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View Full Version : The evil 5 letter word "TAXES"


Ducke
07-15-2011, 08:12 PM
This being my first year on my own I am learning all kinds of neat new things.
I have read many books and talked to many business owners and everyone has been a great help.

So I have a question about my pending year end.

Is it better to end the year with a profit in the bank ?
or
Is it better to reinvest your profit back into the company (equipment advertising etc) and have a 0 balance at the year end ?

I have been setting a side for the sales tax portion so I have that covered.
But which of the above is better for me in the end as it applies to my income Taxes ?

Steve
07-15-2011, 08:48 PM
Let me pick your brain for a moment on this because I think this is a very important topic many many new lawn care business owners deal with.

Are you leaning towards one or the other?

What's your view on the pro's and con's of each?

bruces
07-15-2011, 10:14 PM
its a hard question to answer .If you have money in the bank ,you will have an easier time getting a loan ,mortgage etc. ,if you have no money you will pay less taxes but not have any luck when you darken the door of your bank looking for money to buy something with .Talk to an accountant because either situation has benefits and issues to deal with .

The Cleaning Doctor
07-15-2011, 10:22 PM
Let's put it another way. Say you are in a 30% tax bracket to make things easy for the math and you have $1,000 profit. There are some things you need to think about. This goes for mortgages too.

You have a 1k profit so your taxes would be $300 at 30%

Now you are going to need money come spring when things finally thaw out up there again.

So you want to spend $1,000 just so you don't have to send the government $300?

Same goes for not paying off mortgages, you would spend 10k in interest to a bank every year just so you don't have to pay the government 3k?

Just something to think about.

Ducke
07-16-2011, 07:13 AM
Let me pick your brain for a moment on this because I think this is a very important topic many many new lawn care business owners deal with.

Are you leaning towards one or the other?

What's your view on the pro's and con's of each?

I would like to be able to show a profit at my year end Just to be able to show the kind of success I have had.

Not sure of the pro's and Con's yet this is why I asked the question.
I suppose having a profit will cost me money while breaking even won't ???
I not really sure at this point but maybe I will be enlighten in the coming days.

Ducke
07-16-2011, 07:15 AM
its a hard question to answer .If you have money in the bank ,you will have an easier time getting a loan ,mortgage etc. ,if you have no money you will pay less taxes but not have any luck when you darken the door of your bank looking for money to buy something with .Talk to an accountant because either situation has benefits and issues to deal with .

This is not an issue with me as I am operating on a cash on hand bases, I did not borrow any money to start up and am not planning on becoming a Mega million Landscaper either.

Ducke
07-16-2011, 07:19 AM
Let's put it another way. Say you are in a 30% tax bracket to make things easy for the math and you have $1,000 profit. There are some things you need to think about. This goes for mortgages too.

You have a 1k profit so your taxes would be $300 at 30%

Now you are going to need money come spring when things finally thaw out up there again.

So you want to spend $1,000 just so you don't have to send the government $300?

Same goes for not paying off mortgages, you would spend 10k in interest to a bank every year just so you don't have to pay the government 3k?

Just something to think about.

I understand what your saying but wouldn't it be nicer to put the $300.00 toward a new weed Whacker instead of giving it to some politician to have a steak dinner ?

picframer
07-16-2011, 05:50 PM
Having cash in the bank has nothing to do with the tax you pay, here in Canada.

You pay tax's on your net income after depreciation, depreciation in Canada has various rates depending on the piece of equipment and CCRA's estimate on it's expected life.

A company should always have retained earnings at year end which forms working capital in the new year.

picframer
07-16-2011, 05:55 PM
I would like to be able to show a profit at my year end Just to be able to show the kind of success I have had.

Not sure of the pro's and Con's yet this is why I asked the question.
I suppose having a profit will cost me money while breaking even won't ???
I not really sure at this point but maybe I will be enlighten in the coming days.

There is a big difference between operating income and net income. Operating income is above the line and what a bank would look at if going for a loan or what a buyer of your company would look at.

Your comment on Interest VS tax's on Mortgages here in Canada is a lot more complicated than that.

You can apportion a percentage of your home towards the business and deprecate that portion to reduce your taxable income, should you sell your house it's a taxable capital gain at a business rate which is far less than income tax rates.

Ducke
07-17-2011, 07:45 AM
There is a big difference between operating income and net income. Operating income is above the line and what a bank would look at if going for a loan or what a buyer of your company would look at.

Your comment on Interest VS tax's on Mortgages here in Canada is a lot more complicated than that.

You can apportion a percentage of your home towards the business and deprecate that portion to reduce your taxable income, should you sell your house it's a taxable capital gain at a business rate which is far less than income tax rates.

WHAAAAA:eek: See I knew if the government was involved it had to get complected. But I understand a bit better now.

justin_time
07-17-2011, 01:35 PM
I'd go buy some RRSP (Registered Retirement Savings Plan) and I'd ask your bookkeeper about it because there's a maximum amount you can claim. The rest I'd leave it in the account. You'll need to budget for the following spring.

That's my 2 cents, hope it helped :)

Steve
07-18-2011, 01:54 PM
I understand what your saying but wouldn't it be nicer to put the $300.00 toward a new weed Whacker instead of giving it to some politician to have a steak dinner ?

I really think you nailed this here. I bet you most people if asked would feel this way. However my take is, it's better to have money in the bank first off. Only buy equipment if you need it.

Money is your business's life's blood. You will need a healthy reserve for all those just in case moments. Like the truck transmission just went out. Or you got sick and needed to take a week, or 2 off.

When you have cash in the bank, you can get over a lot of hurdles that would knock out other smaller or newer lawn care businesses.

A three to six month emergency fund would be a nice goal to have.

Ducke
07-18-2011, 06:01 PM
OK I get the part about savings and using your capital for future loans etc.
Maybe I asked my original question wrong ?
Let see if I can elaborate on it a bit more.

If I am taking a monthly wage from my company and then what is left I am putting away in a bank account for the company.
Will I be taxed on what I make salary wise as well as what I make as an LCO ?
If so which is better ? (Tax wise ) a large yearly salary and a small profit in the company or a small salary and a large profit in the bank ?
or should I set an amount (lets say $2000.00) and anything over and above that figure I take to pay my taxes bills loan payments etc and then what ever is left over from all that is my pay (.25 :o) and I still have my original $2000.00 in the bank account and then later as I make more Money with more jobs I can up the amount to $3000.00 so on and so on.
I have been doing some reading on this subject but most of the books I have read are from the USA, I finally got a book that is Canadian and that is what confused me even more.
I may have to break down and go speak to an Accountant :eek:

Thanks for all the advice it is helping to make something a little clearer.

Graham

Steve
07-19-2011, 08:21 PM
If I am taking a monthly wage from my company and then what is left I am putting away in a bank account for the company.
Will I be taxed on what I make salary wise as well as what I make as an LCO ?
If so which is better ? (Tax wise ) a large yearly salary and a small profit in the company or a small salary and a large profit in the bank ?

I am not an accountant but here is my view.

Whether you have the money in a company account or a personal account. The income from either is going to be taxed.

If you own the company, both your personal money and the company money is still contributing to your net worth. And it is always better to save your money and only buy what you absolutely need.

In the U.S. there are a bunch of different ways you can register a business. You can be a sole proprietor, have an limited liability corp, s-corp or a c-corp.

Now the c-corp is different from others as far as taxes go. The income from the c-corp is taxed and then the salaries paid out are taxed. So if you own a c-corp, you run into a double taxation. I think that is why the s-corps were created to help smaller business owners avoid this.

Does this help?

picframer
07-21-2011, 04:06 AM
Steve has it,

Here in Canada in your situation you are a sole proprietor and as such you are going to pay tax on the companies net income and your salary.

If I had time I would sit down and help you however I am going 7 days a week, remember you can apportion a part of your home as a business expense, that includes property tax's, lights, heat, telephone, internet, interest on your mortgage etc.

For the small amount in will cost you talk to your accountant or get a really good bookkeeper.

SECTLANDSCAPING
12-21-2011, 12:34 PM
Around this time I have a general idea of what Ill pay in taxes. So what I do is buy all my tune up parts for equipment and trucks (belts, blades, plugs, filters, brakes, fluids, tools, tires, chains, trimmer line, bearings). I rather buy it now and get the deduction in a few months then buy it in spring and wait a year to get it back. This is all stuff your going to use either way. It will never hurt to have a extra set of blades a spindle or so on. There small expenses too but they add it.

Sometimes ill purchase equipment that ill need next year. My local mulch yard buys a new truck or loader at this time every year. That can be a gamble though if business becomes slow. Thats why I say get everything to maintain your current equipment now. Then when spring rolls around youll have everything tuned and ready to go.

That would be my advice. Spend what you can, dont spend it all so you make no profit. In a way taxes penalize you for saving and forces you to reinvest earnings.

Steve
12-22-2011, 11:01 AM
For those that don't understand this too well, what do you feel are the benefits to purchasing parts or equipment now? How much are they really saving? What is the difference if they buy it now or next year?

SECTLANDSCAPING
12-22-2011, 11:26 AM
For those that don't understand this too well, what do you feel are the benefits to purchasing parts or equipment now? How much are they really saving? What is the difference if they buy it now or next year?

The main difference is if you buy the parts in march or when something breaks in the summer. Youll be waiting a long time to claim it on your taxes. So its coming out your pocket for a while.

The other factor is for every dollar you didnt spend on parts, youll now pay in taxes. I rather have a extra set of everything then a extra $500 tax payment. So either way the money is gone.

If you buy now. Youll be using end of the year surplus money and getting the money back in the form of a deduction in april.

Steve
12-23-2011, 01:45 PM
The other factor is for every dollar you didnt spend on parts, youll now pay in taxes. I rather have a extra set of everything then a extra $500 tax payment. So either way the money is gone.

No matter when you buy it, such expenses are still tax deductible right?

The thing I get concerned with is newer business owners tend to take this and run with it and at the end of the year spend everything on stuff they may or may not need.

Ultimately buying parts and writing that expense off as a tax deductible expense really means you are still taking money out of your pocket to purchase the things.

Where something that you can write off as tax deductible is still costing you 70 cents on the dollar isn't it? Depending what your tax bracket is?

It's not like it is free right? If you didn't buy that say $100 part, you would still retain $70 or so after you paid taxes on that $100. So doesn't the question of whether you should buy something like that or not come down to, would you rather have that $70 per $100 in your pocket or would you rather spend it on a part and have a 30% or so discount because you are buying it with non-taxed money?

SECTLANDSCAPING
12-23-2011, 02:48 PM
No matter when you buy it, such expenses are still tax deductible right?

The thing I get concerned with is newer business owners tend to take this and run with it and at the end of the year spend everything on stuff they may or may not need.

Ultimately buying parts and writing that expense off as a tax deductible expense really means you are still taking money out of your pocket to purchase the things.

Where something that you can write off as tax deductible is still costing you 70 cents on the dollar isn't it? Depending what your tax bracket is?

It's not like it is free right? If you didn't buy that say $100 part, you would still retain $70 or so after you paid taxes on that $100. So doesn't the question of whether you should buy something like that or not come down to, would you rather have that $70 per $100 in your pocket or would you rather spend it on a part and have a 30% or so discount because you are buying it with non-taxed money?
This is why I said spend what you can. If you were thinking of adding a new push mower go for it. I wouldnt go get a ztr so I didnt have to pay taxes. It would be very unwise to just blow money not to pay the tax man.

Yeah you could deduct it the following year. Thats why its a preference. Spend now when you have a surplus of cash or spend in the spring before money is coming in. The only problem with spending in the spring is your waiting a year to get the tax deduction vs a few months.

Chaz
12-23-2011, 08:11 PM
now what if you invested this into a CD or a bond? would you still have to pay income taxes on it?

Steve
12-24-2011, 12:25 PM
now what if you invested this into a CD or a bond? would you still have to pay income taxes on it?

From what I know, if you buy a cd or a bond, you buy it with post taxed money. Meaning this is money you have already paid tax on.

I do believe there are some bonds that you don't have to pay an income tax on the interest but I don't know much about them.

On the other hand, with an 401k there is a type you can put money in that is pre-taxed. Then you pay tax on it after you pull it out when you are retired. With the goal being, you will be in a lower tax bracket at that point in life.

Ultimately, it is very important to not spend money on things you don't need. Running a streamlined operation and banking as much money as possible is your best bet for business longevity.