owners and their companies can predict, plan for, and manage their profitability, cash flow, and income tax exposure, if their companies conduct prudent Financial Management Planning in advance. Here is what is needed:
1. Profitability and Cash Flow Planning - to ensure the Company has the positive bottom line and cash resources that lenders and investors require to consider lending and investing with the Company, and
2. Tax Planning - to anticipate and project income tax obligations, ensure that the Company is minimizing taxable income, paying only the required amount of income tax, and has the cash reserves to fully and timely pay the required amount of income taxes - preferably through quarterly estimated tax installments.
ACCESS TO CAPITAL – GOING CONCERN PRINCIPLE
The Business Owner must understand these distinctions:
1. The Company MUST realize a Financial Net Profit from Operations to be considered a going concern and to qualify for access to capital.
2. A Financial Net Profit can be reduced for income tax purposes by utilizing eligible tax incentives to lessen Taxable Income.
3. A Financial Net Loss means the Company’s expenses exceed its income - which is to be avoided at all costs through prudent Financial Management and Strategic Planning.
An Income Tax Net Loss arrived at by utilizing tax incentives is “NOT” a Financial Net Loss.
4. Positive Cash Flow is different from Financial Net Profit. Positive Cash Flow means having sufficient liquid cash from operations to pay expenses, plus obligations like loan principal and interest, and income taxes,
AND STILL HAVE MONEY IN THE COMPANY’S BANK ACCOUNT.
Financial Net Profit is mandatory for a company to be a Going Concern.
Income Tax Net Loss is a planning objective for the Financial Net Profit.
Financial Net Loss is to be avoided at all costs.
Business owners must mandatorily perform Financial Management Planning - so that the Company:
1. Is operating profitably,
2. Has positive cash flow, and
3. Possesses sufficient liquid cash.
The Business Owner’s responsibility is to plan to have the highest Financial Net Profit possible, the lowest Income Taxes legally possible, generate positive Cash Flow, fully and timely pay all required Income Taxes, and have a Cash Reserve.