Business Owner’s I am talking to you Tis the season for that phone’ call from your CPA that says “Get ready to write those checks’ to the IRS and the STATE for the profit that you’re showing”
Your immediate response, with a red face and heart-pounding through your chest is “WHAT I DON’T HAVE A PROFIT. I HAVE NO CASH IN MY BANK ACCOUNT. HOW CAN I HAVE A PROFIT. You did something wrong on my tax return”
To which your CPA gently replies “No I’m sorry, I didn’t do anything wrong!”
Confused and dazed about your situation you hang up feeling sick to your stomach because[ cash flow probably isn’t warranting you to pay this newfound “bill” on time.
Why does this happen! How does this happen
Because we are NORMAL. As business owners’ we are consumed with making money, paying payroll, paying bills, creating sales, and generating wealth, that’s how.
Here’s the thing that most entrepreneurs have to learn the hard way. Cash in the bank is not necessarily PROFIT or lack of PROFIT.
It does get a bit confusing but there are payments that will hit cash and not reduce’ your profit. Let me give you a few examples:
- Loan payments: Consist of principle and interest. The interest is deductible’ but the principle just reduces the loan balance. The entire payment hits cash, of course, but only a portion reduces profit.
- Meals and entertainment: Again 100% comes out of cash, but usually’ (depending on your situation) 50% hits profit. So again, reduction in cash but not in profit.
- Auto Expense: If you have a car in the business that you use personally, evenings and weekends, a portion is not deductible due to personal use. So for instance, your payment may be $700 per month but you use’ the car 25% personally. Only 75% is going to reduce your profit ($700 X .75 = $525). If it’s a loan vs a lease, only 75% of the interest will be deductible and 75% depreciation. LONG STORY SHORT, you can’t deduct all of it.
If this is too confusing, don’t worry, lol, again you are NORMAL. This is your CPA’s lane. Let her/him explain’ this to you further
Go to http://talktobecky.com and let’s CHAT.
I hoped this served you. My intention was to show you that even though you make payments through your checking account, not everything is 100% deductible, thus the difference between cash in the bank and your profit.
Have a fantastic day! Until next time.