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Question re: taxes on small business profits and adding workers -are they an expense?

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werepossum

Elite Member
Jul 10, 2006
29,876
460
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So far nothing I have read in response to my original post substantiates any argument that higher taxes have a meaningful impact on employment growth. A worker is either needed, or not. If needed, they should pay for themselves.
You don't understand small businesses. Say I own a business and I'm working eighty hours a week. I'd like to work maybe fifty, so I'd like to hire someone. That employee comes off my profit, but her generated profit will be the profit I'm already generating with my additional hours. If my gross profit is $200,000 and I'm taxed at 35% of that (which as a professional services company I am, from dollar one) then I have a net profit of $130,000. Part of that I can take out (with the understanding that I'll be taxed again on it) and some or all I can keep in the business. If I have $1,000,000 invested in the business, then I have a return on investment of 13%. If I add that $50,000 employee, she'll cost me $72,000 in salary, matching taxes and bennies. I will also need to provide her with the tools she needs to do her job - let's say $7,500 initially plus $5,500 annually. (My wife won't let her set in my lap, so I'll need office space, and that space will probably need electricity for lights, heat, air conditioning, and office equipment.) Assuming I pay off the initial investment in three years and my depreciation covers financing and maintenance, my $50,000 employee is costing me roughly $80,000 per year. My gross profit is now $120,000, my net profit $78,000, my ROI $7.8%. At this point, I may be better off investing that million in the stock market or better yet, in China. My tax rate thus controls whether or not my business returns an ROI that makes the business feasible. A business venture must not only make money, it must make enough money to make the tied up capital worth keeping in the business.

The numbers are different for other types of businesses, but the principle is the same. And all employees are not profit centers; some must be overhead by design, and many never generate enough profit to offset their expense. As far as profit-generating, production employees, even the best are seldom profitable immediately. In the long run, most employees should generate profit, but it's fractional; there are virtually no businesses where one can spend $50,000 and generate $100,000. Spending $80,000 on a "$50,000" employees in the hopes of eventually generating $90,000 is more typical of small businesses.
 

Fern

Elite Member
Super Moderator
Sep 30, 2003
26,916
172
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Regarding the first point, capital expenditure is written off with a depreciation schedule. If you buy a new building you will get tax relief based on what you spent over a period 3 to 7 years'ish (exact period subject to fluctuating IRS rules).
A new building is depreciated over 39 years, not 3 to 7.

In any case the problem is one of cash flow. To purchase equip or a (commercial) building you're going to have to pay for it upfront by either:

1. Coming up with the cash. High taxes impair the ability to save that cash.

2. Get a bank loan. Banks use after tax cash flow to analyze whether or not you have sufficient cash flow to make the loan payments. Higher taxes reduce the amount of cash flow available for loan payments.


The second paragraph is correct, there is a higher cost to have someone employed that what their salary is, but that is all pre-tax or items that can be written-off so I'm not quite sure how it relates to the OP.
Again, less money available for that investment. Not every new employee generates profit immediately. Sure, if the employer has a client contract in hand, and a deposit, it can fill out new employee needs and be profitable pretty much immediately. But that's not typically the case and why many businesses speak of "investing in growth". They are going to make the investment and build up capacity and afterwards finds the new business.

The OP is correct, changes in tax rates would not directly force a company to fire employees or stop hiring because employees are essentially a complete write-off.
Higher taxes can choke growth and investment vis-a-vis sucking up cash otherwise available.

And I think it should at least be mentioned that we are in a global economy. You push tax rates here up too far and jobs will be lost here due to outsourcing.

Fern
 

Fern

Elite Member
Super Moderator
Sep 30, 2003
26,916
172
106
And if you paid yourself a $200K before profit salary, you came out smelling like a rose.
The $200K profit is it. No salary.

I can see why Libs don't 'get' business. Your "salary" remarks means you think you can buy a business that generates an annual profit (salary and "profit") of $400K and only pay $1M for it. I.e., and annual ROI of 40%. If you know of any of those for sale, LMK, I'm pretty sure even I could come up the $1M for it.

As I said in my post, I was trying to keep the numbers "real".

Fern
 

BoberFett

Lifer
Oct 9, 1999
37,587
9
81
Fern, there's plenty of businesses you can buy for $1M and clear a healthy $950K/yr profit. You just need to manage your receptionist better.
 

Genx87

Lifer
Apr 8, 2002
41,083
490
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Fern, there's plenty of businesses you can buy for $1M and clear a healthy $950K/yr profit. You just need to manage your receptionist better.
lmao

Lets be honest. The OP wasnt going to be convinced anyways. His mind is already made up.
 

werepossum

Elite Member
Jul 10, 2006
29,876
460
126
The $200K profit is it. No salary.

I can see why Libs don't 'get' business. Your "salary" remarks means you think you can buy a business that generates an annual profit (salary and "profit") of $400K and only pay $1M for it. I.e., and annual ROI of 40%. If you know of any of those for sale, LMK, I'm pretty sure even I could come up the $1M for it.

As I said in my post, I was trying to keep the numbers "real".

Fern
This is why so many businesses fail. People have this bizarre idea that if you're in business, your biggest problem is avoiding suffocating in the piles of cash that immediately start rolling in. As a consequence, people believe that if only they can get started, they're golden. They take too high a salary and don't realize that the vast majority of businesses lose money the first year or two, so they quickly run out of cash and credit. In reality I've seen many months where my father could take no money (including salary) from his wholly owned auto parts store, and as a part owner of an engineering consulting company I've been in the same position.
 

CycloWizard

Lifer
Sep 10, 2001
12,353
1
81
The math on this is simple enough: my projected profit decreases when my tax rate increases. Thus, my risk:reward ratio is inherently worse any time my taxes increase because any potential reward has decreased. This is not a difficult concept. The only counter-argument is that the increased tax somehow decreases the risk. Instead, we now have that paying more taxes will simply fund more regulators waiting for you to trip over some inane rule they have in place thereby making business a fundamentally more risky venture.
 

highland145

Lifer
Oct 12, 2009
40,485
3,552
136
This is why so many businesses fail. People have this bizarre idea that if you're in business, your biggest problem is avoiding suffocating in the piles of cash that immediately start rolling in. As a consequence, people believe that if only they can get started, they're golden. They take too high a salary and don't realize that the vast majority of businesses lose money the first year or two, so they quickly run out of cash and credit. In reality I've seen many months where my father could take no money (including salary) from his wholly owned auto parts store, and as a part owner of an engineering consulting company I've been in the same position.
Hey, I've got a daycare I'll sell you for a good price.:p
 

BoberFett

Lifer
Oct 9, 1999
37,587
9
81
I'm still flabbergasted about the monumental stupidity of Jhhnn's post. A clear demonstration of the politics of envy. And not even informed envy. Ignorant envy. But surely we can trust people like him to implement fair tax law... :rolleyes:

Edit: I'm starting to understand how "liberals" blame management when companies fail. It's not the workers fault. It's all management's fault. They just didn't manage their secretaries, accountants and IT staff well enough to turn a profit on them...
 
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werepossum

Elite Member
Jul 10, 2006
29,876
460
126
You forgot to mention that people don't do enough research on the business/industry they want to go into, too.:oops:
:D The best land plans of mice and men, Robert. Though possibly "If you can't cut hair, don't buy a barber shop" sums it up perfectly.

Still, it could work out. My experience is that everything takes longer and costs more than I expect, but in the end a well-thought out business model with reasonable expectations can prevail even if beginning difficulties are underestimated. It's just very, very painful and scary getting to that break-even point. And of course, irritating dealing with the idiots who think that since you own a business you're rolling in money to which, by mere fact of existence, they are entitled.
 

highland145

Lifer
Oct 12, 2009
40,485
3,552
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:D The best land plans of mice and men, Robert. Though possibly "If you can't cut hair, don't buy a barber shop" sums it up perfectly.

Still, it could work out. My experience is that everything takes longer and costs more than I expect, but in the end a well-thought out business model with reasonable expectations can prevail even if beginning difficulties are underestimated. It's just very, very painful and scary getting to that break-even point. And of course, irritating dealing with the idiots who think that since you own a business you're rolling in money to which, by mere fact of existence, they are entitled.
Right now, the upside is that I'll be getting a big fat refund on what I've paid in via my day job. Not quite the "rolling in cash" that I was expecting but if the wife doesn't get her new kitchen by spring, I'll be living in my unheated/cooled/un-plumbed shop.
 

werepossum

Elite Member
Jul 10, 2006
29,876
460
126
Right now, the upside is that I'll be getting a big fat refund on what I've paid in via my day job. Not quite the "rolling in cash" that I was expecting but if the wife doesn't get her new kitchen by spring, I'll be living in my unheated/cooled/un-plumbed shop.
Surely your wife can be a little more patient than that. LOL

Funding someone else to run a business is always risky, but can pay big rewards. After World War I my grandfather worked for the railroad, but he was looking to settle down. He convinced a man with some money to set him up in an auto parts store. Equal partners, John took the risk and my grandfather did the work. He later said that was the best investment of his life, even though the first couple years he had to do the accounting and didn't really see any profit. But for over half a century he received half the profit from the store for no more effort than auditing the books, and when my father bought him out, he got half the value of the business. And even then, he only sold out his share as a favor to my father, since my family had made him so much money over the years.

You'll never see the kind of profitability LordSegan or Jhhnn take for granted, but then you knew that going in. 15% of investment is probably still a reasonable expectation, just more difficult to get to that point than anticipated.
 

highland145

Lifer
Oct 12, 2009
40,485
3,552
136
Surely your wife can be a little more patient than that. LOL

Funding someone else to run a business is always risky, but can pay big rewards. After World War I my grandfather worked for the railroad, but he was looking to settle down. He convinced a man with some money to set him up in an auto parts store. Equal partners, John took the risk and my grandfather did the work. He later said that was the best investment of his life, even though the first couple years he had to do the accounting and didn't really see any profit. But for over half a century he received half the profit from the store for no more effort than auditing the books, and when my father bought him out, he got half the value of the business. And even then, he only sold out his share as a favor to my father, since my family had made him so much money over the years.

You'll never see the kind of profitability LordSegan or Jhhnn take for granted, but then you knew that going in. 15% of investment is probably still a reasonable expectation, just more difficult to get to that point than anticipated.
Since I promised her last year.....no.

ATM, I'll keep working it and see what month end brings.

LS and Jhnn must be talking about the small loan business. Big $$.

Well, took me 18 years of savings to own my own store. Probably took me 10 years of experience to be able to own my own. Mortgaged my house, wife, kid, begged, borrowed, stole, sole property to be able to own my own store. Easiest $$ I've ever made.

Edit: Forgot to mention that the SBA does not lend to middle aged white guys.
LOL and if I had just hired 10 more daycare workers, I would have been rolling in the dough, right OP?
I've got 10 you can have right now.....fire sale...do not wait.
 
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piasabird

Lifer
Feb 6, 2002
17,183
60
91
It is also very hard to do any kind of business plan for the future if every 4 months congress and the president is threatening to not extend the Temporary Bush Tax Cuts. This causes people in business to be undecisive. If prices increase dramatically in the near future that could mean the difference in making a profit or going out of business. So lets come to a decisive decision on this matter.

Another big problem is the higher taxes could cause inflation also.

Do you think so called rich people will pay higher taxes and the price of goods we buy and sell will not increase? The burden for higher taxes is always paid by the poor suckers like me and you and the poor who have to buy food to eat and clothes to wear. Money does not grow on trees.
 
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highland145

Lifer
Oct 12, 2009
40,485
3,552
136
It is also very hard to do any kind of business plan for the future if every 4 months congress and the president is threatening to not extend the Temporary Bush Tax Cuts. This causes people in business to be undecisive. If prices increase dramatically in the near future that could mean the difference in making a profit or going out of business. So lets come to a decisive decision on this matter.

Another big problem is the higher taxes could cause inflation also.

Do you think so called rich people will pay higher taxes and the price of goods we buy and sell will not increase? The burden for higher taxes is always paid by the poor suckers like me and you and the poor who have to buy food to eat and clothes to wear. Money does not grow on trees.
:eek::eek:Who the F** knew this and didn't tell me?

Think I'll invest in corn.
 

HendrixFan

Diamond Member
Oct 18, 2001
4,649
0
71
/facepalm
?

If you have workers who are "only a drain on the company" then you get rid of them. I have always had the teams I run be as efficient as possible, pushing up those who have high ceilings and getting rid of those who aren't contributing to the bottom line.

Why on earth would you keep around someone who is only a drain on the company?

The cost centres OTOH are not a drain on the company and do help the bottom line, albeit indirectly. Unless they are also a drain in which case you need to re-evaluate your staff or staffing levels in those areas.
 

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