Minimize Interest Expense

GIMME A TAX BREAK

Minimize Your Small Business Interest Expense

Many of you own your own business. Our firm has the opportunity of providing accounting services and tax preparation services for several businesses in San Diego and Murrieta.

It is very common for the owner of a business to need an infusion of working capital several times during the year. It might be to purchase raw materials to manufacture the products or to buy products from a wholesaler for inventory.

We find those clients who sell their products or services on credit often need working capital during the busiest season of the year. This is needed to carry the open account receivables which build up during that time of the year.

Regardless of the reasons, you should try to borrow funds at the least expensive rate possible. Sometimes you can lend your own funds to the business. When doing so, you need to be careful and maintain detailed records of the dates and amounts of the funds which are placed into the business checking account. Otherwise, on audit, IRS might try to claim those deposits represent sales.

I had a client for whom we only prepared annual corporate tax returns. He was using a credit card like a bank account to take advances for his small business. I pointed out his effective interest rate was over 20%, which is more than twice the rate he would have to pay on a conventional business line of credit through his bank.

Granted, most banks will want to see financial statements on small business accounts before they set up a line of credit account for them. Our firm prepares quarterly compilation statements for many small businesses. The cost of doing that is a lot less than the extra interest the client was paying. Plus, the quarterly financial statements will help get a reading on the profitability of the business and do a better job of planning your income tax liability.

9/19/07