Your business tax returns can work against your business objectives. I repeat. Your business tax returns, and the stance you take in preparing them, can work against business objectives such as obtaining bank loans or other financing, building strong supplier relationships (those with excellent terms!),…
Why is this so often the problem with small business owners? Small business owners typically do not prepare and track financial statements on a monthly or quarterly basis. Instead, most of you solely rely on the preparation of your tax returns for your one and only set of financial statements for the year. This is such a horrible practice (i.e., would you check your personal/family financial position once a year?), but I won’t go into that right now.
The main problem is that, as business owners, you are so focused on reducing your tax burden, that you fail to think of your businesses from an external perspective. Essentially, you have tunnel vision! All you can see is lower taxes. I tell business owners if they can have a CPA compile or, preferably, review their financial statements quarterly, they can greatly increase the likelihood of funding. (Of course, audits are optimal but can be costly.) In addition, if they can track and document the personal expenses they run through their business to the point where the CPA is comfortable enough to add a note to the financial statements about those personal expenses, the owner can have their tax loss and still qualify for a loan. But without these externally prepared statements, only the tax returns qualify as credible documentation.
This same problem occurs when business owners are ready to sell their business. They claim that their businesses made more money, really!, than shown on the tax returns. And they want the potential buyers to believe them even though the seller has little to no credible documentation of this.
I can understand the reluctance. Unlike rapidly growing companies with outside backing many small businesses are mom and pops or have one owner. The owners don’t have an executive management team, outside board members or consultants to get advice and insight from. It’s all on their shoulders. Any mistakes fall solely on their shoulders. As a result, small business owners tend to be very conservative and to think and re-think certain moves to ensure they continue to have a business that supports their own families and that of their employees.