If you're like many small business owners, you're glad to have tax day behind you. Even if you did file an extension, you had to figure out what you made (or didn't) and that's usually a major pain.
For many, tax time is an exercise in creativity. How much can I get away with before the Uncle Sam catches on. A few years back we needed a new accountant for our air tour business. One we talked to, a former I.R.S. agent, said to us, “Some business owners want to sleep well, others want to eat well. Which are you?”
What he was telling us was that we were talking to the wrong guy if we wanted to cheat on our taxes. We knew that if we wanted to get a good night’s sleep on the eve of an I.R.S. audit, we’d come to the right place. In the ‘been there, done that’ sense we knew the I.R.S. philosophy was ‘guilty until you can prove yourself innocent,’ and a good accountant with insider knowledge was worth his weight in gold–maybe literally.
It’s all too easy to try to save taxes by understating your income, particularly if you run a cash business. Likewise, it’s tempting to deduct non-business expenses -- who's to know, right. Wrong, and a really good accountant will advise against it.
But if I.R.S. audit worries aren’t enough to keep you up at night, consider that understating your business profit will handicap your ability to raise money for the company. Lenders and investors won’t be amused when you show them your tax reports and than add, with a wink, that they really don’t show all your income. Dishonest business practices, no matter how good the real numbers may look, don’t make you a good investment.
In addition, while you may eat well in the short run, when it comes time to sell your business, you’ll find your plate far from full. That’s because businesses typically sell for a multiple of net income. So, if a home based businesses like yours sell for five times net, every understated dollar of profit will cost you five dollars when you sell.
All in all, I'd rather sleep well anyway. How 'bout you?