hiding profits?? HOW

Discussion in 'Business Operations' started by MacLawnCo, Apr 13, 2003.

  1. MacLawnCo

    MacLawnCo LawnSite Bronze Member
    Posts: 1,847

    Just to preface this, i am going to talk to my accounting professor on tuesday about this idea and i shall let you know what he says...

    I am interested in saving all my profits (after ownder withdrawls :) ) from the next few years with the intention of using that sum to invest in some property for the business. I want to do this in a way as to keep as much for the business and as little for good ol unlce sam. Where can i store my money in a short term, tax free type of account? (ill have to pay taxes on the interest, correct?) Once i get it in the tax free account, will i have to pay taxes on it when i take it out and then directly put it into my business property? What i am after is a large downpayment on some land that i have my eye on. I hate paying so much in taxes and want to keep as much in the business as possible. Any ideas?
     
  2. Meier

    Meier LawnSite Senior Member
    from DFW
    Posts: 269

    One thing's for sure:

    Death & Taxes.

    If you re-invest all your profit into a high dollar asset, you'll have to depreciate that high dollar asset over time with Unlce Sam.

    Example:

    Say you make $100K this year in profit and want to buy $50K worth of assets. Instead of taking $100K out of the company to live on, you instead take only $50K. With the remaining $50K, you buy assets. You'll have to figure out how long you expect those new assets to last. Then you depreciate the assets over time.

    If you expect the assets to last 7 years, you might depreciate 1/7th, or 14%, of the assets this year. 14% of $50K is roughly $7K. So your tax bill would be based on profits of $93K, even though you only took home $50k. (If your company is taxed as a corporation, as mine is, this is how it works...your corporation would pay taxes on $43K and you would pay income taxes on your wages/salary of $50K.)

    But next year, if you make $100K in profit again, you'd only be taxed on $93K. This would repeat for the next 5 years too.

    One huge thing that distorts all of this is the new tax law that allows small businesses to depreciate 100% of their long term assets in the year they were purchased. I think the cap for a small business is something like $26K, but I'm not sure. You'd depreciate all the CapEx above that amount over the usefull life of the asset.

    When you say property, I assume you mean real estate. My understanding is that real estate is generally depreciated over 30 years, but again, I'm no expert.

    Talk to an accountant. But this is the gist of how this works.

    Later,
    DFW, TX
     
  3. bruces

    bruces LawnSite Senior Member
    Posts: 648

    I'll be very interested in suggestions your professor has for sheltering income.

    It will be very difficult to avoid paying tax on the profits when they are earned, without either spending the money on business assets.

    Once you have paid tax on the profits, then you might invest in some tax free investments (municipal bonds, etc.).

    When you take the money out of these investments to purchase the property, there would be no tax consequences to taking the money out, since you have already paid tax on it.

    Also, keep in mind that only the building portion of real estate is depreciable, not the value attributable to the cost of the land.

    And, that is depreciated over 39 years for business property.

    It is a great goal, but might be tough to accomplish.

    An alternative might be to borrow more money to purchase the property sooner. If you are paying rent now, it could help offset the property payment if you are able to quit paying rent.

    Good luck, and let us know what your professor suggests.
     
  4. MacLawnCo

    MacLawnCo LawnSite Bronze Member
    Posts: 1,847

    Bruce, see my idea is to get away without paying taxes before i put the profit into wherever. Then hopefully, i can take the profit out of wherever, pay some interest tax, and buy the land. Probably not doable, but i hope my professor can steer me as close as possible. I will let you know what he says.
     
  5. cos

    cos LawnSite Addict
    Posts: 1,253

    If it is a sole proprietorship, I see no way of getting away without paying taxes (legally). I would just sock away a certain percentage in an account and forget it is there until you are ready to look for your purchase.

    If you find a way, let us know. :)
     
  6. John Allin

    John Allin LawnSite Bronze Member
    Posts: 1,489

    Sure wish I could find a way to avoid paying taxes....
     
  7. MacLawnCo

    MacLawnCo LawnSite Bronze Member
    Posts: 1,847

    This is an accontant's reply that ive coppied from another site:

    posted by GreenInIdaho: The first question was "Where can i store my money in a short term, tax free type of account?" There are many tax-free mutual funds and even direct investments available esp for Ohio specific funds. Those accounts are called municipal bonds and municipal bond mutual funds. To get one seek an investment advisor or do some research on your own to find one and avoid the fees. However, based on your question and revealing your level of investment sophistication I'd recommend that you seek an investment advisor. Such an advisor will probably say, "You are barking up the wrong tree." Most likely you are in a relatively low tax bracket. You're a student, right? Students usually have low income= low tax. Tax-free investments are not advantageous for low tax people. The're designed for high income high tax people.

    Here's some Finance 101:
    Taxable investment of $10,000 yields 5%= $500 income and at 15% tax rate you pay $75 in taxes for an after tax return of $425.

    Alternatively the tax-free yield (always lower than taxable yields for the same risk) of 4% will yield $400. And since it's not taxed that is also your after-tax yield. So it's $425 vs $400 - the taxable is actually better even after paying tax on it.

    BUT if you had a higher tax rate like 31% the the taxable would cause a tax of $155 (550 x .31) and the after-tax yield would be $345 (500- 155). Then it's $345 vs $400 and the tax-free is better.

    Here again, what works for one doesn't work for everyone, and misinformation can detrimental- add a couple zeros to see that evidence.

    If you have relatively low taxable income, tax-free investments are not the right thing for you.

    Further if you are looking for a large down payment, that is not necassarily a good stategy either. With ocean-bottom low interest rates, financing as much of your land purchase as possible is the best way to go. Even if you had $20,000 sitting around and the bank said you could get the land w/$5,000 down, you would be wise to only put the $5k down and use the other part as reserves or a pool to make the payments.

    *****
    Best bet if you are saving for business investments--- stash the money in a regular money market account with your bank until you get enough to purchase their CD's to mature when you need the money.

    Yes, the earnings from money markets accounts and CDs are taxable. But with the current tax benefits of paying for your tuition, your tax bill ought to be about $0 anyway.

    No, you are not going to get a lot of interest there or anywhere else. It's pretty much the same as putting the cash in a cookie jar at this point.

    Until you start making truck loads of money your concern ought to be "protecting" the money by not spending it = Keeping it simple. Unless of course you are holding back and are actually talking about a $500,000 income from your part-time mowing business.... hee hee.
     
  8. hoyboy

    hoyboy LawnSite Senior Member
    from Chicago
    Posts: 346

    Your not going to get away from the tax man altogether, and the question should not be "how do I pay the least taxes" but rather "how am I going to maximize my after tax income"

    For most entrepreneurs, sticking money in a 2.5 % bond just because it is not subject to federal tax just doesn't make sense.

    Why not incorporate as a "C" Corp and take advantage of the low 15% tax rate on the first 50,000 net? That way 85% of your profit is still available to work for you and not stuck in some bank.
    You can then make a loan to yourself personally, use that money to make a down payment, then rent the property back to the corporation as needed. That rental income is free from payroll taxes as well. You can even raise that rent in the future to keep from going into some of the higher tax brackets that inflict the typical "C" Corp.

    Hope that helps....


    Dan Norton, CPA
    Hoy Landscaping, Inc.
     
  9. MacLawnCo

    MacLawnCo LawnSite Bronze Member
    Posts: 1,847

    Dan that makes alot of sense, and i appreciate your ideas. I may have to look down that route, should my accountant suggest it also. This phrase caught my attention though:
    So that may be the loop im looking for? I honestly dont need to use the money for at least 3 years. I just want to have a fair amount "hidden" somewhere for when i get out of school and want to really go full bore into this business. Could you ellaborate any more on this option. Thanks a bunch.

    Jason
     
  10. KZ Lawn Care

    KZ Lawn Care LawnSite Member
    from Midwest
    Posts: 11

    I hope to pay $100,000 to uncle sam next year!!!!!!!!!??????????!!!!!!!

    Figure this one out?
     

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