Don't forget why Al Capone ended up actually going to jail, the notorious criminal. It was tax evasion. Now, the IRS would much rather have you out there earning and paying on your tax bill than to put you in jail, but that is the extent of the recourses that they do have available to them. Peter, very good to see you.
Welcome back, everyone. Today we are talking through the hidden costs. We're going to talk through four reasons why small business owners should report all of their income to the IRS. So I was surprised to learn this, Peter, one study by the National Bureau of Economic Research found that small business owners underreport a significant portion of their income, potentially as much as 30 to 50 percent. It makes sense why that would be attractive to hide your money from the IRS.
Can you just explain that inclination? Because you said you've heard a lot of small business owners kind of toying with this idea. And it's because nobody likes paying taxes and taxes really aren't a hidden cost. It is one of the most apparent costs of doing business. When you bring in X amount of money and then you get that tax bill and you're only left with Y, there is incentive and desire to control all expenses. However, you've got to pay your taxes.
And yes, this is a very serious topic. Small businesses in particular, ones that are maybe more cash heavy than others have a tendency to not report all of their income and then businesses across the board, whether they're cash heavy or not, tend to try to find write offs because of the tax burden and may get into some gray areas. I encourage you not to stay above the board and out of the gray area and up front about all costs and revenue and tax liability. Plus, at the end of the day, it represents potentially an unfair business advantage. If there are two landscapers, we'll call them Joe and Steve, and Joe is reporting 100 percent of all income he brings in, where Steve is only reporting that which is on the books, credit cards, checks, but not the cash, then there is an unfair business advantage there. And so in the name of fairness, this would be one part that is kind of a moral responsibility, but a legal responsibility may be the most important aspect of it here. Right. And we are going to get into four reasons why you should report all income. And they're not all just ethical because I understand that people are going to be like, oh, don't sit there wagging your finger at me. But yes, let's first touch on the legal risk, Peter.
Yeah. Well, the IRS is the world's most aggressive collection agency. They have the ability to garnish your wages, put liens on your property and bank accounts. If they feel they have not been paid, there are recourses and they put 80 billion dollars in new budget line items to increase that power and hired something like eighty seven thousand new agents across the last four years.
So they are out there trying to make sure that they are collecting on all that is owed and do. And don't forget why Al Capone ended up actually going to jail, the notorious criminal for all his criminal affairs. That's not why he went to jail eventually. It was tax evasion.
Now, the IRS would much rather have you out there earning and paying on your tax bill than to put you in jail. But that is the extent of the recourses that they do have available to them. And they will uncover many, many items.
They are a very detailed accounting agency tied with those collection abilities. So just, you know, don't don't venture into the gray area with them. Right. Right. All right.
Now let's get into the what's in it for me reasons, starting with the next reason. Of course, this affects the long term health and growth of your business. Yeah. If you don't put your revenue and your income and your profit on the books, then when you go to reinvest in your business and perhaps finance new research, development, equipment, personnel, buildings, you know, those things are a proxy and byproduct of how much revenue the business on paper looks like it's generating. So you really could be kind of cutting off your nose to spite your face or shooting yourself in the foot if you are looking for growth of your business.
If you need to finance large capital expenditures into the future, that ability may be very hindered if you have not properly documented and stated the income and the revenue that you're bringing in. Right. Also, under reporting your income could affect your ability to plan for the future and finance your retirement. Right. Yeah. Retirement account contributions are also based off of income in certain instances, IRA and 401K contributions, the ability to fund a simple or a SEP IRA based on income in in some capacity, as well as your future Social Security.
Right. If you have been under reporting that income, then you are receiving less than credits to your Social Security. So so not only may you have not been able to finance and grow the business during your working career, but then one day when you do hope to retire, you do not get the credit for the income that you had received.
And therefore they do not replace as much of your income when you retire with that Social Security. So all important elements to remember there. And then, of course, last, you want your business to be valued well, especially when it comes time to sell it.
Yeah. For a lot of business owners, the business itself is the largest part of their retirement plan. They plan to transition out of that business, whether it is selling it to an unaffiliated third party or maybe even transitioning it to family members or employees in order to get the most for your business.
That formula often goes that you will receive something like two to five times annual revenue or EBITDA earnings before taxes taxes and depreciation and interest. And so you've got to put that money on the books in order for it to be there when it comes time to negotiate the sale of the business. And if you have not been, especially in a manner where it has been a repeated process of serial unreporting, that basically is going to dictate the value, the worth of the business when you go to sell it. So for numerous reasons, I think that it is very important for business owners to look, we all want to pay the least amount in taxes possible. And owning a business does offer a true deduction, a legitimate and place where you are investing money before you're bringing it home back into a business to grow the economy, to pay other people. But do not abuse that for the legal and the financial implications and repercussions and for your own well-being and benefit into future years. Make sure that you are actually putting on the books as much as possible and then finding legitimate recourses to save the money, invest the money and grow the money within the tax code.
Right. I'm glad we get to talk this through, Peter, because I think a lot of people see the short-term benefits, maybe feel a little icky about underreporting, but there are good, selfish reasons to be honest about all this. If somebody would like to talk through more of these tax implications or how to save money on taxes, what's the best way to reach you? Give me a call at Rashaan Planning, 919-300-5886, 919-300-5886. We talk through small and mid-sized business owner issues and owner and C-level employee retirement planning all the time with our clients and would be happy to talk with you.
You can also reach out online, rashaanplanning.com is what it looks like, richonplanning.com, or email me peter at rashaanplanning.com. Happy to talk these issues and more through. Great. Peter, thank you. Thank you.
Hey folks, Peter Rashaan here with Rashaan Planning. So glad that you are enjoying the podcast Planning Matters Radio. You know, one of the tools that we've put out there that people really seem to appreciate and really are our finding of value is at 919retired.com. It is your retirement tax bill calculator. If you've got any kind of retirement account, your tax deferred 401k or IRA, this is the website, this is the resource where you can go, you can plug in your own numbers, your information, you can slide the the the tool calculator up and down for your tax rate or your amount of savings and see what your tax bill is likely to be if you default and defer to the IRS's plan versus what you could potentially bring that tax bill down to.
A lot of times it is a very significant savings, so if you have not yet, go to the website 919retired.com, run your numbers on the retirement tax bill calculator. This has been Planning Matters Radio. The content of this radio show is provided for informational purposes only and is not a solicitation or recommendation of any investment strategy. You are encouraged to seek investment, tax, or legal advice from an independent professional advisor. Any investments and or investment strategies mentioned involve risk, including the possible loss principle. Advisory services offered through Brooks' Own Capital Management, a registered investment advisor fiduciary duty extends solely to investment advisory advice and does not extend to other activities such as insurance or broker dealer services. Advisory clients are charged a quarterly fee for assets under management while insurance products pay a commission which may result in a conflict of interest regarding compensation.
Whisper: medium.en / 2024-09-07 10:18:40 / 2024-09-07 10:22:50 / 4
