1) Uh oh! Uncle Sam Wants You! Obviously, under-reporting may invite scrutiny from the IRS and whatever savings you may have once enjoyed will quickly be wiped out by fees and penalties. And while this may be the most unpleasant of the possible repercussions, it is not the only one.
2) Double entry bookkeeping. Your tax return is the official public record of how much money your business makes. If you apply for a loan to expand your business, or to purchase a car or a home, or to finance an education for your son or daughter, your lender is going to use your tax returns to determine how much money you make, and consequently, how much debt you can afford to take on. If your tax returns make it look like your business is not very successful, you will not get the loan you need. Explaining to the lender that you run a "cash" business and that actually, things are better than they may appear is a non-starter. Lenders can only rely on the documentation that you provide and if your documents show that you are running a business that is only marginally profitable, they will be unwilling to take a chance on you, especially in this economy.
3) Future Shock. Part of the taxes that you pay are used to fund your social security account. If you consistently state that your income is very low, the credit that you are accumulating in your social security account will also be low, affecting the amount that social security will pay you when you retire. Even those who are very conscientious about setting aside money for retirement are probably counting on social security to provide at least a portion of their retirement income. If you short change Uncle Sam now, you will also be short changing yourself in the future.If you would like more information about tax credits and deductions that could help lower your tax burden, check out http://cfed.org/programs/seti/resource_bank/shortcuts/ and consult your accountant for help.
4) And When You Sell? A fair price for a business is generally considered 3 times the net income. The net income includes profit shown on tax returns, salaries of the principals, perks paid from the business like cars, health insurance. If you consistently state that your income is very low, the price you will be paid when you want to sell your business will not reflect its true value. You will have sold yourself short for the next phase of your life.
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This post originally written by Kim Jacobs, Executive Director - Community Capital New York for The Small Business Program Newsletter
