Never before have accounting scandals so greatly affected the nation's economy and the personal lives of Americans.
The unethical practices of large, publicly traded companies, such as Enron, WorldCom and Adelphia, was done to drive up stock prices to create wealth for upper management.
The disasters of these companies should serve as an accounting wake-up call for small businesses that may be using inaccurate accounting to minimize profits, thereby reducing the owners' income tax liability.
There is no harm in taking full advantage of the tax code as it is written. However, some techniques push the envelope too far, including:
These techniques can have adverse affects on a small business in the long run.
The apparent reduction in cash flow created by these actions limits an owner's ability to borrow money against his business.
It also reduces your ability to create value in your business beyond the value of your assets because the value of a business is determined in large part by the value of expected future cash flows.
Lastly, but most importantly, violation of tax codes can result in business closure and jail time. It is not just the owner who might suffer adverse consequences. Family members and employees are likely to suffer, also. If you have questions about how your tax professionals are accounting for your business, by all means ask them.
Take this opportunity to evaluate your individual situation and correct it if necessary.
David Lewis is a business consultant in the Brunswick office of the Georgia Small Business Development Center network. Call the Augusta SBDC office at (706) 737-1790.
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