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The evil 5 letter word "TAXES"

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  • The evil 5 letter word "TAXES"

    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 ?

  • #2
    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?
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    • #3
      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 .

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      • #4
        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.
        Pat

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        • #5
          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.

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          • #6
            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.

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            • #7
              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 ?

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              • #8
                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.
                Andy
                Halifax, Nova Scotia

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                • #9
                  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.
                  Andy
                  Halifax, Nova Scotia

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                  • #10
                    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 See I knew if the government was involved it had to get complected. But I understand a bit better now.

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                    • #11
                      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

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                      • #12
                        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.
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                        • #13
                          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 ) 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

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

                          Graham

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                          • #14
                            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?
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                            • #15
                              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.
                              Last edited by picframer; 07-21-2011, 04:09 AM.
                              Andy
                              Halifax, Nova Scotia

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