Let me make one thing very clear here. I will be talking about placing the numbers on your business tax returns, not about making it up!!!
Numbers do not lie, only people working with them sometimes do. In my world, whatever you do, YOU DO NOT COOK THE NUMBERS !!
However, if you planning financing for your business, before you prepare the most recent biz. tax return, think about the kind of financing you will be trying to get, because the way you place your first net income profit in many years will have an impact on the type of the financing you will have the best chance to get.
The post is about a numbers so here goes an example..:
You put your own $ 100,000.00 into your business during the first 3 years. Treat it like loan from shareholder.
Now, in 3rd. year you finally have $ 50,000.00 net income profit.
The question is, Who do you want to impress? Private investors or the bank underwriters ?
Investors are generally smart and know how to read tax returns. You don’t want to place the first profit on return as a net income gain, you just pay yourself portion of your own loan to the business back and save money on taxes. If you approach me as a potentional investor in your business and explain to me what’s the deal with that, I will understand and I will think O.K, this guy is smart, profitable and know how to play the game. Here is your check right ? Right.
Underwriters in the regular banks ( not the biz. oriented) on the other hand, are generally morons and have no clue how to read the tax returns. So if you planning to go with traditional bank financing, you may want to file the profit in different spot. Forget about paying yourself the loan back, sacrifice a few thousand dollars to Uncle Sam and show the profit as a net income gain. ( In this case business still owes the original amount to you).
I must say, that if you approach me with this return, I will think you are an Idiot, but rest assured, the Underwriters will love you to “death.”
There is always next year and you can start paying the loan back to you then, while you have the bank financing secured, and to think of it, if you explain to me, what you did and for what purpose, I will understand too !!
After all, I don’t work in the bank underwriting department, and I know a little bit about numbers.
So again, Numbers Matters, the way you work with them matters, as long as they are The true, The whole true and nothing but the true numbers !