How Reading a Financial Statement Saved a Company


This post is in: Business
No Comments

1-25-2011-1

Year-end tax planning should start in September. Regular tax planning should start at least a year in advance. For a lot of people, though, tax planning often starts at the very last minute.

And then ever so often, I get a new client in the first few months of the year who wants tax planning for the year before.

Once the year is done, all you can do is report on the year. You can’t change it. Trying to use a tax return to create a tax strategy is like trying to change the past. You can try really hard, but you can’t do it.

But one thing that all businesses need to have is an accurate set of financial statements. And unfortunately many businesses are doing that haphazardly at best. This is especially true for Sole Proprietorships who don’t need to report assets and liabilities on their return. Form 1065 (Partnerships), Form 1120S (S Corporations) and Form 1120(C Corporations) all required balance sheets as part of the return. That means you need real double entry financial statements.

This past year, I had a new client who had previously operated as an S Corporation (Form 1120s) but because her business was small, she was able to take an exemption from reporting the balance sheet. Well, we assumed it was small because she and her tax preparer had never gotten around to actually pulling the financial statements together for years. I wanted to fix that so we could exactly where she was with her business. Without the financial statements, she was just flying blind.

So she worked with her bookkeeper and us to get her financial statements caught up. We already knew that this last year had been a great year for her financially and so she was going to have to pay more tax then she had expected.

Well, at least that’s what we thought until we went together through her Balance Sheet. The first thing we noticed was a pretty large number in inventory – over $70,000. She never kept much inventory, so this was puzzling. It turns out that over the years she had bought items that either were packed together for sale in bulk, donated or thrown away. Her actual inventory was closer to $10,000.

Additionally, we found a couple of loans that she had made to employees and advances paid to vendors. The employees were long since gone and never paid the money. There was no hope of repayment either. The advances to vendors were fulfilled with work. That meant she had an extra $15,000 in expenses (from the vendors) and $5,000 in bad loans.. deductions. Before we went through this exercise, my new client had no idea how she was going to pay her tax bill. By preparing her financial statements and actually looking at the numbers, she discovered a tax savings of over $25,000 in federal and state taxes!

She now had good financial information so she could make better decisions plus she had to pay a whole lot less in taxes.

As your tax strategists, we need good accurate information first before we can make solid recommendations.



Leave a Comment