
Business Advisory Services
Everything you need to help you launch your new business entity from business entity selection to multiple-entity business structures.
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Everything you need to help you launch your new business entity from business entity selection to multiple-entity business structures.
Designed for rental property owners where WCG CPAs & Advisors supports you as your real estate CPA.
Everything you need from tax return preparation for your small business to your rental to your corporation is here.
WCG’s primary objective is to help you to feel comfortable about engaging with us
Table Of Contents
By Jason Watson, CPA
Posted Friday, November 3, 2023
As mentioned elsewhere in this book, we encourage people to focus on building wealth and if they can save taxes along the way, then that is just icing on the cake. What do we mean here? Often, we see business owners who want to minimize their tax obligation rather than maximizing their business value, and this can be problematic in two areas; lending and selling.
Lending is more straightforward so we will tackle that first. If you are prone to pump a lot of personal expenses such as cars, computers, business trips that have a huge personal component, and other deductions through your business, your taxable income will be decreased. So, when the IRS shakes you down, you calmly say, “all these deductions have a business purpose and are considered ordinary and necessary.” Then you go visit the bank, and you calmly say to the lender, “all these deductions really aren’t business related and as such they shouldn’t affect my credit worthiness or ability to pay a loan.”
Can you see the pickle you are in between minimizing tax and maximizing value?
Selling a business is slightly different. To determine the value of a business, most valuations need to determine seller’s discretionary cash flow (SDCF) which is also considered the net economic benefit. One technique is to start with taxable income, and then make adjustments such as adding back interest expense, depreciation and amortization. Officer compensation and perquisites (the fancy word for perks) are also checked for reasonableness; so, if personal expenses are being rifled through the business, these expenses are added back as well to increase SDCF. There are other adjustments as well, but these are the biggies.
It gets sticky again when the seller provides a general ledger of all his or her transactions, and starts highlighting a ton of stuff “reversing” tax deductions and reclassifying them as personal expenses. A few things here and there are fine, but if there are several material adjustments to SDCF at the request of the seller arguing that the expenses are truly a form of economic benefit to the seller (and future buyer) the credibility of the data starts to wane.
To recap, lenders want net economic benefit to support debt service. Buyers want net economic benefit because that is what he or she is essentially buying (future cash flow / economic benefit). As such, be careful how much you focus on minimizing tax versus maximizing value if you intend to leverage your business for lending purposes (even buying a house counts) or selling purposes.
This KB article is an excerpt from our 420+ page book (some picture pages, but no scatch and sniff) which is available in paperback from Amazon, as an eBook for Kindle and as a PDF from ClickBank. We used to publish with iTunes and Nook, but keeping up with two different formats was brutal. You can cruise through these KB articles online, click on the fancy buttons below or visit our webpage which provides more information.
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Please use the form below to tell us a little about yourself, and what you have going on with your small business or 1099 contractor gig. WCG CPAs & Advisors are small business CPAs, tax professionals and consultants, and we look forward to talking to you!
The tax advisors, business consultants and rental property experts at WCG CPAs & Advisors are not salespeople; we are not putting lipstick on a pig expecting you to love it. Our job remains being professionally detached, giving you information and letting you decide within our ethical guidelines and your risk profiles.
We see far too many crazy schemes and half-baked ideas from attorneys and wealth managers. In some cases, they are good ideas. In most cases, all the entities, layering and mixed ownership is only the illusion of precision. As Chris Rock says, just because you can drive your car with your feet doesn’t make it a good idea. In other words, let’s not automatically convert “you can” into “you must.”
Let’s chat so you can be smart about it.
We typically schedule a 20-minute complimentary quick chat with one of our Partners or our amazing Senior Tax Professionals to determine if we are a good fit for each other, and how an engagement with our team looks. Tax returns only? Business advisory? Tax strategy and planning? Rental property support?
Taxes can be tricky. Chat with a WCG human now and get questions answered.
Everything you need to help you launch your new business entity from business entity selection to multiple-entity business structures.
Designed for rental property owners where WCG CPAs & Advisors supports you as your real estate CPA.
Everything you need from tax return preparation for your small business to your rental to your corporation is here.
WCG’s primary objective is to help you to feel comfortable about engaging with us