the Air Vent

Because the world needs another opinion

An Entrepreneur’s Experience

Posted by Jeff Id on March 27, 2015

So I was invited to talk to a bunch of college students about my experiences in being an entrepreneur.  I’ve not really worked for anyone for almost a couple of decades although I did accept a VP position as a shareholder once for a few years.  I’m quite lucky to hang around with a bunch of smart people, kind of like this blog, functional minds tend to gather I think.  Five separate times in two different companies and in very different situations, our group has been recognized as the top growing private companies in the US, so we must be doing something right.    We have been around the block as they say, plenty of mistakes, plenty of good advice and plenty of wins.  We make the single most efficient LED lighting products in the world in several categories — have for years.  How cool is that!   Climate skeptics all too.  We’ve saved more energy than the RC geniuses ever will, but we do it for cost rather than lies about saving the planet.

I had fun talking to the students about our experiences.  Some questions were interesting although others, not so much.   You would have been proud of me for not venting too strongly, although I did happen to say -we’re probably the brownest green company on the planet!   That didn’t go over terribly well in a left-wing university, but you have to have a little fun.  I believe the kids need to understand that business is about money, nothing else, and the reason we are ‘green’ is to save our customers money.  You save fuel, you save money and there is nothing whatsoever wrong with that.

There were four presenters in the panel, one group of them had just stared a small business 4 months ago and consisted of exactly two employees.  The guys were well spoken and seemed to have all of the answers.   Someone asked the question of how to motivate employees and they answered for quite a long time quoting things about the 8 ways to motivate and such.   I found it interesting and informative because despite having not read the same book, the answers were not far off from my own and unlike them, we actually have employees.  I wonder if I should have gone to school for management, then I remember that I went to school to design planes, not lights.

I am doomed to learn everything the hard way I think.

One of my favorites on the panel was a lady who started her own bakery business in her basement.  From Ireland, she trained with top notch people from around the world.   She had no money and no bank to loan her money, so she put a used oven downstairs (which her husband installed) and started cooking.   Awesome I say!  Tough, hard work and no nonsense results.   She delivered product and avoided taking on big debts.  She felt overwhelmed by the other stories around her but she shouldn’t have.  Smart business decisions and no nonsense action.

One of my favorite sayings came from a business partner, “A bank is someone who will loan you an umbrella as long as it is not raining.”  He follows it up with, “And they will want it back if it starts raining.”

So when people asked about why we moved to Michigan, the others gave a bunch of fluffy happy answers about the quality of people and businesses and such.  As by far the largest company  represented on the panel, I answered — taxes.   Illinois extremist left-wing governor increased their taxes by 60% in a single year, although I left the adjectives to myself.  Of course the large companies in Chicago protested and made public proclamations of leaving the state.   This led to a series of negotiations, likely political contributions, and the decision by the governor to give those particular companies a pass on the tax hike.  Of course we were a little company with only 24 people back then so nobody cared about us.  Michigan’s conservative governor simultaneously lowered the Michigan rates and cleaned up the code so we took our business there.  Illinois had no care or idea we did it but the state numbers showed that we were not alone.

What I didn’t get into was taxes, and it is probably better that way because those kids don’t want to know what it really means to own a successful business.

Nobody really understands tax law and that is the way the government wants it.  Obama campaigned on raising taxes on the wealthy, voters accepted him and the hike finally became reality this year.  A five percent increase on the top earners.   What people don’t know is that the majority of the top earners are businesses.  S type corporations in the US report their percentage of the company income on their personal returns.  The company does NOT pay income taxes.  So this increase was primarily an increase in business tax

The other thing Americans don’t know is that in manufacturing in particular, when you become moderately successful, nothing is a (non-taxable) expense.  I mean nothing significant can be expensed even though you are writing checks for it.  Taxation hits so much harder in growing manufacturing companies than service type companies, the difference is truly shocking.  When a manufacturing company grows, inventory increases, tooling increases, equipment increases, accounts receivable increases, and payroll increases.  When a service company grows, you have payroll, accounts receivable and minor equipment costs.  In a growing service company, payroll is a non tax expense, however equipment and AR are not an expense.

The result of these pressures is that the US is full of marketing, banking and software ‘service’ firms, yet produces less and less product every year.

The net result of the US taxation system on a company like ours is a taxation rate in the 80% range in comparison to the cash which hits our pockets – because our company is growing and EVERYTHING is NOT an expense.  By everything, I mean even state taxes paid are still considered federally taxable income. Home interest, child care, tooling and equipment costs need to be depreciated over years, inventory increases, accounts receivable  -all taxable.  Every dollar we spend requires us to pay the federal and state governments nearly 45% tax for the privilege.  AND I’m just talking about INCOME tax.  Not import tax, VAT tax, fuel tax, export tax, real estate property tax, sales tax, personal property tax …..on and on and on.

People don’t know jack about taxes in this country.  They think they are paying, but in reality, the companies are paying huge portions of the taxes and their own incomes suffer for it.   They simply don’t see what is going on on their own checks.   How would anyone expect people to know that corporations are paying the majority of income taxes when articles continually come out explaining that individuals are actually the ones paying the most?

Tax law is more convoluted than that, and those who hate capitalism are motivated deniers of that simple fact.  There is a reason for the complexity of US tax law.

So while I am curious what your thoughts are on taxes, kids and entrepreneurship, please don’t assume that we don’t know what we are doing.   You don’t build a successful company multiple times on accident.  People often assume there is some trick which is going to save you from taxation, or it is all about loopholes.  Here’s news folks — real loopholes do NOT exist, although some leftist communists call certain minimally tax limiting rules loopholes.  If you still think we don’t know taxes, please tell us which of our four accountants, CFO or business tax lawyer we should replace and I will personally send you 50% of the savings.

Why the vent — because it is needed.   We compete with foreign companies which have far less difficulty complying with their own communist governments.  Hanging a lead weight around our neck is an apt description of government help.

So at the end of the meeting, the professor, who did a truly excellent job, mentioned that kids these days aren’t jumping in to their own businesses at the rate they used to.   I went away with a good feeling about how smart they were, and a bad feeling that they were probably smarter than me.

 

 


37 Responses to “An Entrepreneur’s Experience”

  1. jinghis said

    I have had a couple of companies, construction, video games, investment, and I figured out a while ago that I was way further ahead by not making anymore taxable money. My wife was a school teacher and we live on a quarter of her small pension. I know not everyone can sail away like us, but I do recommend it. Life is Good.

  2. stevefitzpatrick said

    Don’t tax you, don’t tax me, tax that guy behind the tree….

    Yes taxes are high in the States, but they are much worse elsewhere, and often combined with even more burdensome regulations. The situation is becoming gradually worse in the States, but lots of places have a huge head start in making business ever more difficult. There are places with lower cost/complexity, and that is were manufacturing migrates towards for large volume materials and products.

    I completely agree about bank financing; even very reasonable needs, like financing of accounts receivable, are looked at by the bank as very dubious. My business partners and I say a bank loan is always available, just so long as you can show the bank that you don’t need one…. and indeed, would be foolish to take one. Hard to see why banks only want customers who are fools.

    • jinghis said

      About Banks, Banks are competitors to Businesses, not partners. Banks buy assets, Businesses create assets which devalue Banks assets. Banks are only interested in acquiring Businesses as assets. That is why the current QE programs are so horrible, Banks are simply creating money to buy businesses.

      To work with Banks, build a house and sell that house to the bank (a mortgage), it is not only tax free it comes with a tax credit. $500k every two years.

  3. Jeff Id said

    I don’t think the US is behind many countries in taxation. Even 10 years ago we used to be allowed some expenses. Rates have skyrocketed in multiple categories.

    • stevefitzpatrick said

      Jeff, it could be a lot worse.
      http://en.m.wikipedia.org/wiki/List_of_countries_by_tax_revenue_as_percentage_of_GDP

      • Jeff Id said

        It is hardly helpful to point out that some areas of the Earth are even worse. Some areas of Earth require women to wear bags on their head and kill you if you don’t believe in the correct invisible man.

        My point is that in the US, the tax is paid in large part by business and the laws are heavily biased against manufacturing. When you start paying multiples of your salary in tax, it changes your perspective.

        • Jeff Id said

          Actually I would be thrilled to pay 49% of my actual income in taxes (the highest rate on the wiki list). That would be fabulous!!!

          Where do I sign up!

        • Yes, tax laws are generally unfriendly to businesses.

          Yes, profits re-invested to expand business are not generally expensable, and are taxed as normal income. You clearly think that is unfair, but I very much doubt it is going to change; people like you who pay (business owners with high last dollar tax rates) are a very small minority of voters.

          You do get to depreciate most investments, but for many, like durable equipment, buildings, etc. the depreciation period is long and is unfair to boot, because of accumulating inflation during the depreciation period… you never really get to depreciate the original investment value completely.

          Some kind of debt financing may make more sense, especially if your company has a reasonably long track record of growth in sales and earnings, and so won’t face confiscatory interest rates. Interest payments on debt (bond coupons or bank interest) are, at least for now, fully deductible, and you and the other shareholders would then actually pocket more of your after tax earnings, in spite of having to pay interest. If you or any of the other sharholders in the S-corp are carrying significant non-deductible personal debt, then increasing shareholder net income to pay off the personal debt, by incurring corporate debt, may offer a substantial net tax advantage. The most important question to ask about debt financing is: can I turn investment via debt (eg improved products or expanded operations) into profits that are substantially larger than the interest rate I must pay on that debt?

          • Jeff Id said

            Actually, I really have gone too far on line with personal info but we don’t carry any debt. I sometimes think we are not good businesspeople for not leveraging ourselves when banks actually wish us to. Then I remember back to when we didn’t have options and those same banks weren’t so interested.

            Rates are near zero, and are of little consequence either way. There is no method for us to significantly reduce tax.

            If you have an extra building in your pocket we need a little more space. — joking of course.

  4. Steve from Rockwood said

    The combined federal and provincial tax rate in Ontario Canada is about 33%. Let’s say you wanted to buy a business that generates $1 million in revenue, 45% earnings before taxes (EBITDA) and 20% net profit. By many standards that is a good business. The current owner wants twice revenue. The question is, how long will it take to get your money back? Answer is over 10 years. Why would someone invest their own money in a business that takes over 10 years just to return the capital? They won’t. In my opinion, this is why there is so much money on the sidelines. The investment reward just isn’t there any longer in countries with high corporate tax rates.

    • Jeff Id said

      Your combined rate is 33 and ours is near 45. What is worse is nothing is an expense so we are being double taxed. We have to pay tax on our state tax as though it were income. Worse than that, even our employee salary that goes into producing inventory is not an expense until the inventory is sold. I am literally working for the government and not myself at this point. It is literally insane what is being done to the economy by entirely by liberals. Half of that tax money is then given away to people who won’t work. Not people who can’t work, those who won’t. In many cases because they make more money by claiming depression and other disabilities, but we get quotes like this from the inner city – ‘That whole work thing doesn’t work for me.’

      And we pay. And they vote multiple times.

      Don’t worry about me too much though. We can always stop re-investing in the business and collect some cash from it. It will reduce our competitiveness, job creation will stagnate but we will get money from it. I just wonder why the morons think that this situation is a good thing? Or that we need higher taxes to prosper? It’s like flying by lifting up on your ankles.

      We are so obviously on the wrong side of the Laffer curve it is disgusting. If the tax rate on manufacturing were halved, the economy would boom, labor rates would go up and government income would skyrocket. It affects the world too, when North America doesn’t have the economic power to show the world the benefits of free market business.

      Our population is so ignorant from listening to CNN and MSNBC. They walk around thinking themselves enlightened yet never read or do anything on their own. Like global warming, I used to giggle at the attacks made by the media on capitalism. Nobody could believe that I thought, look around.

      Wrong again Jeff. Don’t underestimate the stupidity or dangerousness of a miss-educated human mind.

      • Steve from Rockwood said

        I was approached by a company last year that wanted me to purchase the business for the numbers I used in my above comment ($2 million purchase, $1 million annual revenue, 45% EBITDA, 20% net profit). I drew up an Excel spreadsheet to show the owner my return on capital, a little over 11 years. I pointed out the high corporate taxes and suggested a purchase price of one times revenue so that I could reclaim my investment in just over 6 years. The owner felt I was treating him unfairly because he has no control over tax rates. The problem for him is, after he pays taxes on the sale of his business (only the first $500,000 is tax-free), his retirement dream doesn’t look too rosy. My problem is, it doesn’t make sense for me to invest my capital into a company that pays one third of its profit back to the government in taxes and where it will take me over a decade just to get my money back. He formed his company in 1979.

        When a government taxes corporate profits at a rate of 45% it is telling you that it (“the government”) is better at reinvesting your profit into the economy than you are. Remember – “you didn’t build this”? That says it all.

  5. Anonymous said

    Tax incidence is a concept you should study. The company only pays the $, it is some combination of the owners, customers, and staff who actually pay the tax through reduced earnings, lower pay, and higher prices. High taxes reduce the utility of all groups; you pay less than you might, you charge higher prices, and earn a lower rate of return yourself.

    And as you point out, the tax deductibility of manufacturing wages is deferred, so the difference to a service business is the timing rather than the amount. I’d also guess that you do get to deduct the cost of plant and equipment over time through depreciation (or equivalent) charges; and what you are arguing for is accelerating the depreciation rates or giving extra deductions on purchase. Strictly speaking though, as the economic benefit of the asset continues for some period, so should the cost. In accounting “theory” that’s often known as “The matching principal”.

    • Jeff Id said

      How to answer…. how to answer…

      Let’s see.

      “Tax incidence is a concept you should study. ”

      That was the somewhat less-than-subtle point of my post. People don’t understand that the tax is being hidden from them. That doesn’t mean that it isn’t their own tax.

      “so the difference to a service business is the timing rather than the amount” — this is not correct. Not even close. You need to pay attention to the d$$/dT of the equations. When a manufacturer becomes successful and tries to grow, the timing is such that big $$ is spent for equipment, inventory, and taxes — on this you are correct. When that same manufacturer, runs into hard times later, as all corporations do, the money of reduced inventory is typically not returned at the same rate — a lower or negative d$$/dT. Which manufacturer doesn’t actually face this reality at end of life?

      “as the economic benefit of the asset continues for some period, so should the cost.”

      Why?

      There is no reason whatsoever that cost cannot be paid for the benefit upfront — as it always is. When we spend 70K on a machine, why do we need to pay an additional 35K in tax to the government for the privilege which you inaccurately allege that we get back over some years?

      As a hint – economic theory is not a good answer and is rather sophomoric in concept. The cost of the tax being front-loaded into the system is economically backward by any pro-growth theory. If the dollars were equal in and out as your comment implies, not collecting the tax in the first place would be beneficial to all parties.

      “Strictly speaking though, as the economic benefit of the asset continues for some period, so should the cost. In accounting “theory” that’s often known as “The matching principal”

      You need to step back from theory and look at practicality.

      Taxes are designed for collection of revenue. Special tax rules are designed for limitation of behavior. When a tax system limits equipment expenditure by requiring payment on equipment, it is specifically limiting equipment expenditure. When it applies to labor expenditure on inventory, it is limiting creation of inventory. When it applies to the purchase of a building, it limits the purchase of real-estate.

      There is literally zero functional reason that any ‘cost’ (tax) must continue simply because an item has value. There are two reasons for tax, collection of revenue and limitation of behavior.

      The reality of ‘economic theory’ is that the government can collect all the money it needs with a simple higher tax percentage and leave the expenditures of people and business alone. In my opinion, you need to consider the motivation as to why taxes are collected from the places in which they are.

  6. Pouncer said

    For the case of the small businessman, the cost of the tax can be minimal compared to the cost of compliance. I refer interested parties to this recent confession:

    http://benswann.com/income-tax-is-immoral-and-unconstitutional-and-not-just-for-the-reason-you-think/

    I have just paid my biggest bill of the year. The invoice was for a cool 9% of my entire annual income: or my “Adjusted Gross Income” (AGI) as it appears on my tax returns, which have just been filed. And that invoice was from my accountant who just filed them for me. My income is earned through my small business, which, for those who know about these things, is an S-corporation. I have no employees. I do no payroll. Yet, I have just paid my accountant more than a month’s worth of income to complete my tax returns. How many pages of tax returns do you think that I, a single individual, and my S-corporation (a small business) had to file, bearing in mind the small amount of income in question? The answer, my fellow American tax victims, is 149.

    Completing 149 pages of tax forms/schedules/supporting statements is a lot of work. And I know exactly how much it is, because of that big invoice from the accountant that I already mentioned. It’s $2000 of work — my aforementioned largest bill of the year. And it’s $2000 of work I in no way could have done myself.

    If the tax code were sufficiently sensible that I could do my own taxes (which, as someone who likes money, spreadsheets and math, I’d be very happy to do), I could have paid the Feds double my actual tax bill — and still have been a thousand dollars better off on the money I’d have saved on tax preparation. Relative to the current situation, both I and the country would have been significantly better off.

    In this particular case the confessing party claims the state and local taxes are less burdensome than the federal. I know that is _not_ a general state of affairs. In the industries our host describes — manufacturing — the local controls on what can be transported in, (when and how, and how packaged ) and how it is to be stored, and how it is to be documented, etc, again drive the compliance costs up over the cost of paying the taxes on inventory. The explosion in the city of West (in the state of Texas, which is not in a region of the state called “West Texas” ) indicates some sorts of these controls are absolutely vital, and yet the costs of governing the controls will drive small businesses out of small towns. (A larger city may be able to socialize the cost of, say, a hazmat-trained fire department over many small manufacturers with slightly risky materials in storage, but a small town will either have to charge the one local risk center all costs, or require that business to do all the risk mitigation as a company business expense.)

  7. sophocles said

    Henry George was an American. He wrote the world’s only best seller in economics “Progress and Poverty.” Until 1978, the State of California taxed according to George’s principles. Until the early 1990’s, Michigan did the same. Now? Well, Delaware is all that’s left. How’s it doing?

  8. gallopingcamel said

    In 2002 I ran for office advocating low corporate tax rates as in the Republic of Ireland:
    http://morcombe.net/Senate/Jobs.htm

    While I failed to get elected it is gratifying to note that North Carolina followed my recommendation by reducing corporate taxes by half. Too bad they did not reduce the taxes to zero or into negative territory by offering to pay a portion of the federal corporate tax bite.

    Former COMECON countries have noted the effectiveness of Ireland’s low corporate tax approach. Bulgaria has a corporate tax rate of 10% (cf. 40% US federal tax rate plus state taxes).
    http://www.kpmg.com/global/en/services/tax/tax-tools-and-resources/pages/corporate-tax-rates-table.aspx

    Bulgaria’s economy is growing and unemployment is shrinking while most European countries are declining and some (e.g. nearby Greece) are in crisis.

    Obama complains about companies relocating “Offshore” but that trend could be reversed in a day by reducing the corporate tax rate to less than 10%.

  9. gallopingcamel said

    Jeff,
    I can relate to your situation as I founded and managed an electro-optics company with 25 employees.

    While I failed as an entrepreneur I appreciated the opportunity to take on what Peter Drucker called the “Market Test”………..something that is lost when everyone works for the government.

    Today I am 77 years old, yet I am still an entrepreneur with only one employee. Todat the only thing I can do is to teach. As George Bernard Shaw said, “Those who can do, those who can’t teach”:
    http://www.bdidatalynk.com/PeterMorcombe.html

    • Jeff Id said

      You have had the full experience then. It looks like you have a very cool resume.

      Employees are one of our biggest challenges, right after government, when we find good ones, we work very hard to keep them.

  10. hunter said

    Gallopingcamel,
    Interesting story.
    What part of NC are you in?

  11. Kenneth Fritsch said

    “Of course the large companies in Chicago protested and made public proclamations of leaving the state. This led to a series of negotiations, likely political contributions, and the decision by the governor to give those particular companies a pass on the tax hike. Of course we were a little company with only 24 people back then so nobody cared about us. Michigan’s conservative governor simultaneously lowered the Michigan rates and cleaned up the code so we took our business there. Illinois had no care or idea we did it but the state numbers showed that we were not alone.”

    Big governments and those who advocate for them could care less from where that money required to keep the governments big and growing comes. The path they take is simply the most politically expedient. Even so most of those governments have lifted money from pension funds in order to grow and are currently facing near term financial crisis. The problem is the size of government and if you want lower taxes where you start is rather obvious. It is not a simple task as those who know the problem is the size of government, like your big city newspapers, will have articles by their junior journalist pointing anecdotally to those who are “hurt” by the reduction in government.

    I would suspect that besides taxes, a more hidden expense for small businesses and businesses in general is the cost of regulations.

    Changing any of this in the near term future will require a major change in the thinking on the part of the intelligentsia whose ideas eventually are what controls our politics. Unfortunately many of those currently in favor would look more favorably on the community organizer than the entrepreneur.

    • Jeff Id said

      Compliance costs are massive and hidden. For instance, we must carry huge life insurance policies just to pay the taxes which would be inflicted on our families. The costs for compliance with crazy osha, epa, FDA, import law, we have stacks of lawyers we must deal with just to keep the doors open and we aren’t that big a company.

      • Jeff Id said

        e.g. when the government takes a garnishment from an employee, if the company doesn’t pay, you aren’t fined, you get the debt yourself. All of it. When the government takes two garnishments, you call lawyers to find out how much to pay each one and how much you are allowed to take from the employee so you don’t get sued.

        e.g. #2 Numerous training courses to prevent harassment and discrimination of any kind because the company is the liable one.

        e.g. #3 Maintaining of a ‘breast feeding room’ for pregnent women.

        #4 Documentation of all materials on site

        #5 Try to figure out what safety guard is allowed on certain production machines.

        on and on and on

      • Jeff Id said

        Try maintaining a 401K sometime. You have to buy insurance for that also.

  12. Bruckner8 said

    Jeff, ya lost me a little bit. In my world (small preschool in VA, so, service industry), every single expense is a write-off (yes, some larger items are depreciated, so what?). Your goal is to make sure that all receipts <= all expenses every year. Projecting big profit? Then time to upgrade the playground; maybe hire another worker to take more load off the admins/owner. All payroll and payroll taxes are expensable. 10 fulltime employees; 4 part time.

    • Jeff Id said

      I understand. In small buisnesses that don’t produce goods and are not growing the rules are different. In manufacturing, you must continually invest in new product development or you die. In growing manufacturing you must invest in ever larger inventory or you fail to service your customers and you die. In our world, if we are projecting a large profit (per what the government thinks), you buy a truck, machine, production equipment, invest in tooling, NONE of that is an expense. You must use after tax dollars. If you are growing, even your additional production people are not an expense.

      There is zero location to invest our money which the government will not tax first, and then use depreciation to give back the money later. Depreciation becomes the excuse of the left for doing it in the first place, but because it is an ongoing flow of goods in and out of the company, and the company is growing, depreciation always lags and cannot offset income.

      If we stop growing, or grow at a 3% rate, our actual tax rate drops to a mere 45%. Having a higher growth, our actual tax rate per the take home is about 80%. If I make 100K, I get to keep 20K.

      The ugly truth of it is that Obama still wants more. The left talks about a few large companies not paying tax. The reality is that they pay huge tax, but mostly overseas as the overseas governments are somewhat sane and that is a better place to operate at a profit. It is NOT a loophole as the leftists will tell you, but a reality created by severe overtaxation in the United States.

      The percentage taxation is actually hidden because rather than increase the top earners percentages, the left eliminated using anything as an expense. The rules are too complicated for Americans to be even remotely aware of what is going on. Just look around though and tell me where you see high growth manufacturing done in the US — anywhere. That growth is required for long-term survival of the industry — thus it has died! Big stuff that is hard to ship is the remaining exception, and it isn’t typically high growth.

      Taxed right out of the country while the left simultaneously demands more tax.

      Here’s a link to a summary of the 263A rules which you may find interesting. On the non-deductability of certain costs: https://www.law.cornell.edu/uscode/text/26/263A

      • Bruckner8 said

        I read that page. I don’t see how it applies to buying a truck. Again, if I buy a truck (a school bus soon!), I plan to depreciate it’s cost (only $6000) over a few years (the lowest number of years possibly allowed). If it’s 5 years, great, I’ll write off $1200 per year. If they’ll let me write it all off this year, even better (prolly not).

        That page is clear about items produced by your business, and how those items might actually become capitalized if not produced for sale. (I can see that happening in your business.)

        “continually investing…or you will die.” That’s a real-world capitalism truth…and nothing to do with draconian governments.

        You make it sound like the process is this:

        1) What are your receipts? (say, $10,000,000)
        2) GOVT: OK, give me 80% of that, leaving you with $2,000,000 to operate all facets of your business!
        3) Next, GOVT says, “now spend that 2M wisely, but if you buy a truck, you can’t write it off…in fact, we’ll add it to your “net worth” and tax that too.”

        if it really works that way, then no manufacturer could grow, b/c the govt would always be taking from the RECEIPTS and not the PROFIT.

        • Jeff Id said

          Hmm. Businesses in the US are taxed on profits (net income not gross).

          The link describes one piece of what happens to those of us who have inventory.

          Say you make 10,000,000 gross, 1.5 million net ( healthy company). The increase in inventory you had from the previous year is 200K, the new tooling is 200K, machines and equipment are 200K, you wrote checks for that stuff and have 900 actually left of your 1.5 million, the government takes 45% for income tax on 1.5 million (675K) rather than the 900 you have left (this ignores all of the other taxes) and you are left with 225K out of your 1.5 million the government “claims” you made. You have just paid multiples of your take home pay to income tax.

          There are no expenses available to protect your net receipts from being taxed at full value. You make way too much money for that so home interest, child care, even state taxes are off the table. The last were taken away by Obama in the last two years.

          Liberals say you will get it back when its depreciated, but that assumes you are still making money in x years and even then that money comes back without interest. If you are functioning as a business, you have already re-invested in new equipment and inventory and the money is then tied to different machines or inventories. You don’t ever see it. If you stop making money, there is no net profit and depreciation doesn’t matter so you’ve lost it. Tough luck. They also say – you are investing that cash in yourself, but again, they fail to recognize the massive negative pressure this creates on manufacturing investment. They also fail to recognize the obvious lack of manufacturing these policies have created in the United States.

          You are always growing in Manufacturing or you are dying, if we held even, 45% is the minimum tax we could ever actually pay. In reality, it is functionally closer to 80% as you can see by my example.

          • Steve from Rockwood said

            Not exactly how it works. You have a business with $10 million in revenue and $1.5 million in net income. You say you spend $200,000 on new inventory, $200,000 on new tooling and $200,000 on machines and equipment. I don’t have experience with inventory (if you manufactured it the cost is claimed in cost of sales) but with the latter two, they are either classified as expenses (and can be written off 100% in the year they are paid) or capital costs (for which a capital cost allowance – depreciation – can be claimed). The capital cost allowance is 30% for a vehicle, for example, but the caveat is you can only claim 50% of the 30% (15%) in the first year. So for a truck (15, 30, 30, 30) it takes four years to claim the capital cost back. It’s better on computer equipment (45%) and worse on buildings (10%).

            It’s not as bad as you claim because businesses are purchasing capital assets every year and the depreciation is claimed before taxable income is calculated. So manufacturing is not so bad. Of course manufacturing is having problems because of low wage economies (China, Indonesia, Mexico), the rise of automated processes and greater free-trade between countries.

            The big issue with taxes is consulting or on-line services that have a low cost of sales (high profit margin). There is little incentive to start these businesses in a high tax regime because you lose so much of your profit to taxes. This is why companies such as Apple have such clever tax “reduction” schemes such as forming secondary companies in Nevada (to avoid paying California state tax) or making a Dutch sandwich (moving intellectual property into a shell company in a low tax regime like Holland and diverting profits there to pay a reduced tax rate).

            America could solve its tax problems merely by eliminating corporate taxes (or making them a nominal 5%) and then taxing dividend and capital gain income at the same rate as normal “earned” income. Offshore shells would repatriate their profits to the US and CEOs would complain bitterly about paying $14 million in income tax (40%) on $35 million of income ($5 million salary and $30 million in capital gains) instead of $7.2 million ($1 million at 40% and $34 million at 20%). It will never happen because the average American does not understand taxation, therefore they do not know how much they are being ripped off by their own government, Republican and Democrat.

          • Jeff Id said

            Steve,

            I do like this sort of answer because while the example is smaller than our business, what I write about is what is actually happening. I don’t know your background but small business operators don’t know that the story gets worse when you grow. You must use accrual accounting when you are over $5million (I believe?) in sales but that number was a long time ago for us. Cash basis accounting is what you have written about. We never used cash basis because we didn’t start a business by planning to stay below 5M and the transition point can really stink.

            Accrual means that your inventory is NOT an expense to be written off in the year it was paid. It also means your equipment, buildings, trucks etc. are not written off as you say. Your answer is not accurate. I think computers are 3 years, buildings are 39 1/3 year so 2.5%/year, tooling 7 years but can be 3 sometimes? (not sure), inventory is when it is sold. As a growing company if we add 200K in inventory (continuously held stock) this year per the example, we must pay income tax to the government of 45% of that amount. The value of the inventory must also include the labor of those who ordered the inventory, and those who helped build it (labor).

            Unfortunately, I do know what I am talking about, but 10 years ago I wouldn’t have. Who the hell could figure out what the government is doing to manufacturing if they aren’t paying the money themselves? The reason I know, is because I’m actually paying the tax right now, today as we speak. I am paying multiples of what I take home and it IS real.

            Our company has 4 accountants, a tax lawyer (as an owner) and a CFO. I’m just the president, so which of them is the one who doesn’t know what they are doing?

            I am writing the checks to the govt, so if I’m wrong, I will pay you a huge consulting fee to correct it and will fire the SOB who cost us so much.

          • Steve from Rockwood said

            Jeff,
            I feel sorry for you. It seems your problems are American tax rules. 45% is outrageous. I live in Ontario Canada (33% combined Provincial plus Federal). I own 3 corporations since 2001 ($1-$5 million in annual revenue) and run a public company. I checked my 2014 financial statements before commenting. I don’t have an inventory so I can’t comment on that. In Ontario buildings are 10% depreciation, vehicles 20%, computers 30%. There are other ways to reduce income tax on a corporation, such as management fees, declaring dividends etc. I guess your problem is having to pay the tax before being able to make capital purchases and therefore not having much money to re-invest. My corporate tax forms have non-capital and capital losses, the latter which lists the depreciation of the capital assets. These are subtracted from my net income as is tax paid for the previous year. What’s left over is taxed at a Federal rate of 20% and provincial rate of 13% ( bit less now because of the small business tax credit and falling corporate tax rates). I never thought I’d say this but maybe you should move to Canada or hire a lobbyist.

          • Jeff Id said

            “he big issue with taxes is consulting or on-line services that have a low cost of sales (high profit margin). There is little incentive to start these businesses in a high tax regime because you lose so much of your profit to taxes.”

            This is both right and wrong. The taxation a “service” company pays is dramatically lower than manufacturing, but it is still too high (way past the optimal Laffer curve point). That is why America is FULL of service companies and empty of manufacturing.

          • Jeff Id said

            Steve,

            That is such a beautiful reply, well written, and 100% accurate to my knowledge. This is what happened to American manufacturing. It has very, very, very (v^3) 😀 little to do with labor cost.

            Left-wing policy killed American manufacturing. It simultaneously destroyed low education jobs and has replaced it with a welfare class of something like 1/6th of the country. They do it because the tax laws are so complex and the media so polluted, that voters don’t know what is happening. Good people like Tom Fuller actually have no idea what they are voting for and there aren’t enough of us business owners to stop the problem. The other issue is that the Republicans in office are sometimes as much on the take as the Dems. Not much left for those trying to be FREE people.

          • Jeff Id said

            I’ve told several people that the problem isn’t the tax rate, it is that nothing is an expense anymore. They were titled ‘loopholes’ on left-wing news outlets and got ‘plugged’. It’s all about the sales angle.

            Actually, the problem is so bad that even our state tax is not an expense to the feds. You pay the feds just like the state $$ went right in to your pocket.

          • Jeff Id said

            isn’t ‘just’ the tax rate.

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