As a business owner, improving your “bottom line” is probably something you think about quite often. An increase in sales usually means an increase in profits, and so does a reduction in costs. But did you know that cutting the tax on your business income could have the biggest financial impact of all?
It’s true: A dollar of tax saved often has more impact on your bottom line than a dollar of additional sales or a dollar of reduced costs. To understand why, remember that when you cut your taxes, you get to keep 100% of the savings. On the other hand, when you increase sales, you must share a portion of your additional profit with the IRS. The same goes for cost savings. Since cost savings ultimately boost your bottom line, the IRS also gets its share.
If you’re still not convinced, consider this simple example. Company Z is in the 30% income tax bracket, and it operates at a 20% pre-tax profit margin. Therefore, if Company Z generates an additional $10,000 of sales, its pre-tax profit will increase by $2,000 (20% x $10,000). Of this amount, 30% or $600, must be paid out in taxes, leaving Company Z with $1,400 of additional after-tax profit.
But if Company Z could simply manage to save $1,400 in taxes, the entire amount of tax savings would flow to its bottom line. There’s another way of looking at this. For Company Z, every $1,400 of tax savings is equivalent to $10,000 of increased sales. If your company operates at a low profit margin, the relative benefit of cutting taxes is even more dramatic than for higher-margin companies.
You should never overlook opportunities to increase sales or cut costs. But sometimes, tax savings can dwarf all of your other planning efforts. To find out what tax savings mean to your company, let us help you run the numbers. Give us a call, while there’s still time this year to make a difference in your 2004 tax bill.
