to business people: what do you do with a tax cut when you don't have customers?

[upaloopa]

14. OK, you are a sole proprietor. You do some tax planning for this year before Dec 31.

(These are all made up numbers) The given is that in each scenario your net income is the same. The variable is the tax rate on your gross taxable income.

You have a 6-30 business fiscal year end. This gives you some months to adjust your business net income before your personal year end of 12-31.

You know what your tax rate is going to be based on all your other income and deductions and current IRS rules. (this is done by your accountant usually)

At your estimated tax rate say you will owe $200,000 given all the income and deductions you know you will have.

Say the estimated net income of your business is $1,000,000. which is income on a schedule C on your personal income tax.

You want to lower the $200,000 taxes you will owe so you need to come up with more business expenses to lower the net income of your business. So say you increase your business contribution to your personal retirement plan thus increasing your business expenses and reducing the net income and thus reducing the schedule C income and your personal income tax expense.

You could just as easily buy a new car or cars for your business and take accelerated depreciation thus having the same outcome of the increase to your retirement plan.

You could hire your kids or other people to build up your inventory for six months increasing your payroll tax and salary expense.

You could do any number of things to increase your business expenses that also increase your business assets (cars or inventory in this example) or personal retirement assets rather than give the money to the IRS.


On the other hand if taxes were low and you didn't mind the amount of tax that will result in your schedule C net income from your busieness you don't need to add extra expense to offset the tax so you keep the extra net income after tax in the business as cash.


Another thing you could do if taxes were high or low, you could increase your business expenses to the point were you had a net loss. The loss would reduce your taxable income and if you could reduce it to where you don't owe tax and still didn't use up all the loss you could pass the remainder of the loss to future years to reduce those taxes or carry it back to reduce past year's taxes. You can't continue to have net losses each year and get out of paying taxes. At some point you have to show net income or lose the ability of using the net losses to reduce taxes.



Lowering taxes on profitable businesses doesn't mean they will take the extra income and hire people, they usually bank the extra income. Higher tax rates leads business owners to want to reduce taxes and use the money in the business rather than give it to the IRS.