Close

Fight Trim and Pay Fair Share of Taxes (Part 1 of 2)

tax-return.jpg

Photo: ©iStockphoto/DNY59

Howard Scott |

PEMBROKE, Mass. — Tax time is here again. Before I give you some tax tips, I want to tell you to pay your fair taxes. I know that not all of you do.

While visiting a dry cleaner’s store, he said to me, “I pay myself a salary of $25,000, $500 a week. But I can’t make it on that. So I take another $20,000 out of here,” pointing to his cash register.

I looked around his small shop. This owner has worked hard 15 years to make his living. He’s doing no more business now than he was a decade ago, and he still does the lion’s share of volume himself. He works 50-55 hours a week processing clothes.

I ask myself, has he not progressed because he skims the top? Is he not interested in building a business? Is his only goal to make a living?

Would it have been different if he drew a fair salary, paid his fair share of taxes, and stayed focused on the business? I can’t say for certain, but I bet his unwarranted withdrawals have had something to do with his lack of progress.

Run a good business, keep flows honest and above board, have a firm handle on your figures, and aim to see the bottom line improving. It should improve every year, year in and year out, even if it is just a token amount. That’s the formula for success.

If you take cash out of the till, your business loses its shape. It becomes an amorphous blob, from which money flows out. It becomes a ca-ching ATM machine and less a concern.

Management doesn’t quite have its hands on the throttle controls because it’s skewed. To offer a basic example, management might want to purchase new equipment in a timely fashion, but it might not be able to because profit, and thus cash flow, is truncated.

Another example is that the cash taken out of the business stunts one’s viewpoint. If you have a $3,000-a-week front counter, and you pull $500 a week out, you tend to think of it as a $2,500 counter, and that might affect your decisions in the future about setting up drop stores or comparing your operation to another shop.

There’s another reason that unwarranted pullouts are a bad idea. They tend to give management a false sense of comfort. One can always take money from the cash register, so why work hard? Why fight to make the business the best in the land? Why worry about contingencies? Such looseness is what business failure is made from.

It’s just when management lets down its guard that the unexpected contingency comes along. The firm is forced to muster all the skill it can manage. Unfortunately, it can’t summon much, so it doesn’t get through the crisis.

A firm must be always on its toes, be resilient, be flexible, and be able to navigate a 180-degree turn at a moment’s notice. If the company isn’t at its fighting trim, it could go down quickly. So don’t make your company, the firm you worked so hard to develop, less effective. Don’t give it any false padding. Like a well-oiled motor, it should be running on all cylinders.

Finally, cheating is illegal, and you risk going to jail. Such an example is a sizeable drycleaner in the Northeast whose longtime owner/founder was a model of skill and savvy. He told me that volume was 1.5 million dollars, but the only problem is that he vastly understated income and profits to the IRS, and it finally caught up with him. He was convicted, served jail time and had to pay tens of thousands of dollars in restitution.

When he came out of prison, the drycleaning establishment was no more. People in the area say he can be seen walking on a beach in a town where he once owned a summer home. They say he’s a broken man.

How did the IRS catch him? When doing a routine audit (he was picked at random), it discovered irregularities. When agents dug deeper, they found that the figures didn’t match up. They figured out how he stole money from the business.

There are other ways of detecting financial irregularities. An owner’s lifestyle might seem at odds with the level of business activity, leading to what’s called a “lifestyle audit.” Or the IRS might receive a tip from a disgruntled former employee that an owner is taking home more than he says he is.

The IRS might be auditing a supplier firm and come across something surprising—a lot of purchases from a supposed small company. Or the business tax return might be compared to others of the same size in the industry. This is sometimes termed a comparison audit. Why does Company A have 12 employees and do $400,000 while Company B also has 12 employees but does $650,000? Such discrepancies might trigger an investigation.

So, my advice is to be above board, submit your true figures, withdraw only your salary, and make the firm as efficient as it can be.

Next: Taking full advantage of legitimate deductions...

About the author

Howard Scott

H&R Block

Industry Writer, Drycleaning Consultant, and H&R Block Tax Preparer

Howard Scott is a longtime industry writer and drycleaning consultant, and an H&R Block tax preparer specializing in small businesses. He welcomes questions and comments, and can be reached by writing Howard Scott, Dancing Hill, Pembroke, MA 02359.

Advertisement

Digital Edition

Latest Classifieds

Industry Chatter