As a buy-side business due diligence consultant and having performed hundreds of due diligence and business valuation engagements many business tax returns are a classic example of how not to maximize business value and ultimately the owner’s wealth. It sometimes feels as if CPAs, Tax Preparers & Business Owners believe that preparing a tax return should be a work of art, emphasizing a confusing lack of profitability. This approach requires complex and confusing presentations with added explanations and arguments rationalizing the process with creative add-backs that do frequenty not meet basic accounting standards.
This is almost always a mistake. It can create unnecessary red flags to the IRS, and concerns from valuation experts and others. The practice may give business owners temporary peace of mind and allow expensive tax preparation fees to be justified as magical solutions to paying lower taxes. The practice undermines business value, credibility and creates high risks to the business owner.
None of this is necessary and unless the intent is to commit tax fraud, it undermines what should be the better objective of making better business decisions regarding business taxes. Bad tax returns for selling my business on its face, provide less useful information to an owner, lender or future buyer of the business. It avoids the better practice of good business tax planning.
Sell business? It ultimately costs more money than what was saved by the bad practices and process; there are better ways. Minimizing business taxes aggressively, transparently and legally is smart business; intentionally violating tax laws is simply stupid. It is risky and more costly that what was gained versus better alternatives. Business ownership is a tremendous pathway to wealth building for owners. When sustainable income and wealth building is a primary objective, choosing good tax strategies, good planning, preparation and business tax practices can pay huge dividends.
Part of good strategy involves being transparent with legitimate tax deductions that may include more “discretionary” items that without clarity, may understate or confuse the higher value arguments of the business to a buyer, valuation professional, lender or investor. Legal tax deductions that are legitimate business “perks” are as valuable as taxable income.
Tax Returns can provide better clarity as to these types of “ownership benefits” whether they are high end vehicles, business travel, insurance and retirement benefits, high end offices, decor or many others.
When tax returns and financial statements hide actual business performance, opportunities to improve profits, cash flow and business value are frequently hidden as well. Lenders, investors, buyers and auditors value transparency; trust is a critical element in building maximum business value. Business owners sign their tax returns “under penalty of perjury”. If these documents cannot stand up to reasonabl scrutiny, what business information can be trusted by any third party? How valuable is it?
We understand value building’s need for strong cash flow which in turn, requires aggressively managing all expenses, including taxes.
Our free business tax review process can provide valuable insight with no obligation, For a free strategy session, contact us at [email protected].