Deseret News Archives,
Sunday, March 31, 2002

Edition: All
Section: Money
Page: M01
Length: 70 lines

Utilize advice of CPA

For example, a trusting relationship with a heads-up CPA as a team member can greatly increase the odds of one's business success.

Fortunately, I was lucky enough to find a terrific CPA who is still doing great work for me nearly 30 years later. This allegiance is based on more than a quarter-century of good advice to me on tough decisions we all face as we grow a business.

Following are a few of the concepts he has taught me over the years:

-- The difference between cash and profit. One of the most difficult concepts for me to learn was the difference between dollars on the bottom line of the income statement and dollars in the bank. I thought that if I showed a profit, then there must be money somewhere for me to use. My CPA taught me that dollars spent on loan payments, capital equipment and other items that I couldn't immediately write off would eat up cash while still not affecting profit. Not only would I not have the cash, but the government would tax the profits as if I did. Once understood, cash management became paramount to everything except cash generation.

-- Leasing versus buying. For start-ups that require a lot of capital equipment, the question of leasing versus buying is a difficult one. Leasing is more expensive but offers many advantages. Every dollar spent on a lease can generally be expensed on income taxes. Leasing conserves cash. It allows for updating of equipment more often.

-- The value of an "S" corporation. While many accountants favor "C" corporations, my CPA has helped me see the value of the "S" corporation in the loss-plagued start-up stage as well as cash-rich mature stages of my business. An "S" corporation eliminates the possible double taxation that so many ill-advised entrepreneurs suffer.

-- Spreading stock ownership of an "S" corporation among family members. Family members earning lower incomes and, therefore, having lower tax brackets share in corporate profits. The legitimate spreading of income has saved me tens of thousands of tax dollars by force-feeding income into lower tax brackets. The children's funds may even be used for future expenses such as college education.

-- Cash versus accrual accounting. Not only did the cash method of accounting save cash that I would have otherwise been forced to pay in taxes on uncollected income, it also allowed maximum flexibility in income shifting from one year to another, which further delayed taxes.

-- Filing timely tax returns. Writing checks to the IRS has always been painful for me. In the early years, my CPA would fill out the returns and send them to me. Since I preferred to avoid painful things, I would put off the check writing and mailing, thereby incurring painful penalties. We learned that if I wrote the checks and brought them to his office, we could sign the returns and mail them together. This helped avoid penalties and interest charges.

Visit with your CPA and see if these issues could be applied in your business.

Stephen W. Gibson is associated with the BYU Center for Entrepreneurship. He can be reached via e-mail at cfe@byu.edu.

© 2001 Deseret News Publishing Co.