Nobody enjoys paying taxes, whether they’re personal, corporate, capital gains, self-employment or something else, but they’re a part of life that can’t be taken lightly.
And yet playing games with taxes is common. The Fiscal Times reported in 2012 that back in 2006 (the most recent year for which data was available) businesses that log income on individual returns — mostly small businesses–were $122 billion short in their tax payments.
When choosing to minimize taxes, there are potential consequences down the line. Those are consequences you may pay when it’s time to get a loan–or not get one.
As a business owner, you may discover that you are trading short-term additional profits for the possibility of not being able to obtain the long-term loans that will help you grow your business or get it through lean times.
And consider this: If a Small Business Administration (SBA) lender discovers that you’ve been fraudulently been reporting your balance sheets, they are obligated by law to decline the loan and report the issue to the Internal Revenue Service (IRS).
As business loan advisors for our clients, we work with hundreds of lenders nationwide that offer a variety of loan programs.
Unfortunately, we all too often see tax returns that don’t accurately reflect what’s going on in the business. Even an untrained eye sometimes can spot ledgers that seem fishy.
And that hurts our business, too. We lose leverage with our lenders. The key to successful business relationships is trust, so presenting clients with suspect finances can hinder our professional standing.
Next, think about it from the lender’s perspective.
The first thing a lender is going to wonder is that if the taxes are fudged, what other aspects of the business are not above-board as well.
Remember that lenders are in business to make money and minimize their own risk. If any aspects of a potential client’s finances appear to be suspect, the lender is sure to take an extremely close look.
The lender likely will take a better-safe-than-sorry approach, and decline the loan. Even if the lender does somehow approve a loan, the interest rate won’t be as favorable and the terms are sure to be onerous.
More likely, though, the loan will be rejected and, as I can relate from experience, loan shopping is no fun when repeated rejections loom.
For many of the same reasons already mentioned, dishonest tax returns may lead to trouble when it’s time to try to sell your business. That’s especially true if you’re selling your business because you’ve been unable to obtain a loan.
So when you’re thinking about your tax strategy this year, think long. It’s better to take the short-term pain of paying the accurate amount of taxes so you can enjoy the long-term gain of a clear conscience and a balance sheet that will hold up under the scrutiny of lenders who will make or break the future of your business.