Small Business Tax Preparation: Write-off Deductions or Get Financing?

| December 17, 2014 | By

Small business tax preparation takes some strategy and looking ahead. When it comes to growing your business with outside financing, you’ll want to complete your taxes in a way that reflects profitability--which means you might not write off all those deductions. If you plan on applying for loans in the near future, it’s probably best to bite the bullet and pay more taxes this year. We explain more in this video:

A History of Small Business Financing : Relationships Pre-2008

Before 2008 it was pretty easy to get a small business loan from a bank if you had 3 things:

  1. A good idea.

  2. A good business plan.

  3. A good relationship with your banker.

That was enough to take your business to the next level with outside financing. Your ability to secure a loan was really based on your relationship with your banker. It was relatively easy for most businesses to get outside financing before the housing/market crash of 2008.

Current State of Small Business Financing Post-2008:

When the market took a nose-dive in 2008, a few things happened to change the way small businesses applied for loans. The first and most important change was in the relationship between banker and business owner: it no longer matters what your relationship is with your banker. Your banker now has to answer to an underwriter and new federal regulations. Here’s the new process:

  1. You provide the following information to your banker:
    1. 2 years of tax returns
    2. Proof that the business is profitable and growing.
  2. Your banker submits the documents to an underwriter.
  3. The underwriter will inform your banker if you are approved for a loan and the terms.

Should I Take Deductions or Get Outside Financing?

You’ve really got to think ahead into the future of your small business. If you think you’ll be looking for any outside financing within the next couple of years, you’ll want to be very conservative about the deductions you write off. If you won’t be needing any outside financing within the next few years, go ahead and write off those deductions to your heart’s content.

Would You Like Specific Advice For Your Small Business? Free Tax Consultation:

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Video Transcript:

Ryan: Hi, I’m Ryan Steck. I’m the lead CPA here at Ignite Spot

Ann: And I’m Ann Whittaker. I’m in the marketing department, and I have no idea what we’re talking about today.

Ryan: Should be exciting for Ann and the rest of you. So today, what we’re going to talk about is financing. Not only are we going to talk about financing, but we’re going to talk about tax strategy and financing. What do I mean by financing? A lot of businesses out there need loans at some point.

Ann: Got it.

Ryan: Businesses like to grow; they like to develop. Sometimes we don’t have the resources to get what we want as a business. So, we need to get some outside funding. A lot of people go the traditional route, and start to look at banks to get their funding.

Ann: Right.

Ryan: So what we’re going to talk about today is what does funding mean for your business, what tax strategies there are, and how those two get married together, and how they can work against each other.

Ann: So this is kind of going over, then, you know, as you’re trying to grow your business you want to be aware of the tax consequences of the route you choose.

Ryan: Absolutely. The tax consequences, but also understanding changes you can and can’t make if you think you’re going to get a loan.

Ann: Got it.

Ryan: First, let’s start talking about the lending environment right now, and what it looks like to go out and get a loan. First, is a quick history lesson: before 2008, it was pretty easy to get a loan. If you had a good business plan, a good idea, and a strong relationship with a banker, a loan officer, or someone who was lending money, odds were you were probably going to get the loan you wanted.

Ann: Awesome.

Ryan: Now things have changed. 2008 came, the housing market crashed, the banking system changed, federal regulations came in--the world is just different now. And, so, now that relationship with a banker, a loan officer--they’re still important, but they don’t nearly do what they used to in getting you a loan and financing. So, what we have to understand is that it’s different. What you do and how you treat your taxes, what you do to go about getting loans--it’s all different now, and we need to be aware of that as business owners because if you’re going to go to the next level, a lot of times you’re going to need a loan.

Ann: Alright, so help us out. What has changed, and what do businesses now need to apply for those loans?

Ryan: Great question. To apply for those loans, it’s really the decision-makers who have changed--the decision-makers and the federal regulations. So, before, your banker, the person you talk to, when you walked into a lending institution, had a lot of say in what happened. Now the world is run by underwriters. And, what’s an underwriter? That’s the guy that you never see. He’s the guy that’s just behind the scenes, in a desk somewhere, no one knows what he looks like, what he acts like, what he talks like--he just gets numbers, and he does calculations and runs formulas, and based on federal regulations decides whether or not you get to qualify for a loan or not.

Ann: So you’re going to go to your banker, your banker is going to talk to the underwriter, the underwriter’s going to come back to your banker, and then your banker can tell you what the underwriter says.

Ryan: Exactly. And so that personal interaction is really diminished now. Your ability, based on a relationship, really isn’t as effective as it used to be in getting a loan.

Ok, so what does this mean as far as you, your business, and getting the loans? First, you have to understand, are you getting a loan any time soon? Or are you going to be pursuing any outside financing any time soon? Or is this something you want to consider years down the road? Because how you approach your business, your tax strategy, and everything you do, really depends on when and if you’re going to get a loan.

Let’s quickly discuss what your business needs to look like to get a loan. Time didn’t used to be a factor. If you went into business and everything looked good, then you were fine. Now, in order to get a loan, most underwriters won’t even consider you unless you’ve been in business for at least two years.

Ann: Oh, wow. Ok.

Ryan: When I say two years, I mean they want to see two years of tax returns. That’s usually the first thing they request.

Ann: Ok, so this is something beyond startups.

Ryan: This is something usually beyond startups. It’s very difficult, unless startups have collateral to give, for a startup to get financing. It just isn’t as easy as it used to be.

When they ask for two years of business history, they want to see, generally, the past two years worth of tax returns. And when they look at those tax returns, they’re going to be looking for two very specific things: they’re going to be looking at the profitability of the company, and they’re going to be looking at how that company is trending.

Ann: Ok.

Ryan: So from a financial standpoint can you show, “hey the business is growing,” and two, “we are profitable.”

Ann: Ok. Got it. So, two things. Not too bad.

Ryan: So what does that mean for tax planning? Well, sometimes it means maybe we need to consider having a more profitable company, not being as aggressive with our deductions.

Ann: Right. Ok. So how do the deductions affect what your profits look like?

Ryan: Great question. So, you sit there as a business owner, and you write off expenses every year, and you write off as many as you possibly can that are legal and justified because you want to pay as little in taxes as possible. But, in today’s environment, it’s really important to be profitable if you’re going to get outside funding so that the bank looks at you and says, “that’s somebody I want to give money to.”

Ann: Ok.

Ryan: So, what used to be a marriage between lending and tax returns, because it was more relationship-based, has now kind of separated themselves. And, so now you have to look at the world and say, “do I want to save on taxes or do I want a loan?” And sometimes we have to make that hard decision.

Ann: Ok. Alright. That will be a hard one.