He spent $1M to save $220k. Good idea?
I want to share a thought-provoking story about an entrepreneur that you may relate to. Let's call him Entrepreneur X. And Entrepreneur X’s recent situation raises an important question about tax strategy.
In 2022, Entrepreneur X was hit with a hefty $220K tax bill. Ouch.
Determined to avoid a repeat in 2023, he went to extremes.
By spending nearly $1M on various investments and expenses, he managed to whittle his tax bill down to zero.
On the surface, it seems like a slam dunk win. Who wouldn't want to eliminate their tax bill entirely?
But here's the catch: to achieve that $220K in tax savings, Entrepreneur X had to part with $1M in cash.
Think about that for a second. He depleted a huge chunk of his cash reserves, essentially betting that his business would grow enough to replenish it.
If everything goes off without a hitch, sure, he comes out ahead. But if his business encounters any unexpected challenges, suddenly he's in a precarious position with limited cash to weather the storm.
Plus, now he’s depleted his business’s resources in the short and medium-term, which leaves him limited on the growth he could do - which I see as a pretty big opportunity cost.
So even if he “wins,” he’s potentially winning much less than he could have.
That's a high-stakes gamble.
Had Entrepreneur X instead implemented:
Strategic cash flow engineering -- recapturing funds that weren’t creating outside returns, and reallocating those funds to where they’d be more productive;
Intelligent repositioning of his balance sheet, to ensure all liabilities are being properly accounted for (they’re not, 99% of the time)
Assessed and corrected for concentration risk, to ensure more cash flow came in throughout the year
And correctly managed debt, debt repayments, and losses...
He could have achieved similar tax benefits while still preserving a healthy cash cushion.
The key takeaway is this:
The best methods to cultivating a favorable tax situation will include a host of little-discussed, even lesser-mastered financial strategies that will inevitably scale your BUSINESS VALUE and NET WORTH as a whole.
Tax is but one piece of this.
In fact, more small businesses (those doing between $1M - $10M/year in revenue) are insolvent than ever...
Precisely because they don’t follow the practices mentioned above, and there are very few places on the planet they can find that type of support.
But, by virtue of reading this message, you don’t need to play the game backwards like the rest of them.
You can do things (UN)Conventionally and experience the glorious outcomes that come with it.
Here’s to your success and financial certainty,
Warm regards,
Dan Nicholson
Founder, Nth Degree CPAs
Author of “Rigging the Game”
Dan Nicholson is the author of “Rigging the Game: How to Achieve Financial Certainty, Navigate Risk and Make Money on Your Own Terms,” deemed a best-seller by USA Today and The Wall Street Journal.
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