Business Income Taxes Hurt the Small Business
Is This a New Thing?

At this point in the year, you may be wondering if this series of articles is ever going to tell you something new about the problems of the small business. In short - no! The fact is that you, as a small business owner or consultant have already experienced most, if not all, of these problems in your business.

This monthÂ’s article is a perfect example. Any small businessperson who has ever shown a profit knows one thing for certain - somehow, someway the state is going to get its share of your income. As Willy Wonka might say, "Erase that. Reverse." The state is going to find a way to get what it THINKS is its share of your income. For those of you in Texas, you have a perfect example in your state franchise tax. At one time, the franchise tax was based solely on the "capital" of your company. If you had no capital, you paid no tax. Well, that changed. Now you have a "franchise" tax that is equal to the greater of tax based on capital or tax based on a percentage of your income. For some small businesses, the difference can be staggering.

So, if this article is not going to let you in on some top-secret new business problem, what will you learn this month? Believe it or not, this monthÂ’s article will point out a few things not to do. Some may say the suggestions are nothing more than common sense, but thatÂ’s the nature of most articles on business management. ThereÂ’s a whole group of people making their living from teaching managers and executives what should be common sense and they are making a good living. Still, we all get so involved in the day-to-day battles that taking time to look at problems from a common sense standpoint is nearly impossible.


DonÂ’t worry about the taxes!

This suggestion takes a bit of explanation. Taxes are a fact of life and your job as a good taxpayer is to pay as little in tax to the state government as possible. In any business setting, however, taxes should not be the prime concern in any decision you make. For example, before it was fixed, federal law allowed you to buy a big expensive Hummer and then write the cost off. Some states accepted the federal law and some did not. Did this mean that it was a good idea to go buy that Hummer? LetÂ’s look at a few facts.

The first and foremost question is: Did you need the Hummer? Need is subjective, but letÂ’s say your old vehicle is doing well, no major repairs are needed, Â…you know, you donÂ’t really need a new vehicle, butÂ…wellÂ…the neighbor got one and you want a new toy too! If the answer is that you donÂ’t need the vehicle, why are you going to spend $50,000 for an H2 that gets lousy gas mileage? Even if you pay state tax at 6%, after saving on federal and state taxes, you will still be out of pocket 66% or so on your investment. In the case of the vehicle, you spent $50,000, saved taxes of $17,000, and still put $33,000 cash into a new vehicle you really didnÂ’t need. Where is the business sense in doing that?

There was no business sense in what many people did in purchasing expensive vehicles before the rules were changed on business vehicle purchases, but they wanted the vehicle and the tax incentives helped make the sale. ThereÂ’s nothing wrong with that, but if you are simply interested in the economics of a decision, donÂ’t even think about taxes as a major consideration.


DonÂ’t forget when your business ends its tax year!

There will be a little more discussion on this topic in the tax and accounting article for this month, but here is a little reversal in the first rule. If it is a slam-dunk that you need a piece of equipment, or you will be required to make a particular expenditure, why not take advantage of the tax system to minimize the present value of the expenditure. Say you know that a new embroidery machine will increase production and make you far more profitable in the future. You plan on getting one in the next six months, but just havenÂ’t taken the time to place the order. This being October, you have three months in the current calendar tax year to purchase the equipment and get it running. If you are going to spend the money anyway, why not buy the equipment in 2005 and get the tax deduction in this year instead of 2006?


DonÂ’t automatically assume you know all the rules!

Many states and many local governments offer some economic, a/k/a tax incentives, to lure businesses to them. Given the propensity of governments to change laws constantly, donÂ’t assume that you already know the full tax effect of any decision you make. Take time to talk to your local chamber of commerce or economic development authority. Ask them what incentives you might have available. In some cases, the bucks can get pretty big.


DonÂ’t forget your friendly CPA!

One thing is for certain - nobody knows everything. They donÂ’t have time to know everything and thatÂ’s where this firm comes in. We are here to help you! We arenÂ’t interested in sending more money to the state capitol to fund the public debt. We would much rather you keep that money to fund your own debt, or retirement, or that Hummer you want. Give us a call and letÂ’s talk about some ways you might be able to shave a few bucks off your state tax bill.

Have a great October and stay out of the way of those money-eating tax goblins this Halloween.

These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.

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