[Grumpy]

Question about taxes here since we are at the years end and I am trying to minimize my 2004 taxation.

I will have money left in my bank account after all vendors/suppliers are paid. I will need that money to carry the overhead of my company through the winter months. BUT I don't want to leave that money in the bank account for uncle sam to Tax at years end.

Thoughts?

 

[Mike Finley]

Money in your bank account isn't taxable, only your profits are.

You can have $100,000 in your bank account and have no taxes to pay if you didn't make a profit. You can also have $3 in your bank account and owe $30,000 in taxes.

Also, don't fall into the trap of spending money to not pay taxes. If somebody tells you to go out and buy this and that at the end of the year so you don't have to pay taxes, kick them in the balls. That is spending a dollar to save 30 cents. There is only one scenario when spending money to save taxes on the end of the year makes sense, but I'm not going to bore you, I fear you may have already stopped reading this due to it being too long.

 

[hatchet]

Yeah - I think the max is $250,000 cash on hand without being taxed.

 

[Grumpy]

Mike, all the money in my bank account will be profits as of next week once my accounts are reconciled and balanced. There will be a profit much more than I expected.

LOL kick them in the balls you say? That is one of my favorite past times. I have done just that however. I have written pretty hefty checks to local utilities (phone companies) basically pre-paying for services.

LOL when it comes to money I am willing to read lengthy posts... and when it comes to reading answers to my questions I am willoing to offer double forgiveness. I love money. I love money so much. I'd make love to money if it didn't just end up all sticky.

I think that I should call my accountant who has done my own personal taxes and consult with him in this scenario. I'm sure he's been here before.

 

[Teetorbilt]

Grumpy, how did you end up with profits in your first year? Nobody does that and Unka Sam doesn't expect it. Yoose young guys! You probably thought that showing a profit in your first year was good, yes?
If you are expecting to sell in the next few years, this is good. Otherwise, bad. Your BA or MBA is from where?

 

[Grumpy]

Teetor I dunno how I showed a profit to be honest. Spending less than I make is a good formula. A good solid game plan is another way to show profit. I actually don't want to show a profit, hence the question... How do I minimize my taxation?

Or maybe I am just a moron and I am really in debt and looking at my accounts wrong.

I have a BS, Bull ********************, from Chicago Streets University.

 

[Craig]

Grumpy
Why not dump some money into a 401K. Its not much help taxwise, but better than nothing.

 

[Grumpy]

Craig, that is a plan for next year... This year is damned near over. I'm also holding all deposites until January 05.

 

[Teetorbilt]

Grumpy, I really don't understand your position. As near as I can tell you sell jobs and have subs do all of the work. If that is so, and you turned a profit, get ready to pony up to the IRS.
Holding deposits doesn't mean anything, if it's on your books, it's due whether you get paid or not. That is next years issue.
I'm not sure where Mike is coming from on the don't spend money issue, I've been doing it for 30 yrs. Got and extra $100K at the end of the year? Buy a cabinet shop. It's a capital expense for business improvement and can be amortized for up to 5 yrs. Same for vehicles and most other purchases. Profit made, profit spent on growth. Don't forget the $100K deduction for vehicles over 6K/lbs. that is on it's second of three years.
If you are inc'd, you also have to pay your stockholders on their investment. In my case that's 51% for me and 49% to the wife and you have to pay capital gains tax but it's much better than income tax.
You are young, go back to school and get a BA. Once you get to be my age it is much tougher. I'll have mine in June after almost 5 yrs. of night classes and just before my 54th birthday. Worth every minute.

 

[Grumpy]

Teetor I take at least one class a year preferably two. You have heard my opinion on education, haven't you? It's very important but isn't yourt key to easy street. A degree? Sure maybe fine... at some point in my life... but I see absolutely no point to me obtaining a degree. How will it help my quality of life in any way?

Like I said I take at least one class per year in classes that interst me. Computers? Construction? Business? marketing? I'm even thinking of taking a cullinary class next year.

Teetor I am incorporated but it's my understanding that you don't HAVE to pay out dividends. That's an election of the stock holders, and since I am the only stock holder... and already in over my head when it comes to accounting... I am leaving all this up to my accountant. I have it on my list of things to do monday. "Call account and set appointment to meet".

 

[Mike Finley]

Okay, what I am talking about is when somebody tells you (often an accountant) to go out in December and spend money so you reduce your tax burden.
Profits = Income - Expenses.
Taxes = Profits * tax rate.

So the logic is reduce your profits by spending your profits on expendable items.
Example

You show a 75,000 profit you are going to pay $22,500 in taxes.

So buy a 2005 F350 for work for $49,000 and can deduct the cost.
$75,000-$49,000 = $26,000 x tax rate = now you are only going to owe $7800 instead of $22,500.

That makes perfect sense if you need a F350 for work and you were going to buy one anyways, but to spend $49,000 to save $14,700 in taxes for something you don't need is basically spending a dollar to save 30 cents.

If you don’t need the truck I would rather pay the $22,500 in taxes and have and have the $52,500 to spend any way I see fit. I would get a lot more enjoyment out going on a trip around the world or paying my mortgage off by $52,500, than a new F350.

If you are going to need a new computer, or some new tools or something for the business, by all means now is the time to go and buy it.

If you have profits and you don't need anything, then pay the taxes and go spend the net income on stuff you want in your personal life - dinner, a boat, your house, savings, whatever.

Teetor - we are both basically saying the same thing, you are saying to reinvest profits into a cabinet shop, that is identical to reinvesting profits into a computer or tools, both will make you money. That is smart use of your money.

The majority of people in small businesses who are incorporated have declared themselves s-corps, so they are flow-through entities as far as the IRS is concerned. All profits flow through to the shareholders, whether they are disbursed or not. That is why when Grumpy says - I have money left in my bank account - it doesn't really mean anything, profits aren't based on cash on hand, they are based on (income - expenses), what you have in the bank doesn't mean you can spend it or it is taxable.

Really the only thing Grumpy can do just like everybody else, is reinvest in his company, invest in his retirement, or pay the taxes on the profits and disburse the net profits to himself and do with it personally as he sees fit.

Remember paying taxes is a good thing; it means you are making money!

 

[PipeGuy]

Your BA or MBA is from where?

Probably from the same place guys like William Durant, Henry Ford, Warren Bechtel, Peter Kiewit, Merv Griffin, Bill Gates and Michael Dell got theirs.

 

[Grumpy]

Mike said: That is why when Grumpy says - I have money left in my bank account - it doesn't really mean anything, profits aren't based on cash on hand, they are based on (income - expenses), what you have in the bank doesn't mean you can spend it or it is taxable.

No mike you are wrong. I am saying EVERY PENNY LEFT IN THE ACCOUNT IS PROFIT. I understand this is not always the case, but in this case, it is the case all profit just sitting there waiting to be spent. That's why I am trying to reduce the balance.

I agree I am not about tp spend money on a new truck because I don't need a new truck yet. I am not going to spend money on anything I don't need, but I am trying to figure out creative ways to turn that profit into a deduction.

 

[Mike Finley]

Make out a check to the Support Mike Foundation, your tax problems will be solved. I personally would find that to be a very creative solution.

I will pay the taxes on it and spend the rest.

By the way, since you said you need the profits you have made to carry you through the winter how would you propose to do both? - Keep the profits(which you call money in the bank) and reduce it at the same time? That trick might raise Houdini from the dead to find out how you pull that trick off.

The only possible way I could see that happening would be to make a capital expenditure using credit. That way you could record in on the books and reduce your profit, thereby making your current cash spendable, but you would just be robbing Peter to pay Paul, since eventually the credit would have to be paid off by profits generated in 2005. Seems like a lot of trouble just to avoid paying the taxes today instead of tomorrow.

I think you would be smarter just to donate the money to me and worry about selling more roofing jobs.

 

[Grumpy]

Mike how do I propose to do both? That's what I was asking you guys

Like I said I prepaid some of my re-occuring expenses (cell phones, telephones, webhosting) so they don't pop up in the winter but are on this year's expenses. That was the only way I could think of to accomplish both my goals.

 

[Mike Finley]

Like I said the only way I can see that you can reduce your taxes on your profits is to spend the money on tax deductable expenses. But if you do that you won't have the money in your account to spend to carry you over the winter. So the only way to do both is spend the amount of your profits by using credit. You would book the expense in December which would make your taxes zero, you would still have the cash in your account to take you over the winter. But it is just robbing Peter to pay Paul.

 

[Grumpy]

Yes Mike. I agree. That's why I spent as much as I could pre paying the next few months expenses. This will float me through the slow winter and incrase my December expenses.

 

[PipeGuy]

I dunno how I showed a profit to be honest. Spending less than I make is a good formula. A good solid game plan is another way to show profit. I actually don't want to show a profit

Regardless of how the other aspects of your "good solid game plan" may have panned out, it would appear that the "tax" portion of the planning activities fell short of the ideal - particularly since you admittedly don't know how you showed a profit that you didn't want to show to begin with. It seems to me you need a better, more engaged, accountant.

If I might say so, (admittedly without the benefit of the wisdom that I would otherwise possess upon the award of a BA or MBA) pre-paying expenses should be at the bottom of the list of things to-do. If that's a good idea, why don't you just prepay your subs in anticipation of future work? Or go buy some sea containers and stock them full of roofing materials for use on future jobs? Again, your accountant should have had (in October) a long list of things for you to otherwise do before you started paying Nextel in advance.

Next year call your accountant on Monday, June 13th instead of Monday December 13th. Start your tax planning early. After all the hard work you've put in, you owe it to yourself.

 

[DRO8821]

Grumpy

I handle the accounting for the construction company I work for and I have to agree you need to have your tax plan in line long before December. I never have a big bank account at years end even on a great year!!!! Everything can be tax deductable throughout the year with a little planning. I keep a close eye on incoming monies as well as expenses as we near Oct/Nov. We also need carry over funds for the winter months and many times vehicle/equipment loans have skip months or interest only payments in winter. When it looks like additional cash is on hand these can be paid on in December. Also supplies and/or equipment or capital improvements you might be thinking on should be moved on if additional funds are there. Don't forget to expense that big christmas bash you have each year too!!!!!!

Ironically, I have a BA but not in accounting. Sometime common sense is the biggest plus. After all the work of running your own business you want to keep as much of the money as you can!!! That's my logical anyway!
Congrats on a good year.
Debbie