Whether you are religious or not, if you are a business owner, you would benefit by following the Commandment, “Thou Shalt Not Steal.”
Some small business owners who deal in cash think it’s a good idea to remove cash from the business and not deposit it or report it. While removing unreported cash from the business and stuffing it in the mattress or burying it in the back yard may provide some feeling of security, it can actually cause a litany of problems that may, in fact, threaten your security. Let me explain why this is a particularly bad idea on many levels.
Risk of physical harm and or property damage
When you hoard any valuables in significant quantity in your home, you may put yourself, your family, and your loved ones at risk. Criminals will target residences suspected of having, or known to have, stockpiles of precious metals, cash, jewelry, and even weapons. Cash, of course, is the most valuable of them all because it is untraceable and does not need to be sold or converted into cash.
In a burglary, all of this property can be stolen, and your residence damaged or destroyed in the process while you are away from home. Worse yet, it would be a home invasion strong-arm robbery during which you or your loved ones could be hurt, killed, or worse.
Let me tell you a secret. If you are “secretly” hoarding cash or valuables in your home and you tell even one person about it, it’s no longer a secret. Whether you think you are a “tough guy” or not, being surprised in your living room by a desperate, drug-crazed, armed criminal is not a scenario you want to be involved in, or be responsible for indirectly creating the conditions for. Get the picture?
Risk of fines, asset confiscation, and criminal prosecution
Taking cash out of your business and failing to account for that on your tax return is actually a crime. Federal Income Tax evasion is a felony and can saddle you with huge fines and even prison time, in addition to having to pay back the actual tax owed. A simple audit that looks at sales and matches them up with inventory purchases, bank deposits, etc. can easily reveal tax evasion. Underreporting of income is the single largest contributor to the $450 billion tax gap, making it the most popular form of tax evasion.
Paying employees “under the table” is another form of underreporting and evasion. Paying a worker cash “under the table” allows the employer to avoid having to pay unemployment tax and payroll taxes. This is not considered negligence but rather a willful act and, therefore, a crime.
May reduce your social security benefits
Unreported income that you don’t pay social security tax on will not contribute to your future benefit. By taking significant amounts of cash out of your business, not reporting it, and not paying tax on it, you may significantly reduce your benefit upon retirement.
Loss of value over time
Cash in a safe, in your mattress, or buried in the back yard earns no rate of return. In fact, it actually has a negative rate of return. Let’s assume for this discussion, that the rate of inflation is 2%. If you are sitting on a cash hoard of $100,000, you would, in essence, lose $2,000 per year, perhaps $20,000 over ten years in purchasing power as the cost of goods continually rises year after year due to inflation.
This creates a compounded effect. In addition to that 2% per year loss of purchasing power, you also lose the potential earnings in the form of interest, dividends, or capital appreciation that you could have potentially earned by legally declaring and investing the income.
Lack of liquidity
You may have a difficult time making large legitimate purchases with cash, thereby limiting your ability to actually spend the money you hoarded. Ever since the terrorist attacks on 9/11, the Federal Government has been tracking the flow of assets with a much higher level of diligence and scrutiny. In fact, Title III of the Patriot Act is aimed specifically at cutting off the financial support of terrorist groups. This means that the federal government requires that all financial institutions report significant deposits of cash to prevent money laundering.
Reduces the value of your business
Businesses are appraised and valued for sale using several different methods. One very common method is to use a multiple of annual revenue, i.e., 1 times, 2 times or 3 times sales, etc. These sales will need to be accounted for in the books in order for them to be included in the multiple. So when you remove unreported cash from your business, you actually devalue your business.
A better idea!
Instead of stealing from yourself and your fellow tax-paying American citizens, consider making a significant investment in yourself and your future.
Start a retirement plan and make the maximum annual contribution to that plan each year. Some self employed retirement plans allow a business owner to make annual contributions of tens of thousands of dollars per year. These contributions can reduce your annual taxable income, thereby having a similar tax-reducing effect to stealing money from your business, but without all of the serious unnecessary potential legal consequences.
For example: In a SEP (Simplified Employee Pension) It is possible to legitimately contribute as much as 25% of net earnings from self-employment up to $55,000 (for 2018). Scheduling a visit with an experienced Financial Advisor and or CPA could reveal a multitude of viable options for business owners looking to lower their tax burden and increase their savings.
The author, Stephen P. O’Donnell Sr., is President of O’Donnell Wealth Management, a financial planning and asset management firm located at 1306 Sheridan Avenue in beautiful Cody, Wyoming. Steve has 18 years of experience, having worked as a portfolio manager for some of the largest firms on Wall Street. For a no cost, no obligation, initial consultation, call 307-586-4279, email, or simply stop by the office Monday through Friday.
Investment Advisory Services Offered Through Saxony Capital Management, LLC. Securities Offered Through Saxony Securities, Inc. Member FINRA/SIPC.