Question: Every restaurateur hides some cash from operations so why is my CPA so shocked when he learns this side of my business?
Answer: For some background, the field of ethics is involved in defining behavior as good or bad. People in business generally have as their primary motivation increasing profits. If we assume that people will not behave ethically simply because it is the right thing to do, then there must be some additional incentive or motivation for people to act in an ethical manner.
One obvious motivation for a CPA is the fear of sanction or punishment that can come with noncompliance or simply assisting the restaurateur in not reporting cash transactions for instance. No CPA would reasonably do something that he knew could result in the loss of his license to practice because such action would threaten the person’s livelihood.
But there are other reasons that the CPA should be concerned about following ethical rules. First, being ethical is the right thing to do. Second, being ethical will often lead to better assisting the restaurateur down the road in representing the client for a bank loan or possibly selling the restaurant.
For example, if John, a CPA, serves a restaurateur that offers John a cash bonus if he will agree not to report all of the Restaurants income, John might be faced with a predicament. John might ask: “Who does it really hurt if we underreport our income and pay less corporate tax?” At the same time, John might need the extra money being offered by the Restaurant so that his son can get a potentially life-saving operation.
There is little doubt that to accept the payment in return for signing a knowingly false tax return violates the professional rules of ethics and you as a restaurateur are placing him in that position when you ask your CPA or bookkeeper to aid you in hiding cash transactions, underreporting income, or other operational deviations from the normal protocol of accounting.
Remember, there will come a day in your restaurant existence when you will need your CPA or accountant to go to bat for you representing the integrity of your financial affairs and the last thing you need at a critical time is for your trusted advisor to pass on this request.
Question: Why is it that if I try to pay minimal taxes to the Government that my banker penalizes me for that?
Answer: This is the age old double edge sword in building a business. Since most bank loans are based on the ability of a restaurant operations cash flow the further you reduce your net income the harder it becomes to qualify for a loan.
Reducing your corporate tax obligations to the fullest extent does retain cash in the business to help grow the restaurant operations. But just recognize that this strategy lowers the restaurant’s reported net income from operations which is the starting point that lenders use to calculate whether your cash flow adheres to their lending guidelines. Simply put coordination with your CPA or accountant to look into the future and determine if accessing third party debt is on the horizon and ensure that various tax saving or deferral strategies match your goals for the restaurant.
For example, depreciation of equipment and restaurant leasehold improvements is a tax deduction that allows for the expensing of the cost of the asset over a designated period of time. Some methods of depreciation are allowed to “write-off” the assets over a shorter life than others which creates a larger expense against net income in the earlier years of the asset reducing net income. Most lending institutions will add back these tax deductions to net income to determine true cash flow of the restaurant if clearly stated on the financial statements and many times have to be explained to the banker.
Bottom line is to always be looking ahead in determining your possible cash flow needs of the restaurant when the tax man starts talking to you about tax saving and deferral strategies. A simple question is how these strategies will affect my ability to borrow money in the future.
You can visit us at www.rasmussentaxgroup.com for additional insight into restaurant specific tax strategies, accounting and technology programs. To ensure compliance with requirements imposed by the IRS, we inform you that any US federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and it cannot be used for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein. You should seek advice based on your particular circumstances from an independent advisor.
