Tax Tip Thursday
Corporate & Small Business Cashflow
The Nemesis of Any Business
I happen on this every year, and it is always around this time. The issue? Corporate & Small Business Cashflow, which can be your nemesis if you don’t pay attention.
It doesn’t take much or long to fall behind on the cashflow of your business if you are not watching it! Unfortunately, one of the biggest problems is taxes. I tell all my clients they should be putting 25% of their deposits into a separate tax account, ESPECIALLY if they are a service business with low overhead!
Every business is different — that rule would be far too much for some businesses. But not very many! 25% is a pretty good estimate for most service industries.
Really, it boils down to your expense base.
Impact on Your Business
The impact can be huge, which is why I am spending a whole week’s show on this topic.
The tax bill for a mildly successful business can easily be $10k – $20k in a year. I don’t know about you, but I would not like to get a $10,000 tax bill without being prepared for it!
These numbers are rough, but as an example let’s say you have:
- Revenues = $100,000
- Expenses (inc. HST) = $30,000
- Net = $70,000
As you can see, this is not a huge amount of money for a sole proprietor or owner of a corporation. But look at this:
| Corp (you pay yourself dividends) | Sole Proprietor | |
|---|---|---|
| HST | $9,100 | $9,100 |
| Corporate Tax | $8,500 | N/A |
| Personal Income Tax | $7,600 | $18,500 |
| Total Tax | $25,200 | $27,600 |
This example highlights two things:
- You pay less taxes as an individual owning a corporation, and
- If you don’t plan for it, you will need to come up with a hell of a lot of money at the end of the year!
In this example, each person was making about $70,000 a year before taxes. I would think that coming up with $25k at the end of the year would be next to impossible based on that income! However, if each of these people had put away 25% of their deposits ($113k), then they would have been in good shape with $28,250 in the bank. They would have even had a little bit left over!
Do Yourself a Favour
Put that tax money away!
Looking for some help applying this strategy to your business? Or maybe 25% isn’t the right amount for you, and you’d like some help figuring out what amount is! Doesn’t matter which — just give me a call or book an appointment and I will be happy to help!
Disclaimer:
This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal or tax advice nor can it or should it be relied upon. All tax situations are specific to each individual. If you have specific tax questions you should book an appointment for a 1 on 1 consultation.